The Subrogation Strategist

By: Edward A. Jaeger, Jr.

In KB Home Greater Los Angeles, Inc. v. Superior Court (Allstate Ins. Co.), 168 Cal. Rptr. 3d 142 (Cal. Ct. App. 2014), the California Court of Appeal addressed the question of whether a subrogating insurer’s failure to comply with the pre-litigation procedures of the California Right to Repair Act (Cal. Civ. Code § 895 et seq.) (the Act) – which require that a homeowner give a builder notice and an opportunity to repair alleged defects – barred the insurer’s claim under the Act. The Court of Appeal held that the insurer’s failure to comply with the pre-litigation procedures of the Act prior to repairing the insured’s home barred the insurer’s cause of action under the statute.

In KB Home, Dipak Roy (Roy), the insured, bought a home from builder KB Home in 2004. Roy’s purchase agreement with KB Home contained a right to repair addendum that advised Roy of the pre-litigation procedures of the Act and directed that notices of defect claims be sent to KB Home’s corporate address in Los Angeles. The limited warranty section of the agreement provided for telephone notice in cases of emergency, followed by a promptly submitted written warranty claim.

In March 2010, Roy’s property manager discovered a water leak in the home, which was vacant at the time. The property manager shut off the water service to the home and called Roy, who, in turn, called his insurer, Allstate Insurance Company (Allstate). Allstate hired a mitigation company to remove excess water, damaged dry wall, and carpet. Allstate inspected the home in April 2010 and completed repairs in June 2010. In July 2010, Allstate sent KB Home a notice of its intent to pursue subrogation claims arising from the water leak. Allstate sent the notice to an address in Irvine, not to KB Home’s corporate address in Los Angeles. In November 2010, however, Allstate’s counsel sent a settlement demand to KB Home’s Los Angeles address. KB Home did not respond to Allstate’s demand.

In March 2011, Allstate filed a subrogation complaint against KB Home. In March 2012, Allstate filed a second amended complaint that alleged causes of action for negligence, strict liability, breach of implied warranty, and violation of the Act. KB Home demurred and the trial court overruled the demurrer, reasoning that the Act did not apply to subrogation claims. On KB Home’s petition, the Court of Appeal issued an alternative writ, directing the trial court to sustain the demurrer as to the negligence and strict liability claims, and to overrule the cause of action under the Act.

After the matter was sent back to the trial court, KB Home filed a motion for summary judgment against Allstate, arguing that it was not given timely notice and an opportunity to repair the defect. Allstate filed a cross-motion for summary judgment, arguing, among other things, that the Act did not require that notice be given to builders before repairs are made and that Allstate complied with the statute’s notice requirements. The trial court denied KB Home’s motion for summary judgment, finding that Allstate’s July and November 2010 letters to KB Home substantially complied with the notice requirements of the Act, and that KB Home forfeited its right to repair when it failed to respond to those letters. In addition, the trial court granted Allstate’s motion for summary judgment, finding that KB Home violated the building standards of the Act. Upon KB Home’s petition, the Court of Appeal issued an alternative writ of mandate, directing the trial court to grant KB Home’s motion for summary judgment and to deny Allstate’s cross-motion for summary judgment. Instead, the trial court upheld the rulings and returned the matter to the appellate court.

Upon return, the Court of Appeal addressed the issue of whether the Act – which applies to the original construction of individual homes sold after January 1, 2003 – requires that notice be given to a builder before repairs are made to a home. Pursuant to Chapter 4 of the Act, a homeowner is required to provide written notice to the original builder of a violation of any of the building standards identified in the statute. Although Allstate argued that the Act does not expressly require that builders be given notice of a defect before repairs are made, the Court of Appeal rejected Allstate’s argument because the pre-litigation procedures in the Act are sequential, and designed to give a builder the opportunity to resolve a homeowner’s construction defect claim “in an expeditious and nonadversarial manner.” As such, completing repairs before providing notice defeats the purpose of the pre-litigation procedures by prohibiting a builder from inspecting the alleged defect and making an offer to repair. The Court of Appeal also found that Allstate’s notice to KB Home did not substantially comply with the Act’s requirements because Allstate gave notice to KB Home months after the defect was repaired. Specifically, the appellate court observed that the notice letter merely asserted Allstate’s subrogation rights, made no reference to the Act, and identified a defect that no longer existed at the time. Because the Act required that Roy, the insured, give KB Home timely notice of the alleged construction defect and KB Home did not receive such notice, Allstate’s subrogation claim under the Act failed.

In analyzing Allstate’s claim, the Court of Appeal also addressed Allstate’s argument that the Act’s notice requirements are not practical when a construction defect causes actual damage, requiring emergency repairs. The appellate court, in dicta, rejected this argument, stating that the Act does not prevent homeowners from seeking immediate redress. Rather, under the Act, a homeowner can comply with the pre-litigation procedures by contacting the builder immediately, through any applicable normal customer service procedures and, then, providing the statutorily required written notice. As stated by the Court of Appeal, because the Act requires the builder to compensate the homeowner for consequential damages, including the cost of repairing actual property damage, the builder has an incentive to act quickly in cases of emergency.

The analysis in KB Home highlights the fact that, when a home is subject to the requirements of the Act, subrogating insurers should comply with the written notice requirements of the Act. In cases of emergency, insurers should contact the builder through its normal customer service procedures and send written notice as required by the Act. Absent compliance with the Act’s notice and opportunity to repair requirements, an insurer’s subrogation claim may be barred.

For more information regarding this alert, please contact Ed Jaeger (215.864.6322 / jaegere@whiteandwilliams.com).