Litigation in the construction and building arena continues to be extensive and, over the past few years, many construction cases have expanded to involve products incorporated into the buildings themselves. A failure or a defect present in a product can lead to financial damage and hazardous situations.
Building Products Issues
As a result of the down turn in the real estate market, many parties are seeking to involve not only the builder or developer, many of whom are out of business, but also expanding claims to involve the product manufacturer, distributors and in some instances retailers. Historically, typical construction defect claims and cases have not included product manufacturers, distributors and suppliers. However, there appears to be a trend toward looking to the component parts of the construction of buildings to contribute in these cases. In addition, some cases are now seeking to pursue only the building products as the key issue or defendant in the case as opposed to being an add-on in the litigation.
As a result, product manufacturers, distributors, and suppliers should be prepared to be brought into these actions and be aware of some of the idiosyncrasies of construction defect actions and to ensure efficient case management. Key issues to look into immediately are:
- risk transfer options
- case management issues
- early settlement possibilities
Jurisdictional issues also should be at the forefront of the initial analysis of the case as there may be a way to remove the case to Federal Court, which will likely spur some cases toward early resolution. In the discovery process, the cases are usually focused on investigation of the defects.
Most construction defect cases involve multiple issues, and other issues may dwarf the particular product issue. Product-related parties need to ensure that the case management order/pre-trial order (CMO) takes their discovery needs into consideration. If the necessary discovery for dispositive motions is not included early in the case, product-related parties may be forced to stay in the case for a significantly longer time due to the discovery structure under the CMO.
The most recent product cases garnering regional and nationwide attention include the Chinese drywall cases (primarily in the Southeastern U.S.) and the Uponor/Yellow Brass Fitting cases (primarily in Nevada and Arizona). These cases provide good examples of some of the CMOs and management tools in product-related construction cases.
In most building product cases, the building product issues come in on a cross-complaint/third-party complaint as opposed to being the focus of the case by the property owner. However, in recent years, and in specific instances, if the sole or key issue in the case is the building product failure itself, the property owner may file its complaint against the product manufacturer, distributor and retailers.
Depending on the role of the building product defendant, there will be different case management considerations. If the product issue is simply one of many, there may be incentives to allowing the case to proceed and conducting the product issues as a part or after the other issues in the case. However, this may result in the building product defendant being dragged through years of litigation. Strong consideration to attempts to negotiate a separate track for discovery and settlement discussions should be given. Parties may also wish to consider separating out the product issues from the defect/workmanship claims.
In the defense of a building product’s liability case, it is critical to be familiar with the unique defenses available. These defenses, if briefed, argued and litigated can mean the difference between a multiple million dollar award or settlement, replacement costs or even a defense verdict. Controlling the plaintiff’s remedies can have far reaching impact on a building product manufacturer’s exposure.
Economic Loss Rule. The Economic Loss Rule is a modern development in products liability. Generally, under the rule, there is no tort liability for a product defect if the damage suffered by the plaintiff is only to the product itself. A party who suffered only economic harm may recover damages for the harm based only upon contractually (warranty) claims and not on a tort theory. The Economic Loss Rule eliminates all negligence-based property damage claim. There are exceptions that vary from state to state.
The Economic Loss Rule naturally implicates the integrated products doctrine in many jurisdictions. Building product manufacturers are protected by the economic loss doctrine if their product is integrated into the ultimate product. An example is a light switch placed in a home during construction. To apply the integrated product doctrine, you must identify the product purchased by the plaintiff. If the building product was part of the overall structure and not purchased by the plaintiff, you may have a defense.
Sophisticated Used Doctrine. The Sophisticated User Doctrine applies where the end user possess special knowledge, vocation or expertise concerning the product and its risks and accordingly, need not be warned of those risks. Instead, the responsibility to warn transfers to a middle person as a sophisticated user overseeing the use of the product. The sophisticated user doctrine cuts off liability, insulating the manufacturer from strict liability and negligence claims. The doctrine is picking up steam in many states. A related concept is the sophisticated purchaser doctrine. This relives a manufacturer of a duty to directly warm an ultimate user when the product is sold to a sophisticated and knowledgeable intermediate purchaser and it is reasonable to rely on the intermediary to communicate necessary warnings to end users. For example, an argument can be made that the design professional who specifies a particular product in construction has the special knowledge related to the product and therefore is the party that should be held responsible if the product fails from being improper.
Bulk Supplier Doctrine. The Bulk Supplier Doctrine applies to manufacturers and suppliers of bulk products delivered to an intermediary vendee. This allows the manufacturer to discharge its duty to warm end users of a product’s hazard by reasonable reliance on an intermediary.
Each of these defenses must be evaluated early in a building products case and the defenses must be developed and wielded wisely.
There are many unique and diverse elements that need to be analyzed and addressed. The first is coverage — does the complaint or claim trigger coverage under the policy? Many times there is at minimum a duty to defend, but perhaps not to indemnify. There may be coverage afforded under one policy year, but it may be excluded on the next. When in doubt, contact your internal technical managers or claims staff and local panel counsel. Many of these cases will have expenses running well into the six-figure range, and you want to make sure that coverage is properly addressed, and any Reservation of Rights letter is worded correctly. Failure to assert a coverage defense or improperly asserting one due to a misinterpretation of the policy can be costly.
Once you have determined your initial coverage obligations, it is time to evaluate a defense strategy. Secure all applicable contracts. Indemnification language flows both ways and you need to determine what your potential obligations may be towards other involved parties, along with your ability to tender to another party. If you have a contract that contains a favorable indemnity clause, you still need some additional analysis before drafting your tender demand. Review the clause against the individual state’s laws that may apply. Many states have enacted indemnity-limiting statutes for construction contracts, and other industries may also be affected. Confirm the contract is considered a valid contract for both the indemnity clause and any insurance requirements. If the contract contains favorable indemnity language, and an additional insured requirement in your favor, make sure you address both in your tender demand. Do not wait too long to send out a tender demand. The clock starts running as soon as the demand is made when it comes to reimbursement of defense costs. As a general rule, you are not entitled to reimbursement of any pre-tender costs you may have incurred.
Defending these claims can be a complicated and expensive process. Maintain an open line of communication with your attorney, insured and experts. Remember that as the claims adjuster it is your job to direct the defense. However, you cannot do this without adequate reporting from your counsel and a strong knowledge base. When counsel and adjuster communicate with ease, you will find the experience far more valuable than simply reading reports.
Too often adjusters fail to keep the insured informed and part of the process. This is especially true if there has been any sort of coverage position taken by the carrier. Due to the length of time these cases may take to get to a settlement, there may be personnel changes. Reach out to all new contacts, especially with your insured.
Assemble a strong team to handle these cases — adequate legal counsel familiar with these types of claims, the proper experts needed to address the damages and liability issues, and a seasoned adjuster and claims staff. Once you have these elements addressed, you can evaluate your case with confidence, and hopefully secure a favorable outcome for your insured.