Understanding and Managing Claims For Construction Defects
Published Date: September 27, 2010
Stephen H. Reisman, Esq. and Adam P. Handfinger, Esq.
It has been reported that during the construction boom approximately 65,000 condo units were constructed in Palm Beach, Miami Dade and Broward Counties. Between the years 2003 and 2009 some local markets saw more than twice the number of units built over the forty (40) years before the boom. That’s a lot of condo units.
This large volume of new condominium units comes with a dramatic increase in claims by condominium unit owners and associations alike for alleged construction defects. Anyone that has been involved in the development and/or construction of condominiums knows that these types of claims are almost certain to be filed, regardless of the quality of construction. Attorneys and engineers hired by the unit owners and their associations will ulti- mately dissect the building, looking for items that can be claimed a defect. Almost any variation from the submitted as-built set of plans, no matter how minor, will be included in the engineer’s report and submitted to the developer and contractors as a claim.
Of course, those well-versed in these issues took precautions before and during construction to limit potential claims and to adequately address unavoidable claims. Typical pre-project planning includes use of the appropriate contractual provisions, such as warranties and indemnification, as well as the procurement of insurance and performance bonds to guarantee performance of those performing the work. During construction, increased supervision as well as frequent and proper inspections by the developers, contractors, design professionals, consult- ants and city/county inspectors can help reduce the likelihood that claims will be made and the number of issues ultimately to be identified by the engineers retained to uncover potential claims.
The bad news is that careful planning and perfect execution will likely not be sufficient to completely avoid claims for construction defects. The good news is that effectively managing these claims could help avoid the filing of a lawsuit by condominium unit owners and/or associations.
I. Chapter 718 Warranties:
Chapter 718, Florida Statute, titled “Condominiums”, not surprisingly governs most things relating to condominiums, including their development and construction. More specifically,Florida Statute Section 718.203 contains statutory warranties automatically provided by developers and contractors to the unit owners. These warranties typically serve as the basis for claims of construction defects and deficiencies.
* Published in the Summer 2010 edition of CONSTRUCTION Ink! – The Magazine of the Construction Association of South Florida
As you will see below, the warranties provided by the developer differ somewhat from those provided by the con- tractor.
Developer Warranties Florida Statute Section 718.203 states that Developers automatically grant each purchaser an implied warranty of fitness and merchantability for the purposes or uses intended, but the length of the warranty differs depend- ing upon the building component at issue.
For the units themselves, the warranty is for three (3) years, beginning with the completion of the building. For personal property that is transferred with, or appurtenant to, each unit, the developer grants a warranty for the same period as that provided by the manufacturer of the personal property, which begins with the closing of the purchase or the date of possession of the unit, whichever is earlier. (As to all other personal property for the use of unit owners, the developer provides a warranty which is the same as that provided by the manufacturer of the personal property.) There is a three (3) year warranty for any other improvements for the use of unit owners, beginning with the date of completion of the improvements.
The developers warrant all other property conveyed with a unit to the initial purchaser for a period of one (1) year from the date of closing of the purchase or the date of possession, whichever occurs first.
With regard to the roof and structural components of a building or other improvements, and as to mechanical, electrical, and plumbing elements serving improvements or a building (except mechanical elements serving only one unit), the developer’s warranty runs for the period beginning with the completion of construction of each building or improvement and continues for three (3) years thereafter or for one (1) year after owners other than the developer obtain control of the association, whichever occurs last, but in no event more than 5 years. This timing is critical because claims for defects in the roof, structure and mechanical, electrical and plumbing components typically form the bulk of the defect claims and, in any event, often prove the most costly to investigate and ultimately remediate.
Contractor, Subcontractor and Supplier Warranties.of course, Florida Statute Section 718.203 does not ignore contractors, subcontractors and suppliers, and states that they automatically grant to the developer and to the purchaser of each unit implied warranties of fitness as to the work performed or materials supplied by them. As with the developer warranties discussed above, the length of the warranty depends upon the building components at issue.
The contractor, subcontractors and suppliers warrant the roof and structural components of the building or improvement as well as the mechanical and plumbing elements serving a building or an improvement (except mechanical elements serving only one unit) for a period of three (3) years from the date of completion of construction of a building or improvement. As to all other improvements and materials, the warranty is for a peri- od of one (1) year after completion of all construction.
While the warranties provided by developers are broader and, under certain circumstances, longer, general contractors are typically required to indemnify developers from these types of claim and that indemnification usual attention to the developer’s warranties.
II. Timing of Claims.
The warranty periods identified in Chapter 718 typically govern when claims must first be submitted by the unit owners and their association to those providing the warranty. This is typically accomplished and governed by the procedures set forth in Ch. 558, Florida Statutes, discussed below. However, the deadline to actually file a law- suit to recover damages for construction defects and the potential breach of the Chapter 718 warranties is gov- erned by Florida Statute Section 95.11.
The deadlines imposed by Florida law to file suit are strictly construed, meaning that claims filed even one day late will be deemed waived. Thus, the time requirements must be, and generally are, carefully followed.
Unit owner and association claims for construction defects are governed by Florida Statute §95.11 (3)(c), which states as follows:
An action founded on the design, planning, or construction of an improvement to real property, with the time running from the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest; except that, when the action involves a latent defect, the time runs from the time the defect is discovered or should have been discovered with the exercise of due diligence. In any event, the action must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.
Thus, lawsuits for claims arising from latent defects (those that were not discovered and could not have been dis- covered with the exercise of reasonable care) must be brought within four (4) years from discovery of the defect or when the defect should have been discovered with the exercise of due diligence, but in any event, within ten (10) years after the date of project completion. It is interesting to note that this ten (10) year statute of repose was recently shortened from fifteen (15) years.
The length of time that claims for latent construction defects may be brought is problematic, especially for developers and contractors looking for protection from the performance bonds procured by those actually performing
the work. Claims against performance bond sureties, such as those naming a contractor or subcontractor as the principal, must be brought within five (5) years from either the completion of work or completion of the project. This is true even for claims arising from latent defects as the aforementioned “discovery rule” does not apply to performance bond sureties. There is an obvious discrepancy between the length of the protections provided by performance bonds and the length of time that unit owners and associations may bring claims for construction.
defects. Thus, those developers and general contractors wanting to preserve the protections afforded by performance bonds need to make sure that claims are asserted before the expiration of the appropriate five (5) year period. Practically, this may be difficult, but the first step is calendaring the appropriate dates and addressing these issues before the deadlines expire.
One thing is for sure, awareness of the competing deadlines and time frames is critical to adequately shifting the risk and responsibility for claims.
III. Assertion of Claims.
In order to provide construction professionals with advanced warning and an opportunity to resolve claims before a lawsuit is filed, Florida’s legislature enacted Chapter 558, appropriately titled “Construction Defects”. This statute was adopted in 2004 and provides the right to obtain notice, inspect and offer to correct, and/or settle claims for defective construction. While the statute originally applied only to residential construction, it has been expanded to cover all claims of defects in improvements to real property, including commercial projects as well as manufactured and mobile homes. Only public transportation projects are still excluded.
A lawsuit is filed, Florida’s legislature enacted Chapter 558, appropriately titled “Construction Defects”. This statute was adopted in 2004 and provides the right to obtain notice, inspect and offer to correct, and/or settle claims for defective construction. While the statute originally applied only to residential construction, it has been expanded to cover all claims of defects in improvements to real property, including commercial projects as well as manufactured and mobile homes. Only public transportation projects are still excluded.
Chapter 558 has proven to be incredibly helpful in limiting claims and/or ultimately avoiding the filing of a law- suit altogether, which is consistent with its purpose described by Florida’s Legislature in Fla. Stat. § 558.001, as follows:
The Legislature finds that it is beneficial to have an alternative method to resolve construction disputes that would reduce the need for litigation as well as protect the rights of property owners. An effective alternative dispute resolution mechanism in certain construction defect matters should involve the claimant filing a notice of claim with the contractor, subcontractor, supplier, or design professional that the claimant asserts is responsible for the defect, and should provide the contractor, subcontractor, supplier, or design professional with an opportunity to resolve the claim without resort to further legal process.
The deadlines and notice requirements contained within Chapter 558 must be followed and satisfied prior to the institution of a legal action for construction defects. Not only do these prerequisites apply to the initial claimants, (i.e. condominium associations and property owners) but to general contractors passing-through the claims to design professionals, subcontractors, and suppliers.
Initially, it is very important to note that some of the time requirements of Chapter 558 are extended for associations representing more than twenty (20) parcels (a/k/a units) since the size of those properties likely necessitate additional time to complete the notice and inspection process.
Claimants must provide sixty (60) days written notice of alleged construction defects to the contractor, subcontractor, supplier, or design professional, as applicable, prior to instituting legal action, including arbitration. The aforementioned notice requirement is extended to one-hundred and twenty (120) days for associations represent- ing more than twenty (20) parcels.
If applicable, construction professionals must forward notice of the claim to any contractor, subcontractor, sup- plier, and/or design professional that may be responsible for each defect, and must do so within ten (10) days after receipt of the notice of claim, or within thirty (30) days after receipt of the notice of claim involving an association representing more than twenty (20) parcels. Then, within fifteen (15) days after receipt of the notice of claim, or within thirty (30) days after receipt of a claim involving an association representing more than twenty (20) parcels, the construction professional must serve a written response to the person who forwarded a copy of the notice of claim.
The Statute entitles construction professionals to inspect the alleged defects within thirty (30) days of receipt of the notice, or within fifty (50) days of receipt when the claims are made by associations representing more than twenty (20) parcels.
Finally, within forty-five (45) days after receiving the notice of claim, or within seventy-five (75) days after receipt of the notice of claim involving an association representing more than twenty (20) parcels, construction professionals must respond to the original Notice of Claim by either offering to resolve the claim through remedial work and/or monetary payment or reject the claim. Only after this process is completed may claimants initiate legal proceedings.
All claimants are required to “endeavor” to serve notice of construction defect claims within fifteen (15) days of their discovery. However, there is no absolute requirement to provide notice within this time frame and the fail- ure to do so shall not serve as a bar to the claim.
Understanding the deadlines and logistical requirements is important, but knowing what do to once the process is initiated is critical to resolving claims and avoiding lawsuits. General contractors receiving the initial notice of claim must lead the charge of subcontractors, suppliers and design professionals to inspect the allegations and develop a comprehensive matrix of each item to track responses and the performance of remedial work. The construction and design professionals should work closely with the unit owners/association’s engineers to address each allegation, and either obtain an acknowledgement that some items are ultimately not defects or an agree- ment that remedial work was sufficiently performed. A protocol for inspection and acceptance of remedial work should be established so that all parties know who has authority to resolve claims on behalf of the unit owners and associations.
Of course, triggering the protections provided by insurance companies issuing commercial general liability policies and sureties issuing performance bonds should be an initial priority. In light of the timing issues discussed above, these issues must be considered even before the Chapter 558 process is initiated.