Betts Patterson Mines

Condo Association Construction-Defect Claims under First-Party Policies: A Growth Industry?

The Washington Condominium Act created a bonanza for plaintiffs’ lawyers representing condominium associations. It permitted the condominium association of a new condominium to sue the developer (who would then sue the contractors who built the condominium) for breach of the implied warranty of quality – that is that the condominium was “free from defective materials,” “constructed in accordance with sound engineering and construction standards” and “in a workmanlike manner,” and “in compliance with all laws.” In practice almost any trivial or technical violation of the building code would qualify as a breach of the warranty. And in any suit over the warranty the condominium association could be awarded its attorneys fees. The only rub was the four-year statute of limitation (running from substantial completion) applicable to those claims. As long as there was a steady supply of new condominiums being constructed there was a ready market for the condo associations plaintiffs’ bar.

Then came the 2008 financial crisis. New construction – particularly condominium construction – came to a standstill. As a result by about 2012 the market for condominium association claims against developers had dried up.

So the plaintiffs’ bar sought to develop a new market: Older poorly constructed condominiums whose associations would sue their first-party property insurers for the cost of repairing their deteriorating buildings. They would sue all of the property insurers on the risk since the condominium was built, frequently decades earlier. And to avoid the typical property policy exclusions for wear-and-tear, dry-rot and defective construction, the theory would be that the damage was caused by wind-driven rain (typically not an excluded peril, particularly under older policies.) In addition, they would claim that any building decay created a collapse to which the separate coverage for collapse caused by hidden decay would apply.

One problem existed though: most property policies contained suit-limitation clauses requiring that the insured must bring suit on any claim under the policy within one or two years after the loss occurs. But the plaintiffs’ bar thought that they had found a answer to that question in Panorama Village v. Allstate Insurance Company, 144 Wn.2d 130 (2001). According to their reading of that case, the suit-limitation period would start running only on the uncovering of “hidden decay”. Because the hidden decay was exposed only recently, as the argument goes, a claim under an old policy would not be time-barred.

But the plaintiffs’ argument stands Panorama Village on its head. What Panorama actually decides is that (1) the court must carefully follow the policy language, (2) when the suit-limitation clause does not include language imposing a discovery rule, the court cannot “interpret” it to require one, and (3) in continuing-loss situations claims under policies in effect during the one- or two-year period before suit are not time-barred. But Panorama Village does not address, as the plaintiffs seem to think, whether claims under earlier policies are time-barred.

So will the plaintiffs’ bar create a new gold mine for itself and condominium associations with its interpretation of Panorama Village? Two linked cases pending before the Court of Appeals will answer that question. In Bellevue Highlands v. Aetna two insurers, whose policies were in effect 30 and 10 years before the condominiums association tendered its claim, appealed the trial court’s denial of their respective suit-limitation summary-judgment motions. The trial court denied summary judgment because the insured association purportedly did not know that the uncovered rot damage was “systemic.” The insurers argue that Washington courts have consistently enforced suit-limitation clauses, the clause requires the insured to bring suit within one year after the loss occurs during the policy under which the claim is made, a discovery rule does not apply unless the policy language authorizes it, the uncovering of “hidden decay” is not the trigger starting the running of the limitation  period, and even if a discovery rule applied the insured know of the damage—even systemic damage—years before its suit. The court will have to decide the legal standard that applies to suit-limitation clauses and thus whether, despite the clause, long-tail liability will apply to first-party policies in much the same way as in third-party policies. The court’s resolution of the issue will determine whether we will see an explosion of first-party property suits or whether the trend will be abruptly ended. Stay tuned.

Russell Love