Dispute Resolutions and Residential Construction

In 2004, the Georgia Legislature enacted a series of statutes that were purportedly intended to facilitate dispute resolution and reduce the need for litigation when construction defects occur in residential property. To affect this purpose, the statutes prescribe a series of steps that must be followed in the prosecution of a claim for a construction defect. Failure to follow the statutory procedures essentially forecloses the right of a claimant to pursue litigation against the wrongdoer. These statutes have significant implications for the adjustment of residential property claims arising from poor construction in Georgia, as an insurer can lose any prospect of subrogation if the statutory procedures are not followed. Further, these procedures create significant potential for friction between good-faith compliance with the insurance contract and preservation of recovery rights by the insurer.

O.C.G.A. § 8-2-30(a) provides that these so-called “Alternative Dispute Resolution” statutes apply to “all installations, alterations, and repairs of plumbing, air-conditioning and heating, or electrical systems within or on public or private structures, or premises.” This broad applicability is narrowed in O.C.G.A. § 8-2-36(4) (the definitions section of the Act) which defines a “construction defect” as having the same meaning assigned by any written or express warranty given by the contractor or required by applicable law. In the absence of a written or express warranty, a “construction defect” is defined as:

“a matter concerning the design, construction, or repair of a dwelling, of an alteration of or repair or addition to an existing dwelling, or of an appurtenance to a dwelling on which a person has a complaint against a contractor. The term may include any physical damage to the dwelling, any appurtenance, or the real property on which the dwelling or appurtenance is affixed proximately caused by a construction defect.”

“Dwelling” is defined by O.C.G.A. § 8-2-36(6) as a “single-family house, duplex, or multifamily unit designed for residential use in which title to each individual unit is transferred to the owner. . .” i.e., condominiums and cooperatives. The “dwelling” includes the systems, components, improvements, other structures and/or recreational facilities that are appurtenant to the “dwelling” at the time of initial sale, even if not actually a part of the “dwelling.”

Under O.C.G.A. § 8-2-38, a claimant for a construction defect in a dwelling must, no less than 90 days prior to bringing a civil action or arbitration proceeding against an allegedly responsible contractor, provide written notice (by certified mail or statutory overnight delivery, return receipt requested) to the contractor (or the contractor’s registered agent if the contractor is a corporation, limited partnership or limited liability company) of the claim, stating that a claim is being asserted and describing the “construction defect” in sufficient detail to explain the claim. The claimant must also provide any expert reports, photographs, videotapes, etc., if such would be “discoverable under evidentiary rules.” O.C.G.A. § 8-2-38(a).

The contractor then has 30 days after service of the notice of claim to respond by “serving” (i.e., in writing in the same manner required of the claimant), on the claimant and any other contractor who was served with notice by the claimant, a written response which either offers to settle or proposes to inspect the dwelling that is the subject of the claim. If the contractor proposes to inspect the dwelling, the claimant has 30 days to provide the contractor (or his experts, subcontractors, etc.) access to the dwelling for inspection of any alleged defects and any nondestructive testing required to evaluate the claim of a construction defect, as well as the necessary scope of repair. If a contractor wishes to conduct destructive testing, advance notice must be given to the claimant and, after such testing is completed, restore the dwelling to its pretesting condition.

If the contractor determines, during inspection, that further inspection or testing is required, the contractor must then give notice to the claimant, and the claimant must make the dwelling available in a “prompt and reasonable” period of time. After the completion of all inspections and testing, the contractor has 14 days to “serve” on the claimant (1) a written offer “to fully or partially remedy the construction defect at no cost to the claimant” that describes any additional construction necessary to remedy the defect and (2) a written offer to settle the claim by monetary payment, (3) a written offer including a combination of repairs and monetary payment or (4) a statement that the contractor will not proceed further to remedy the defect, stating the reasons for rejection of the claimant’s claim. [NB: The statute places the conjunction “or” between (3) and (4), but uses no other conjunctions. It is not clear if each of the four choices is an independent, exclusive option, i.e., 1 or 2 or 3 or 4, or whether it requires 1 and 2 and (3 or 4).]

If the claimant accepts any of the contractor’s offers (which must be done by “serving written notice on the contractor within 30 days after receipt of the offer) and the contractor does not comply with the settlement, the claimant may bring suit without further notice. If the contractor does not respond within the 30-day period allowed after the initial notice of claim, or completely rejects the claim, the claimant may bring suit without further notice.

If the claimant rejects the contractor’s offers, the claimant must “serve” written notice on the contractor of such rejection and “all known reasons” for the rejection of the contractor’s offer. This triggers an additional 15-day period in which the contractor may make an additional supplemental offer of repair or money to the claimant. If the claimant rejects the supplemental offer, notice of the rejection must be “served” on the contractor, again stating “all known reasons” for the rejection of the contractor’s supplemental offer.

If, in the course of the inspections and repairs, additional “construction defects” are detected in the “dwelling,” the entire process must begin anew as to the newly-discovered construction defect. If a claimant rejects a contractor’s offer of settlement, the issue of the “reasonableness” of the offer becomes a question for the fact-finder in any subsequent civil action. If the trier of fact (which can be either judge or jury, depending on the nature of the proceeding) concludes that the contractor’s offer was “reasonable,” then the damages recoverable by the claimant are limited to either (1) the fair market value of the offer of settlement or the actual cost of the repairs made or (2) the amount of a monetary offer of settlement.

No civil action can be brought to recover for “construction defects” in a “dwelling” unless the statutory provisions have been followed. If an action is brought without compliance, the action must be stayed until compliance is achieved. If a statute of limitation or repose is about to run, an action can be filed but must be stayed pending the following of the statutory procedures.

The statute is silent on how a claimant, without assistance of counsel, will know what is or is not “discoverable under evidentiary rules” and thus be able to include appropriate reports and materials with the statutory notices to the contractor. The statute is silent on how a claimant will know, without involving counsel, whether a statute of limitation or repose is about to run on the claim, thus necessitating immediate filing of an action to toll the statute.

The statute requires a contractor doing work that is governed by its provisions to give written notice, “upon entering into a contract for sale, construction, or improvement of a dwelling,” to the owner of the contractor’s rights to resolve a claim before litigation. However, no penalty is prescribed for the contractor’s failure to do so. These statutory provisions are in derogation of common law and thus presumably will be strictly construed with respect to compliance.

There is no suggestion, however, in the statute that a contractor forfeits the benefits of the dispute resolution provisions if the required written notice is not given to the owner.

To place all of the above in a real-life context, assume that an insured, the owner of a single-family dwelling, calls his insured with a claim for water damage caused by a severe roof leak. It turns out that a new roof was installed by a contractor six months before the leak. Examination of the roof indicates that the roof is grossly deficient, with shingles laid at too-wide intervals over partially-rotted plyboard sheathing roof and no underlay was installed beneath the shingles. It is obvious that, if more rain falls, the roof will continue to leak. Mold damage to the structure and to personal property in the dwelling is a likely consequence of the water incursions into the dwelling. The insured wants to get it fixed as quickly as possible and the damage is a covered claim under the policy in force. There is manifest fault on the part of the roofing contractor, which means that there is at least some prospect for subrogation in the matter. BUT . . .

• How long can you reasonably delay repairs while the statutory notice periods run?
• What about spoliation of evidence if you make repairs before the contractor can inspect the dwelling?
• Will you run up your ALE payments if the dwelling is not habitable because of the leak?
• How long will the homeowner’s association let the insured keep a tarp on the roof during the notice and inspection periods (which can run up to 89 days by my calculations)?
• Does good faith require you to effect repairs promptly and disregard recovery potential?
• When will it be cost-effective to pursue recovery under the statutory provisions?
• Can you even find the contractor to serve the required notice?
• The statute only applies to the damage to the improvement to real property that must be repaired to remedy the “construction defect.” What about claims for damage to personal property, loss of use, ensuing damage to other parts of the structure that were not defective, but become damaged because of the “construction defect” by, for example, water incursion?

The requirements of this statutory scheme are overwhelmingly favorable to the building industry and detrimental to residential property owners. No allowance is made for emergency repairs to mitigate further damage. The great likelihood is that these provisions will simply add another layer to construction defect litigation (which has been the experience in Florida, which enacted a similar statute several years ago).
Although the statutory scheme purports to be a type of alternative dispute resolution, in fact it merely mandates an extended period of time in which the contractor is given an opportunity to cure defective work and make unilateral settlement offers, with no third party involved in mediation or arbitration of the dispute.
The major effect of this statutory scheme is to shift most of the risk of damage from and burden of repair for shoddy work onto owners and insurers of residential property, away from negligent contractors. There is virtually no way a lay person can negotiate this maze of statutory requirements without retaining counsel. Only in large claims will the cost of jumping through all the statutory hoops be a reasonable expense, since attorney fees incurred during the non-litigated portion of the claim will almost never be recoverable. Underwriters and actuaries may need to revise premium calculations for residential property in light of the increased risk of loss and increased probability of indemnity payments precipitated this statute. Adjusters and recovery personnel must be mindful of these provisions if they have any hope of pursuing subrogation against shoddy contractors.

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