August/September 1998 - In a shocking June 11 decision, the 4th District Court of Appeal in San Diego held that
homeowners' and associations' recovery against builders and their insurance companies over
construction defects will now be limited to claims that have caused actual property damage
or personal injury. In the case of Aas vs. Superior Court (The William Lyon
Company), the court held that other "economic damages" would not be recoverable
under a negligence theory. This means that homeowners and associations can no longer
recover the cost of repairing structural problems in homes until physical damage occurs.
Economic damages include items such as lack of firewalls, improper shear walls, faulty
electrical wiring and the like. According to the court, costs to repair such deficiencies
are not recoverable by homeowners unless a fire, earthquake or other catastrophic event
results in significant damage to the buildings or building occupants sustain serious
injury. In other words, buildings with improper firewalls would have to catch fire and
threaten the lives of families before repair costs could be recovered.
The Aas decision involved a group of single-family homeowners who sued The
William Lyon Company over a number of construction defects. Also involved in this case was
Provencal Community Association, a 162-unit condominium project. By a motion at the time
of trial, evidence was excluded and both the single-family homeowners and the condominium
development were barred from recovering economic damages.
In so ruling, the Aas court refused to follow a prior decision from another
California appellate district (Huang vs. Garner), which held that these economic
damages were recoverable by homeowners in a construction defect case.
This split of authority, with the San Diego court refusing to follow the precedent set
by the Huang ruling, makes this case ripe for review by the California Supreme Court.
If the Supreme Court takes this case up for review, it will certainly need to analyze
the following effects of the Aas decision.
Duties to repair and maintain common areas
Associations are required to repair and maintain common areas. (Cal. Civ. Code §1364.)
If an association investigates other claims and finds defects that have not manifested in
any physical damage, the association will be stuck with the cost of fixing the problems.
They may have nowhere to turn for funding except, perhaps, to borrow the money or impose a
special assessment.
10-year statute of limitations
Associations and homeowners have only 10 years from the date of substantial completion
of a project to recover damages from the builder. (Cal. Code of Civil Procedure §337.15.)
If a project was built with no firewalls or improper shear walls, and a fire or earthquake
results in physical damage after the tenth year, the association and homeowners are
forever barred from recovering any damages from the builder.
This increases the likelihood that multiple cases will be filed by homeowners and
associations each time physical damage occurs. For example, a lawsuit for many serious
defects at the project could be followed by the filing of additional suits after each
instance of physical damage, such as a landslide, fire or structural components failure.
A serious look at the effect on damage claims beyond California's current –10-year
limit will also have to be considered.
Precedent Ignored
The court seemed to ignore the interest of the homeowners, leaving literally hundreds
of associations with claims now pending in California courts in a state of shock as a
result of this unanticipated decision. However, if the Supreme Court takes this matter for
review. then the Aas case will not be published and will not be of any further
precedent until the Supreme Court makes its decision.
If the Supreme Court refuses to accept the case, then it will likely be published,
which means that it will have legal precedent and must be followed by the courts, at least
those in San Diego County that surround the 4th District Court of Appeal.
But with the split of authority, each of the other appellate districts in the state
would be free to ignore the 4th District's ruling and follow that of the case of Huang
vs. Garner, a 1st District Court of Appeal case. (157 Cal.App.3d 404(1984))
The Next Step
One possible way to attack this problem is to introduce legislation that would better
define the nature of a construction defect and include such items as lack of firewalls
between units, structural failures and Uniform Building Code violations. This however, may
take months and will require the support of the community association industry and the
state's consumer attorneys.
Errors & Omissions Claims Intact
The court did leave intact a claim for errors and omissions (malpractice) against
design professionals such as architects and engineers. Defective plans often lead general
contractors and subcontractors into making mistakes in the field.
Nevertheless. If an association or homeowner uncovers building code violations and even
if the violations rise to the level of life-safety problems there is no recourse until
injury or physical damage occurs, even though the companies insuring builders have been
paying for these types of claims for the last two decades.
This decision will represent an extreme hardship if homeowners have to come
out-of-pocket to finance repairs.
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