"California supreme court decides the AAS case and construction defect claims may change"

The California Supreme Court issued a ruling that will have a major impact on construction defect claims in California and on the rights of homeowners and associations throughout the state. Essentially, the Court held that homeowners and associations may not recover the cost of repairing construction defects caused by builder negligence unless those defects have produced actual injury to either property or persons. In other words, construction defects such as building code violations, without injury to either a person or property, are considered "purely economic" injuries and will not be compensable.

You will hear that "economic damages" are not recoverable in construction defect claims. Economic damages include items such as the following:

• structural deficiencies
• firewall issues between units
• faulty electrical installation
• poor heating, ventilation and air conditioning
• noise transmission problems between units
• plumbing issues

These are provided by way of example only. Other damage categories may also fall within the economic loss column. So, without a fire, earthquake or other catastrophic event causing actual physical damage, the Court has refused recovery.

However, the laws governing community managers and board's duties remain the same. The following are just some of the fiduciary duties you are required by law to meet:

Duty To Repair And Maintain Common Areas (Civil Code 1364)

Associations are required to repair and maintain common area. If an association investigates other claims and finds defects that have not manifested in any physical damage, the association is still required to fix the problems.

Duty To Investigate Potential Construction Defects (Corp. Code 7231(a))

Association board members must exercise sound judgment, including the duty to undertake "reasonable inquiries" into matters affecting the health, safety and financial well-being of the members under Corporations Code section 7231(a).

Duty To Meet Statutes Of Limitations/Time Limits(C.C.P. 337.5)

An action that is not initiated within the designated time limit of ten years from the date of substantial completion (337.1) or three years from the date of discovery of the defects (338) will be forever barred. This is the primary defense a builder has to claims for defects. Failure to meet these deadlines constitutes a breach of fiduciary duty and this decisions has not changed these time limits.

Duty To Disclose (Civil Code 1368 and 1368.4)

Full disclosure of common area defects must still be made to association members, even though the association may not recover damages for certain defects. The rules of disclosure have not changed, including disclosure to prospective purchasers and notice to members prior to filing civil actions.

Even though the damages your association recovers may be less than before, common area construction defects do need to be addressed and failure to meet these duties above could expose Management liability.

A determination of what amounts to "actual physical damage" should be left up to experts. Investigation by experts and an analysis by construction defect counsel is required to determine what amounts to a defect. Now, more so than ever, referring to a construction defect specialist is important because there are significant legal theories that must be made and only a litigation specialist will understand these legal intricacies. Managers should defer to these experts when the possibilities for defects arise.

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