In a decision surprising to many in the residential home building industry, the California Court of Appeal recently ruled that California’s Right to Repair Act (also known as SB 800) (the “Act”) does not provide the exclusive remedy in cases where actual damages have occurred to a home because of construction defects. In Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC (Case No. G046731, Cal. App. 4 Dist., September 26, 2013), the Court concluded that even when a construction defect claim falls within the scope of the Act, where actual damage to a home has occurred, a property owner is not limited to the remedies provided in the Act, and retains common law rights and remedies.
In 2004, Eric Hart purchased a home from Brookfield Crystal Cove LLC (“Brookfield”). In 2008, the home was flooded when a fire sprinkler pipe burst. Brookfield acknowledged its liability for, and repaired, the damage to Hart’s home. Hart moved into a hotel for several months while Brookfield repaired the damage to the home. Hart’s homeowner’s insurance provider, Liberty Mutual Insurance Company (“Liberty Mutual”), paid for Hart’s hotel and other relocation expenses during that time.
In 2011, Liberty Mutual exercised its rights under Hart’s homeowner’s insurance policy and filed a subrogation claim against Brookfield to recover the hotel and relocation expenses it incurred related to the repair of damage from the burst sprinkler pipe. The claim included common law causes of action for strict liability, negligence, breach of contract, breach of warranty and other claims. In a subrogation action, the insurer steps into the shoes of its insured. Thus, Liberty Mutual’s right to recover from Brookfield was dependent on whether Hart would have been able to recover from Brookfield for the hotel and relocation costs.
In response to Liberty Mutual’s claim, Brookfield argued that the claim was time-barred under the section of the Act that requires any claim for plumbing issues to be made within four years of the close of escrow for the owner’s purchase of the home. Because Liberty Mutual did not file the claim until 2011 (seven years after Hart bought his home), Brookfield argued the claim did not meet the time limits in the Act, and must therefore be dismissed. While the trial court agreed with Brookfield and dismissed Liberty Mutual’s claim, the Court of Appeal reversed the trial court’s decision.
COURT OF APPEAL DECISION
The Court of Appeal decided that claims under the Act were not the only options for a property owner seeking recovery for actual damages. The Court determined that the Act was not intended by the California legislature to provide the sole remedy for actual damages to residential property. Rather, the primary purpose of the Act was to provide a property owner with remedies for repair of construction defects before the defects caused actual damages. The holding also stated that the Act was not intended to eliminate a homeowner’s other rights under the common law when actual damages have occurred to the owner’s property. For this reason, even if Liberty Mutual’s claims under the Act were time-barred and properly dismissed, its other common law claims should not have been dismissed as untimely. The Court noted that the Act was adopted in large part to overturn the previous court case of Aas v. Superior Court (2000 24 Cal.4th 627) which held that in the absence of actual damages to the property, a homeowner could not file a claim for construction defects in residential property. Thus, the Court determined that the Act was largely intended to provide a homeowner with a means of pre-damage redress for defects that such owner would not have under the Aas decision, and the Act was not intended to limit an owner’s other rights once actual damages have occurred.
IMPLICATIONS OF DECISION
When the Act went into effect in 2003, many believed it provided the exclusive remedy for construction defect claims for new construction residential projects, including time limits for such claims. The Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC decision calls this belief into question, in particular with respect to common law claims involving actual damages. This uncertainly may make it difficult for those in the residential building industry to predict and protect themselves from claims related to construction defects, and the applicable timeframes for such claims.
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.