Deconstructing Construction Claims
Issues to consider when handling construction defect subrogation
Construction defect claims often are complicated by a variety of issues, including those related to the statute of repose and contractual bars to recovery. In order to maximize the subrogation potential for these claims, you should deconstruct any potential subrogation barriers and, upon identifying a potential target, avoid procedural barriers that impact the pursuit of subrogation claims.
When you receive a construction-related claim, you should immediately identify potential subrogation targets, such as the architect, general contractor, subcontractors, the developer, and material suppliers. As part of the identification process, first attempt to procure copies of all of associated contracts, subcontracts, and purchase orders. These documents are important because they often contain contractual barriers to recovery, including indemnification clauses, waivers of subrogation, insurance clauses, caps on liability, and contractual statutes of limitations.
In addition to securing copies of the applicable construction documents, you should also try to secure information that will help you identify when the accident occurred during the construction cycle. This information can impact the potential subrogation recovery because subrogation waivers and insurance clauses often refer to dates such as the substantial completion date or final payment date, gearing the applicability of these clauses to those dates.
Statutes of Limitations and Repose
In addition to gathering the documents identified above, you should consider whether claims against potential targets are barred by the applicable statutes of limitations or repose. If either bars the claim, then the claim has no true subrogation potential. Although the defendant can waive a statute of limitations defense by not asserting it in a timely fashion, the defendant cannot, generally, waive a statute of repose defense because this statute creates substantive, rather than procedural, barriers to pursuing a claim. If a statute of repose applies, then no cause of action arises after the repose date and, thus, after the repose date—say, 10 years after the date of substantial completion—there is no cause of action to pursue.
When considering the impact of any statute of limitations or repose, you should also review the applicable contract terms to ensure that the contract does not have a contractual statute of limitations clause or an accrual clause. Courts generally enforce these clauses as long as they are reasonable. Thus, if applicable, a contractual statute of limitations or accrual clause may bar your claim. For example, the American Institute of Architects (AIA) contract form A201-1997 has an accrual clause, §13.7.1, stating that claims accrue on a certain date, such as the date of substantial completion. If applicable, the clause bars any discovery rule that may otherwise apply and, effectively, turns the otherwise applicable statute of limitations into a statute of repose.
Of note is that some states, in addition to having a construction defect-related statute of repose, also have a statute of repose related to products liability claims. As such, to the extent that your potential target is a company that provided a product incorporated into the construction project, you may need to analyze the impact of both the construction defect statute of repose and the products liability statute.
Waiver of Subrogation
The most common contractual barrier to pursuing subrogation targets involved in construction losses is a waiver of subrogation clause. If you find such a clause in your construction contracts, then you should analyze the scope of the waiver clause to determine whether it applies.
To analyze the scope of the clause, determine whether the property damage at issue is covered by the clause. This analysis generally focuses on the meaning of the term “work” in the contract, as waiver of subrogation clauses typically apply to the proceeds of insurance applicable to the work. Thus, if the damage at issue relates to personal property or to parts of a building that were not the subject of the contract, then you may be able to pursue subrogation for damage to this non-work property.
However, the success of your subrogation claim may depend on whether the applicable jurisdiction follows the source-of-coverage approach to defining the scope of a waiver clause (based on whether the insurance policy that covered the work also covered the non-work property) or the nature of the damage approach. Although courts often refer to the source of the coverage approach as the “majority” approach, the U.S. District Court, Northern District of Mississippi, recently applied the nature of the damage approach in Liberty Mut. Fire Ins. Co. v. Fowlkes Plumbing. Thus, when analyzing the scope of a waiver of subrogation clause, your analysis should include an analysis of how the applicable jurisdiction interprets such clauses.
With respect to the AIA contract forms, the most recent version of the AIA General Conditions, A201-2017, includes a waiver of subrogation clause, §11.3.1, that references the term “project,” rather than the term “work.” Under this version of the waiver clause, owners and contractors waive all rights against each other and their subcontractors “for damages caused by fire or other causes of loss, to the extent those losses are covered by property insurance…applicable to the project, except such rights as they have to proceeds of such insurance.” The term “project” is defined in §1.1.4 as “the total construction of which the work performed…may be the whole or a part….” Arguably, this change clarifies that the waiver of subrogation clause refers only to the construction work itself. However, it remains to be seen how courts will interpret this change in the wording of the AIA waiver of subrogation clause.
Right to Repair Acts
As part of the process of identifying subrogation targets, claims professionals should be aware of the fact that many states have Right to Repair Acts. These acts generally require that the homeowner, and possibly the insurer, give notice of construction defect claims to the contractor or builder. Thus, to the extent that you identify a subrogation target, you should review the applicable Act to determine whether, as a subrogating insurer, your claims notice needs to comply with the terms of the applicable Act.
The issues discussed here offer only a partial review of some of the issues that subrogation claims professionals need to consider when handling a construction defect claim. The issues identified, however, should highlight the importance of analyzing the subrogation potential for construction-related claims during the early part of the claims investigation. When the issues you identify are complicated or warrant additional analysis, it is equally important to involve subrogation counsel early.