WINTER 2002

Toxic Mold Protection Act

Governor Gray Davis has become the first in the nation to sign legislation governing mold. On January 1, 2002, California's "Toxic Mold Protection Act of 2001" took effect and now requires state officials to begin identifying and categorizing certain varieties of mold, study the health effects of mold exposure, if any, and establish "permissible exposure limits" for homes, schools, businesses and other public buildings. Thus, under the Mold Act, commonly found molds may soon join the ranks of legally recognized, defined and heavily regulated substances such as asbestos and lead-based paint.

The Mold Act establishes a formal framework and structured network within the State Department of Health Services for the gathering of information, setting of standards and the in-depth study of potential mold-related health effects. By July 1, 2003, the Department of Health Services will be required to report its findings to the California Legislature so that "permissible exposure limits" may be established.

Although mold exposure has been suspected to contribute to respiratory ailments, headaches, allergies, asthma and nose bleeds in some sensitive individuals, as well as even more serious ailments, including brain damage and, in infants, bleeding lungs and death, up to this point, all such health effects remain the subject of controversy and dispute by the medical community where research is ongoing. If the research, investigation and analysis by the State Department of Health and other agencies involved under the Mold Act establish a causal link between mold exposure and health effects, however, we anticipate the effects on construction defect and personal injury litigation to be far reaching, both in California and throughout the nation. Plaintiffs may soon bolster their cases with allegations of unlawful conduct and statutory violations. Further, stigma damages may also be enhanced since mold will be added to the list of conditions which make housing "substandard" under the Health and Safety Code. In sum, it is anticipated that the statutory recognition of common mold as a "toxic substance" will fuel mold claims and provide plaintiffs with a codified basis for their complaints.

General Assertions in Advertisements Do Not Rise to Level of Warranty and Property Damage Needed for Recovery Under Strict Liability

In Carrau v. Marvin Lumber and Cedar Company, homeowner Robert Carrau and his wife brought claims for breach of warranty and products liability against the manufacturer of the wood-framed windows in their residence. The windows had been treated with an ineffective preservative and the result was that the windows were subject to premature rotting.

The First District California Court of Appeal held that there was insufficient evidence to support a finding that the manufacturer breached its warranty to the homeowners, in that the windows were sold with only a limited one-year warranty and no defect in the windows was discovered or reported until over one year had passed from the date of purchase. Furthermore, the Court found that general assertions in advertisements and literature, for example, as to the performance or durability of a product, like the assertions made by Marvin in its advertisements, do not explicitly extend to future performance of the product, and thus, do not rise to the level of a warranty. Marvin's advertisements made assertions such as that its windows would be "long-lasting," even "in the most challenging of climates," and would provide the homeowner with an "investment that will stand in good stead for years to come."

Additionally, in Carrau, the Court held that there was insufficient evidence to support a finding that the manufacturer was liable under strict liability for the costs of repairing or replacing the defective windows. The Court recognized the holdings in Aas v. Superior Court, Zamora v. Shell Oil Co., and Casey v. Overhead Door Corp., which set forth that, in negligence and strict liability actions, liability is limited to damages for physical injuries, and no recovery is allowed for economic loss alone. Accordingly, the Court held that Carrau was not entitled to recover his lost economic benefit on a theory of strict products liability. Carrau failed to produce evidence of any actual property damage other than to the windows provided by Marvin.

Insurer Must Provide Defense for Additional Insured for Entire Action as Matter of Public Policy in Construction Defect Litigation

In Presley Homes, Inc. v. American States Ins. Co., a real estate developer contracted with certain subcontractors (concrete and framing) to work on a residential construction project. The subcontracts required that the subcontractors amend their liability insurance policies to name the developer as an additional insured, which was done.

Later, when some of the homeowners sued the developer for construction defect damages, the developer cross-complained against these subcontractors and tendered its defense to the subcontractors' insurers. With respect to the tender to the concrete subcontractor, the subcontractors' insurance company agreed to share in the developer's defense, but denied having to defend the developer against all of the homeowners' claims. Likewise, with respect to the tender to the framing subcontractor, the insurance company proposed to retain separate counsel on just the framing issues. In sum, the insurance company maintained the position that it had a duty to defend the developer against only the claims relating to the subcontractors' work.

The trial court ruled that the insurance company did not have an obligation to provide the developer with a full and complete defense of all clams asserted by the homeowners. However, after the validity of the ruling was challenged by the developer, the Fourth District California Court of Appeal concluded that the trial court had erred in holding that the insurance company did not have a duty to defend the entire lawsuit.

In so holding, the Court recognized that it is settled law in California that where an insurer has a duty to defend, the obligation applies to the entire action, even though the suit involves both covered and uncovered claims, or a single claim only partially covered by the policy. Furthermore, an insurer's duty to defend is based upon public policy, not the terms of the parties' contract. "To defend meaningfully, the insurer must defend immediately. To defend immediately, it must defend entirely." Hence, by agreeing to pay a share of the developer's defense costs, the Court in Presley Homes found that the insurance company effectively admitted it owed a duty to provide the developer with a defense, and accordingly, a full defense was owed.

10-Year Statute of Limitations for Actions to Recover for Latent Construction Defects is Subject to Equitable Tolling During Periods of Repair
[Petition for Review Granted]

Lantzy v. Centex Homes involved construction defect claims brought by a group of homeowners against the developer of the residential subdivision. The homeowners failed to file their complaint within ten years of the date on which their homes were substantially completed. However, they alleged in their complaint that the developer had tried to repair the defective conditions. The developer argued that the homeowners' complaint was untimely, barred by the 10-year statute of limitations set forth in California Code of Civil Procedure … 337.15, and that attempted repairs do not toll the statute of limitations for actions to recover damages for latent construction defects, pursuant to FNB Mortgage Corp. v. Pacific General Group.

The First District California Court of Appeal held that the 10-year statute of limitations set forth in California Code of Civil Procedure … 337.15 is subject to equitable tolling during periods of repair. In reaching such a conclusion, the Court distinguished and specifically disagreed with the contrary holding in FNB Mortgage Corp. v. Pacific General Group, and agreed with the holdings in Cascade Gardens Homeowners Assn. v. McKellar & Assoc. and Grange Debris Box & Wrecking Co. v. Superior Court.

Lantzy is currently up for review by the California Supreme Court.

Manufacturers of Single Purpose Products Incorporated Into Mass-Produced Homes Are Subject to Strict Products Liability to Homeowners

Acosta v. Synthetic Industries, Inc. involved claims for strict products liability by homeowners against the manufacturer of Fibermesh, a secondary reinforcer added to concrete. Fibermesh was used in the construction of the slab foundations for the homes purchased by the plaintiff homeowners. The homeowners alleged that Fibermesh did not serve to hold the concrete slabs together, as it was supposed to, and as a result, they suffered water intrusion, insects, and dirt through the cracked foundation, as well as cracking and racking of stucco and windows due to weakness of the foundations.

The Second District California Court of Appeal concluded that manufacturers of nonversatile, single purpose products used and incorporated in mass-produced homes are subject to strict products liability to the ultimate consumer. In coming to its conclusion, the Court set forth that there is "no logical reason to insulate suppliers and manufacturers of defective products from strict liability just because the developer had primary responsibility for the construction of the mass-produced homes," and expressly disagreed with the reasoning and holding in Casey v. Overhead Door Corp., which states that strict products liability does not extend beyond the developer of mass-produced homes to the subcontractors or suppliers. The Court noted that the manufacturer of Fibermesh did not provide services of any kind and, therefore, Fibermesh does not fall within the category of products that are merely incidental to the provision of services, to which the doctrine of strict liability does not apply. "As long as the plaintiffs establish that the product was defective when it left the hands of a given seller in the distributive chain, strict products liability will attach." The imposition of strict products liability on one person in the distributive chain does not relieve other persons in the chain from liability.

If you would like to discuss these or any other construction law matters, please do not hesitate to contact any member of Klinedinst's Construction Law Department (Arthur S. Moreau III, Kurt U. Campbell, Susan S. Kohn, Dayna L. Chmelka, Maurine P. Travis, Mark H. Nys, Kristin M. Johnson, David N. Bregman, Bonnie M. Cloutier-Simonek, and Gabe P. Wright).