Ruling could help in construction defect disputes
KENT DARR Aug 24, 2016 | 8:44 pm
2 min read time
498 wordsBusiness Record Insider, Real Estate and DevelopmentAn Iowa Supreme Court decision could halt the chain reaction of lawsuits that often results from construction defects.
The 4-3 ruling earlier this summer focuses on an insurance settlement dispute between Westlake Investments LLC, owners of a 300-unit West Des Moines apartment complex, and National Surety Corp., which held a general commercial liability policy on the project when it was completed in 2003.
Westlake Investments bought the development in late 2003, and nearly five years later filed a federal lawsuit seeking to recover expenses for lost profits and the repair of water-related damages.
The federal lawsuit resulted in a consent judgment in which the apartment complex’s developers, general contractors and subcontractors agreed to $15.6 million in damages. The developer, its primary insurance carrier and its subcontractors paid about $3 million. The property owner sought to collect the balance from National Surety Corp., which had been retained to provide the excess commercial general liability coverage.
National Surety balked and filed a lawsuit against Westlake Investments in Polk County District Court, claiming it was not liable because its policy did not provide coverage. The case hinged on the words “occurrence” and “accident.”
After a three-week trial, a Polk County jury ruled National Surety was liable and ordered the company to pay the remaining balance of more than $12.4 million.
A three-judge panel of the Iowa Court of Appeals upheld the verdict, and in June a majority of Supreme Court justices affirmed.
Of significance here is that the Supreme Court ruling held that an accident can occur when subcontractors perform defective work, with the effects becoming noticeable over a period of time.
Prior to the ruling, property owners, developers or general contractors would often have to track down every subcontractor responsible for the work to collect damages. That happened in the federal case. Westlake Investments filed a lawsuit against the Missouri-based developers of the apartment complex, and those developers sued about 20 subcontractors.
Todd Lantz, an attorney with the Weinhardt & Logan law firm, and Stephen Eckley, an attorney with Belin McCormick P.C., represented Westlake Investments, said the ruling should press insurance companies to resolve disputes at an early stage.
That alone could free some space in courtrooms and conference rooms. Lantz said that during the underlying litigation, all of the lawyers representing various parties could not fit at counsel tables. During depositions in preparation for a trial, lawyers would fill hotel conference rooms.
“It was a very complicated process,” Lantz said.
Prior to the Supreme Court ruling, insurance companies frequently would claim that poor workmanship did not amount to an accident. In essence, the Supreme Court ruled that inferior work performed by subcontractors may be unexpected and unintended from the viewpoint of a general contractor or developer, and therefore may be an accident.
The ruling could be groundbreaking for work performed in Iowa.
“I have seen other construction lawyers describe this as the most important case for the construction industry in decades, and I don’t think I disagree,” Lantz said.
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