May 2005
Table of Contents
Mahoney, Dougherty and Mahoney, P.A. distributes this newsletter to its clients and others to keep them informed about developments in the area of tort and insurance law. The articles are not intended to be legal advice and should not be relied on without counsel.
By Victor Lund
The court of appeals has recently issued several opinions on the general topic of construction law. Several of these have dealt with the statute of limitations for improvements to real property found at Minn. Stat. § 541.051. In Merritt v. Mendel , ___ N.W.2d ___ (Minn. App. 2005), the court decided that a replacement roof was an improvement to real property within the meaning of the statute. Consequently, the homeowners' claim was barred because they brought it more than two years after discovering that the roof leaked. The argument in opposition was that the original roof, along with the house underneath it, might be an improvement to real property, but a replacement roof is a repair. Roofs wear out like anything else. Replacing it should be a repair and not an improvement to real property. The case law defines improvement to real property to exclude mere ordinary repair. The court of appeals in Merritt rejected these arguments. A new roof is an enhancement to the capital value and consequently an improvement.
The result of the Merritt case is less obvious than you might suppose. Your editor lost a summary judgment motion many years ago when the judge found that a replacement roof on a commercial building was a repair and not an improvement, even though it cost tens of thousands of dollars, on the theory that the replacement roof merely restores capital value rather than enhancing it. That argument should now be unavailing.
The Merritt court cited another court of appeals decision from last year, Taney v. ISD No. 624 , 673 N.W.2d 497 (Minn. App. 2004) which held that substantial remodeling can be an improvement to real property and not merely repair. Before the Taney case, there was very little Minnesota case law on the question of remodeling or repairs to real property. One older case held that replacing a $35 seal on a multi-million dollar power generating plant was repair and not an improvement. Those facts provided very little guidance in other cases.
In another recent case involving the same statute of limitations, the court of appeals decided that a water purification system in a commercial building was an improvement to real property even where the system was entirely removable and did not enhance the building's capital value. Allianz Insurance Co. v. PM Services , ___ N.W.2d ___ (Minn. App. 2005). The water purification system may have been removable, but it was plumbed into the building's water supply and nobody intended to remove it. The court distinguished a 1988 decision holding that a large water slide at a city park was not an improvement where it was dismantled and put in storage for half the year. The court stated expressly that the supposed requirement that an improvement enhance capital value is not rigidly applied in all cases. Your editor believes there is no Minnesota decision that cites a specific dollar figure in support of capital enhancement. Previous cases have held that a smoke alarm and bird feeder are improvements to real property. Any capital enhancement associated with such improvements must be minimal. If the thing makes the building more useful, it is likely an improvement. The Allianz claimant further asserted that one component of the water system developed a leak within a few days of installation. The installer repaired or replaced that fixture. This led to the argument that the damages were attributable to negligent repair rather than a defective improvement. The court was not persuaded. Without holding the proximity of repair to installation is crucial, it concluded that fixing a punch list item within days of installation was part of the original installation.
The court of appeals has issued yet one more opinion on the improvement to real property statute of limitations this year. Weston v. McWilliams & Associates, Inc. , ___ N.W.2d ___ (Minn. App. 2005). The issue there was the effect of the ten-year statute of repose. The statute states that no cause of action shall accrue more than ten years after substantial completion of construction. In Weston , the homeowners discovered water damage to their home in the ninth year following construction and sued the contractor two months before the ten-year anniversary. The contractor brought contribution claims against subcontractors after that anniversary. The court held that the contribution claims were timely. No doubt, the bottom line was simply a matter of fairness. Since the statute says no claim shall accrue more than ten years after completion, the court had to do some creative statutory analysis to reach the result. The rule now is that the ten-year anniversary of construction will not cut off contribution claims where the principal claim is timely. In theory, the claimant could discover the damage shortly before the ten years expires and then have two years to sue the claim out. The defendant could bring contribution claims more than 12 years after completion of construction. Under those circumstances, the defendant would be well advised to sue out contribution claims as quickly as possible.
On the same general topic of construction law, the court of appeals recently decided an issue of coverage for construction disputes. In Westfield Insurance Co. v. Kroiss , ___ N.W.2d ___ (Minn. App. 2005), the issue was the familiar one of coverage for water claims. Several homeowners sued the home builder for water damage at homes built during the period when Westfield covered the building. The builder tendered defense to Westfield and later insurers. The later insurers defended under reservations of rights, but Westfield declined on the grounds that the complaints did not state when the property damage took place. The court had little difficulty with the duty to defend. The underlying complaints did not state when the water damage occurred. It might have occurred when Westfield was on the risk. Consequently, coverage was arguable and there was a duty to defend. The more interesting question was whether the insured should get attorney's fees in the declaratory action where other insurers assumed the costs of defending the underlying actions. The court concluded that declaratory fees were damages resulting from the breach of the duty to defend even if there was little actual damage resulting from the breach in the underlying actions.
Also of interest on the topic of construction coverage, although less topical, is a decision from last year, Wanzek Construction, Inc. v. Employers Insurance of Wausau , 679 N.W.2d 322 (Minn. 2004). The Wanzek matter arose out of construction of a swimming pool for St. Louis Park. The contract included coping stones at the parameter of the pool and further provided precise specifications for the stones, including size, density, strength, color, pattern, and further listed two acceptable manufacturers. Aquatic Design, one of the specified manufacturers, got the contract, provided shop drawings, fabricated the stones, and delivered them to the work site. Aquatic Design did not actually install the stones, but the contract required it to provide employees to supervise installation. A large number of the stones cracked. The city demanded replacement. Aquatic Designs refused and then went out of business. Wanzek, the general contractor, replaced the stones at a cost in excess of $100,000 and tried to recoup the cost from its insurer, Wausau. Wausau denied the claim on the basis of the business risk doctrine, specifically the "your work" and "your product" exclusions.
The court began by reviewing the history of the business risk doctrine. The most important development in the doctrine is the 1986 revision to the standard CGL language which added a clause that the "your work" exclusion did not apply to work done by a subcontractor. In 1996, the court of appeals held that that language was intended to mean something and in fact meant exactly what it said. O'Shaughnessy v. Smuckler Corp. 543 N.W.2d 99 (Minn. App. 1996). There was no issue in the O'Shaughnessy case whether the subcontractors were in fact subcontractors.
That is the issue which came up in Wanzek - is a supplier which fabricates building materials according to specifications but does not actually install them a subcontractor or a material supplier? Everyone agreed that a supplier of fungible materials, such as nails, is not a subcontractor. A party that actually performs a portion of the construction work at the job site, such as a roofer, is a subcontractor. Aquatic Design fell in between those two obvious examples.
To resolve the issue, the supreme court noted first that the policy does not define subcontractor. Previous case law on the question arose in the context of taxation. None of this precedent was binding in an insurance context. The court concluded that where "a supplier custom fabricates the materials to the owner's specifications and provides on-site services in connection with the installation, the supplier meets the definition of subcontractor under the exception to the 'your works' exclusion." 679 N.W.2d at 329.
The court had no difficulty holding that the "your product" exclusion did not apply because of the limitation in the exclusion to goods or products other than real property. If the product is incorporated into real property, the "your product" exclusion does not apply. The court rejected the argument that a finished building, or swimming pool, is the product of a construction company.
The Supreme Court of Wisconsin also addressed the same issues in American Family Mutual Insurance Co. v. American Girl, Inc. , 673 N.W.2d 65 (Wis. 2004). The Wisconsin case arose out of construction of a warehouse. The soil engineering subcontractor gave deficient advice on the condition of the soil. Construction went forward but, alas, the building began to sink, buckle, and crack, and eventually had to be torn down. After considering other issues - whether the damages were caused by an occurrence - the court reached the subcontractor exception to the "your work" exclusion. The policy was a CGL. The relevant language was the same as in Wanzek . Citing to O'Shaughnessy , the court of appeals' Wanzek decision, and other case law, the Wisconsin Supreme Court held that the subcontractor exception restores coverage for deficient work done by subcontractors where coverage would otherwise be precluded by the terms of the "your work" exclusion. The court rejected American Family's argument that an exception to an exclusion cannot create coverage. That is true, but in this case, the exception does not create coverage; coverage existed already. The court has a detailed discussion of the history of the exclusion and the 1986 edition of the subcontractor exception.
We may expect there will be future lawsuits further refining the question of who is a subcontractor and who isn't. The industry may respond by changing policy language.
WORKERS' COMPENSATION DECISIONS
By Patrick E. Mahoney
A. Court of Appeals Clarifies Workers' Compensation Subrogation
In a recent case issued by the Minnesota Civil Court of Appeals, the court clarified the nature and extent of a workers' compensation carrier's subrogation interest. The court of appeals ruled in Zurich American Ins. Co. v. Bjelland (filed December 28, 2004) that the 2000 amendments to Minn. Stat. § 176.061 redefine the measure of recovery in subrogation actions.
The Zurich American case dealt with a workers' compensation carrier seeking recovery from a responsible third party for benefits paid to or on behalf of an employee killed as a result of a motor vehicle accident.
Initially, all parties did agree that the workers' compensation carrier had a right to seek recovery and would be entitled to recover benefits subject to its proving the nature and extent of the same in front of a jury at trial.
The parties, however, disputed the nature and extent of the benefits that could be recovered by the workers' compensation carrier. The insurer for the liable third party claimed that subrogation interest was limited to the damages allowed under the Wrongful Death Act. Minn. Stat. § 573.02. The workers' compensation carrier sought recovery of all benefits paid out in workers' compensation.
The court indicated that the year 2000 amendments made by the Minnesota Legislature to the Workers' Compensation Act, specifically Section 176.061, expanded the extent of benefits that were recoverable. The subject language allowed recovery of benefits "regardless of whether such benefits are recoverable by the employee or the employee's dependents at common law or by statute." The court felt that the intent of the amendments was to permit an employer and insurer who had paid workers' compensation benefits to seek to recover all of those benefits without being limited by the common law or statute. This is because workers' compensation is in and of itself a statutory creature and not a creature of the common law, and the subrogations under workers' compensation are a further statutory entitlement separate and distinct from common law entitlement. The court further noted that under the provisions of theWorkers' Compensation Act, employers are entitled to a right of indemnity; as an indemnitee, the employer is entitled to be made whole. Thus the court felt that either under the principle of statutory subrogation or the principle of indemnity, the workers' compensation carrier was entitled to recover without limitation such damages as it could prove the damages to which it was entitled.
That is good news for workers' compensation carriers. There is no longer a limitation on the nature and extent of the benefits that can be claimed. It needs to be remembered, however, that the workers' compensation carrier does have the burden of proving the nature and extent of the benefits paid, that the benefits were causally related to the work injury, and caused by the negligence of the third-party tortfeasor.
B. Clarification of Dependency Offsets
The supreme court recently (in the matter of Sundby v. City of St. Peter , Sup. Ct. No. A04-1047, filed March 17, 2005) clarified calculation of benefits under 176.101, sub. 4 relative to receipt of certain social security disability benefits.
In the Sundby case, the supreme court concluded that social security disability benefits paid to a dependent child are to be included when calculating the amount of reduction in workers' compensation benefits under 176.101, sub. 4. In this particular case, the employee was entitled to permanent total disability and supplementary workers' compensation benefits given the date of injury. The employee was financially responsible for three children and was awarded SSDI child's benefits for his children at the rate of 50% of his monthly SSDI benefits. The question was whether the inclusion of those benefits in the offset would be allowed under the aforementioned statute.
The decision is rather arcane but does indicate that not only are the employee's own social security disability benefits includable in the amount to be offset, but any benefits that are based upon his benefits and any ancillary benefits payable on the same social security account are also offsetable.