Residential construction in Southern California has always been a challenge from a risk management perspective. Condominiums by far are the most litigated project type, and single-family subdivisions, "spec," and custom homes are not far behind.
Heavy litigation and lack of insurance or outrageous insurance premiums have created a desperate need for tort reform. Efforts have been made over the years, but by the time any proposed legislation actually became law, the compromises and back-and-forth regulation processes usually watered down the original intent enough to make the law ineffective.
The most recent attempt to reform the legal system as it pertains to residential construction is known as "State Bill (SB) 800" or the "Right to Repair" bill, which can be found in the California Civil Code Sections 895 through 945.5. In essence, SB 800 sets forth new, legislatively-defined actionable defects, outlines the "pre-litigation" repair process, and spells out available damages and defects.
So, what what does this mean for a design professional? Does this lower your exposure to loss? Or does it create a new set of uninsurable obligations? Do you have to participate?
SB 800 applies to new residential construction sold on or after Jan.1, 2003. The law pertains to "any action seeking recovery of damages arising out of or relating to deficiencies with residential construction, design, specifications, surveying, planning, supervision, testing or observation of construction."
Specifically, SB 800 pertains to builders, subcontractors, material suppliers, individual product manufacturers, and design professionals (although design professionals are not defined).
Of most interest or concern to design professionals is the definition of "construction defect" under this law. Previously, design professionals only had to perform to the applicable standard of care. Historically, the "standard of care" has been determined by expert witnesses on a case-by-case basis.
SB 800 creates a "contractual" set of standards that must be met by the design professional in order to avoid liability. In other words, the standard of care still exists, but now design professionals may have the burden of proving that they have met the new standard, which arguably could be stricter than the historical "expert-determined" standard.
The standards that are specifically defined pertain to water, structural, soil, fire protection, plumbing and sewer, electrical and "other areas of construction." There also is a catch-all provision that states: "To the extent that a function or component of a structure is not addressed by these standards, it shall be actionable if it causes damage."
It is interesting to note that a majority of the "defined" defects refer only to "installation" or "construction." This raises the question of whether the law even applies to a pure design professional. Whether or not design professionals can use this subtlety to exempt themselves from the defined standards remains to be seen. It is optional for the builder to either opt in or out of this process. This is something the design professional should be aware of when working with residential clients.
The repair process itself is fairly specific, and each step is tied to a time frame. The design professional, who will no doubt be included in this process, needs to understand the implications. First and foremost, the likelihood is that design professionals will have to design the repair for free unless they can qualify the work as an "additional service."
Moreover, design professionals should avoid admitting fault at any point in the repair process, as one can expect that any such admissions might be used by claimants as evidence of negligence if the dispute continues beyond the repair process.
SB 800 also spells out the definition of damages, and provides the builder some defenses. Interestingly, design professionals are not specifically mentioned in this section.
A growing number of homebuilders are tying design professionals into SB 800 contractually. One developer encourages design professionals to participate in the bill by requiring them to waive their right to dispute findings if they don't participate. Further, they have to agree to pay 115 percent of any costs to repair.
Another change has occurred regarding statutes of limitation and repose. Under SB 800, the statute of limitations runs not from the substantial completion of the home or improvement, but from the close of escrow. Oftentimes, the close of escrow is determined by market conditions, which could extend the period of time within which the developer or general contractor, subcontractors or design professionals could be sued beyond the original ten-year statute.
There also is some question as to whether or not the pre-litigation efforts required of the builders, or the others who agree to indemnify or hold harmless the builders, will be covered by standard general liability policies. While the bill itself repeatedly refers to the word "claim," there is nothing about the new law that mandates insurers to treat a homeowner's claim as a lawsuit for purposes of assuming a defense, the cost of investigation, or the cost of obligatory repairs.
As a matter of fact, some insurers are currently adding exclusions to their policies to make it clear that responsibility and liability under SB 800 are completely excluded from policy coverage. The concern here is that if it is not covered by the builders liability policy, builders will look around for others to share the burden, and one of the first groups they'll point at will be design professionals.
Implications for design professionals
The unfortunate reality of SB 800 is that the law is too new and is surrounded by too many unanswered questions for any solid conclusions to be drawn at this point in time.
In the mean time, here is what we do know:
A professional liability policy written for a design professional covers legal liability arising out of professional services. Legal liability is tied to the standard of care. The standard of care is generally defined as "that degree of care and skill ordinarily exercised by members of the same profession currently practicing under similar circumstances."
If the level of design professionals' performance falls below the standard of care, they are legally liable. If design professionals contractually agree to be responsible for more than their "legal liability," then that which extends beyond their legal liability is uninsurable.
If the standards established by SB 800 are determined to be higher than the "standard of care," this is conceivably uninsurable. In addition, there is a possibility that the bill could result in a higher frequency of claims and earlier involvement of design professionals. To the extent that some of these claims against contractors may not be covered, design professionals could be logical targets.
Design professionals could find themselves providing free "repair" work, which they would not have been subject to without SB 800.
Design professionals are advised to not misinterpret these details to mean that SB 800 is all negative (although plaintiff attorneys generally seem to think the law will benefit their clients more than the defense). There are those who think it could be a net positive, but it is simply too early to tell.
Until SB 800 has had time to work its way through the system, design professionals can take certain precautions.
First, have any SB 800 provisions reviewed by both a knowledgeable insurance broker and your attorney.
Second, limit your participation in any repairs to a certain number of attempted fixes and/or a capped dollar amount.
Third, make certain that there are no punitive provisions or liquidated damages in any SB 800 provisions (or any other aspects of the contract).
Finally, stay closely involved with your clients and your projects. The sooner problems are identified and dealt with, the better off everyone will be.
While intended to reduce litigation in the home building business, SB 800 could potentially create additional problems for design professionals. Beware of SB 800 provisions if you find them in the professional services agreements you're asked to sign. It's critical to understand the implications so that they can be addressed effectively.
Cavignac is president of Cavignac & Associates, a commercial insurance brokerage firm. More information can be found at www.cavignac.com.>