An Important Ruling on Building Defects

A little more than a month ago the 4th District Court of Appeal in Santa Ana issued an important ruling on construction defects that I thought your readers would like to know about.

The court ruled that property damage caused by construction defects may not be rejected simply because their causes could not be detected by the naked eye. This redefines the exclusion for latent construction defects found in standard homeowner’s, homeowners association and building owner’s insurance policies.

In the past, California courts have ruled that latent construction defects can be excluded from insurance coverage if causes “were not observable from a cursory examination of the insured’s property.”

In Scott vs. the Continental Insurance Co. (96 Daily Journal D.A.R 3694), apartment complex owner Martha A. Scott sought repair coverage for a cracked and leaning retaining wall in the complex’s parking area. Her insurer, Continental Insurance, denied the claim because of her policy’s latent defect exclusion. Scott then sued the insurer, only to have her case tossed out of the trial court.

On appeal, Scott invited the justices to rethink the meaning of latent defects for insurance purposes. In overruling the trial court, they said, “A latent defect is one which is both not readily discoverable and not discoverable to any but the most searching examination.”

Thus the insurer could not simply on the basis of everyday observation classify the defective retaining wall as latent. And that to deny coverage, the detection of the cause of the retaining wall’s failure must entail a more in-depth and searching examination.

The court stated insurance coverage turned on determining what would have “needed” to be done to detect the defect at the time the policy was issued.

THOMAS E. MILLER

Newport Beach

The writer is an attorney.