The California Supreme Court’s decision in Aas v. Superior Court 24 Cal.4th 627 (2000) held that the economic loss rule barred homeowner construction defect claims that were limited to solely economic losses. In response, in 2002 the California legislature passed SB800, commonly known as the Right to Repair Act (the “Act”), which comprehensively reformed California construction defect litigation. The Act requires homeowners to participate in a comprehensive pre-litigation dispute resolution process which affords builders an opportunity to cure alleged defects prior to a lawsuit being filed.
Despite the Act providing a detailed plan for pre-litigation resolution, some plaintiffs balked at complying with these requirements. These plaintiffs argued that the Act was only meant to apply to construction defect claims that were limited to economic losses and that it was not intended to apply to all construction defect claims. Although this argument was occasionally raised in the first ten years after the Act was passed, it was generally considered frivolous by the majority of people involved in construction defect litigation. However, that general consensus was shaken when a California appellate court agreed with the plaintiff’s argument in Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC, 219 Cal.App.4th 98 (2013). This case specifically held that the Act only applied to cases solely seeking purely economic losses and that it did not apply to common law actions for negligence or strict liability seeking recovery for non-economic property damage. The Liberty Mutual decision created significant confusion in construction defect lawsuits, because plaintiffs could apparently avoid the Act by simply alleging non-economic harm.
This confusion has remained for nearly five years. However, on January 18, 2018, the California Supreme Court issued its ruling in McMillin Albany LLC v. Superior Court, 2018 WL 456728 (Jan. 19, 2018).
The McMillin Albany case sprang directly from the holding in Liberty Mutual. In 2013, shortly after the Liberty Mutual decision was issued, the plaintiffs in McMillin Albany explicitly relied on it when they dismissed their claims under the Act and sought to proceed without complying with its pre-litigation requirements. Defendant McMillin moved for a stay pursuant to the Act, but the trial court, while expressing doubt about the propriety of the Liberty Mutual decision, denied McMillin’s motion, noting that it was bound to follow Liberty Mutual’s holding. However, the trial court certified the issue as one worthy of immediate appellate review, and McMillin filed a writ petition. The Court of Appeal disagreed with Liberty Mutual and a case that had followed it, Burch v. Superior Court, 223 Cal.App.4th 1411 (2014), and granted the petition and stay. Subsequently, the Supreme Court accepted the case for review and expressly rejected the decision in Liberty Mutual. The Court held that the Act was applicable to all claims for alleged damages from construction defect, including claims for non-economic and economic loss.
The Court noted that, although the Act explicitly exempted common law claims for personal injury from the Act, “it made the Act the virtually exclusive remedy not just for economic loss but also for property damage arising from construction defects.” McMillin at *1. The Court spent significant time analyzing the language of the Act and the legislative history of the Act. The Court found no basis to interpret the Act as limited only to claims of solely economic loss.
The Court’s holding, although it reversed Liberty Mutual and Burch, is not particularly surprising. The language of the Act does not limit itself to solely economic loss claims and the legislative history of the Act shows that it was meant to apply to all construction defect claims, other than those for personal injury. Considering that an extremely small percentage of construction defect lawsuits involve solely economic losses, the rulings in Liberty Mutual and Burch had the effect of rendering the entire Act nearly meaningless. It was never particularly logical to think that the California Legislature would have spent the considerable time and effort to pass the Act, if it was applicable to few actual lawsuits.
This ruling from the Supreme Court provides much needed clarity to construction defect litigation in California. It is now clear that, if plaintiffs wish to file suit to recover for property damage caused by construction defects – whether non-economic or economic – they must first comply with the pre-litigation procedures set out in detail in the Act. This consistency will make defending and prosecuting such cases simpler for all parties involved, as there is no longer any confusion over the procedures that must be followed. This ruling should also benefit insurers involved in construction defect matters, because it will eliminate the expenses incurred for defending and prosecuting the procedural motions that were spawned by the Liberty Mutual decision, and therefore should, hopefully, streamline the construction defect litigation process.