CA Supreme Court: Right to Repair Act (SB 800) is the Exclusive Remedy for Residential Construction Defect Claims – So Now What?

A torrent of alerts have been flooding e-mail inboxes regarding the California Supreme Court’s decision in McMillin v. Superior Court, to reverse the Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC (2013) case, but with little discussion about the practical effects of the ruling.This alert will discuss how this ruling affects litigation of SB 800 Claims and Builders.

Background on Liberty Mutual Case

In 2002, the California Legislature enacted comprehensive construction defect litigation reform referred to as the Right to Repair Act (the “Act”). Among other things, the Act establishes standards for residential dwellings, and creates a prelitigation process that allows builders an opportunity to cure the construction defects before being sued. Since its enactment, however, the Act’s application has been up for debate. Most notably, in Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC (2013), the California Court of Appeal for the Fourth District held the Act was the exclusive remedy only in instances where the defects caused only economic loss, and that homeowners could pursue other remedies in situations where the defects caused actual property damage or personal injuries.

Liberty Mutual remained the law of the land until the Fifth District issued a contrary ruling in McMillin Albany LLC v. The Superior Court of Kern County. In McMillin, the homeowners sued the builders for negligence, strict product liability, breach of contract, breach of warranty, and violations of the Act. In turn, the builders asked the homeowners to stay the litigation so that the parties could proceed with the Act’s prelitigation requirements – that is, so that the builders could have an opportunity to cure the defects. The homeowners did not agree to the stay, and instead withdrew their claim under the Act. The builders subsequently moved to stay the action, which the trial court denied based on Liberty Mutual. The builders appealed. The Fifth District sided with the builders, holding the Act’s prelitigation progress applied even though the homeowners had dismissed their statutory claim under the Act. The California Supreme Court subsequently granted review to resolve the District split between Liberty Mutual and McMillin.

The California Supreme Court Decision

The California Supreme Court recently held, after a lengthy discussion on legislative intent, that the Act is the virtually exclusive remedy not just for economic loss but also for property damage arising from construction defects. In doing so, the Court made three critical findings: 1) the prelitigation requirements apply to “any action” seeking damages for construction defect, not just those brought under the Act; 2) a homeowner who suffers only economic loss may present a claim under the Act without waiting for the defect to cause actual property damage; and 3) the Act preserves common law tort claims for construction defects resulting in personal injury. In light of these findings, the Court ruled that even though the homeowners had withdrawn their claim under the Act, they were nonetheless required to initiate the prelitigation procedures because their alleged damages arose from construction defects of the residential homes.

How Does the Ruling Affect Builders – and their Lawyers?

This decision should speed up litigation and reduce attorneys’ fees for Builders. As attorneys for Builders can appreciate, complaints that contain common law causes of action are a major distraction; we are forced to spend time evaluating theories of liability that Liberty Mutual said were not pre-empted by SB 800. This additional work increased the cost of the litigation for Builders and their insurers, which obviously the Plaintiffs’ attorneys liked because it increased settlement leverage. Now, McMillin returns the legal landscape back to where it should have been, restoring more order to the legal process.

So now that Plaintiffs’ lawyers are relegated to litigating under SB 800, the Builders should hold the Plaintiffs’ lawyers feet to fire in the Prelitigation Procedure and demand a dismissal of prematurely filed claims. Plus, Builders need to look at instituting the Right to Repair on a case-by-case basis. If there is a claim involving a small number of homes, it may make sense to perform repairs, whereas repairs in large cases with dozens of homes may not make sense. Before performing repairs, Builders should check to see if the repairs count against a self-insured retention, since frequently they are not.

McMillin is a win for builders of residential homes because it returns clarity to the legal process and eliminates disputes about common law theories of liabilities. This should ease some of the fees associated with these cases and speed them up towards a resolution. And just as importantly, it decreases Plaintiffs’ settlement leverage, which is always a good thing.

This document is intended to provide you with information about construction law related developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

January 25, 2018