SUMMARY OF AB 125
by Owen Mackedon, Josh Correlli and Peter Bernhard
INTRODUCTION
Assembly Bill No. 125 was approved by Governor Sandoval on February 24, 2015. Many of AB 125’s provisions became effective immediately upon Governor Sandoval’s approval, thereby amending Nevada Revised Statutes (“NRS”) Chapter 40 (among others), and modifying rights and remedies in construction defect litigation. This summary of AB 125 highlights some of the issues we thought may be relevant. The full text of the bill can be found at http://www.leg.state.nv.us/Session/78th2015/Bills/AB/AB125_EN.pdf.
CONSTRUCTION DEFECT
Prior to AB 125, NRS 40.615 defined “constructional defect” in a manner that allowed construction defect actions based on building code violations, regardless of whether the defect was dangerous or caused any significant damage to the property.
AB 125, Section 6 narrows the definition of “constructional defect” to now define a “defect” as work that either (1) presents an unreasonable risk of injury to a person or property; OR (2) is not completed in a good and workmanlike manner AND “proximately causes physical damage to the residence, an appurtenance or the real property to which the residence or appurtenance is affixed.”
AB 125’s new definition eliminates (i) language relating to violations of law, codes and ordinances; and (ii) language regarding generally accepted standards of care in the industry, both of which served as an avenue to some of the more frivolous construction defect claims under prior law. The new definition will likely require claimants to prove actual damages in any litigation pertaining to an improvement.
ATTORNEY’S FEES
AB 125, Section 15, eliminates a claimant’s right to recover reasonable attorney’s fees as part of the claimant’s damages in a cause of action for constructional defects. Accordingly, incentives to initiate construction defect suits have been reduced.
However, other opportunities exist for claimants to recover fees under other laws or by agreement of the parties. Thus, the recovery of attorney’s fees is not totally prohibited, but the automatic award of attorney’s fees in construction defect litigation is no longer in Nevada law.
OFFER OF JUDGMENT
Prior to AB 125, there was a lack of clarity regarding whether offers of judgment could be made during the pre-litigation process. AB 125, Section 3 now expressly permits offers of judgment prior to the commencement of litigation. If a claimant rejects the offer and then fails to obtain a more favorable judgment, the court shall allow the defendant its costs and may allow the defendant reasonable attorney’s fees.
NOTICE REQUIREMENTS
AB 125, Section 8 amends the provision of existing law to require additional detailed information in any notice of a constructional defect. Accordingly, general notices of defect intended to toll the statutes of limitations and repose, as well as to avoid inspection expenses, will no longer suffice.
NRS 40.645 now requires claimants to identify in specific detail “each defect, damage and injury to each residence or appurtenance that is subject of the claim, including, without limitation, the exact location of each such defect, damage and injury.” Claimants must still “describe in reasonable detail the cause of the defects if the cause is known” and the “nature and extent” of the damage or injury caused by the defects.
AB 125 further amends NRS 40.645 to now require claimants to include a signed statement by each named owner verifying that the defect, damage and injury exists in the residence owned by him or her (“Verification”) prior to commencing an action or amending a complaint to add a cause of action. This requirement documents any claimed defect at a residence and prevents an owner from claiming ignorance and not disclosing a defect to a potential buyer.1
COMMON CONSTRUCTION DEFECT NOTICES
Prior to AB 125, claimants were authorized to allege defects on behalf of other similarly situated owners of residences of appurtenances within a single development that allegedly had common defects. However, AB 125 has eliminated this, and the owners of similarly situated homes will not be deemed claimants unless they have provided the required Verification.
INSPECTION
As before, after providing notice of a defect but before commencing any action, a claimant must allow for inspection and the opportunity to repair the alleged defect. However, AB 125, Section 11 now requires the claimant and any expert who provided an opinion concerning the alleged defect, or a representative of the expert with knowledge of the defect, to be present during inspection and identify the exact location of the alleged defect.
These requirements are intended to eliminate those instances where builders and subcontractors were unable to identify the claimed defects, and will hopefully lead to quicker repairs and offers of settlement.
HOMEOWNER’S WARRANTIES Prior to AB 125, NRS 40.650(3) provided that if a residence or appurtenance was covered by a homeowner’s warranty that was purchased by or on behalf of a claimant, the
1 Also note that pursuant to AB125, Section 19, residential resales now require the seller to deliver copies of NRS 11.2055 and Sections 2 and 3 of AB 125. claimant was required to “diligently pursue” a defect claim under his or her applicable homeowner’s warranty. However, AB 125 now requires a homeowner to submit all claims for construction defects under his/her homeowner’s warranty. Only when those claims have been denied by the insurer may the claimant provide a builder or subcontractor notice of an alleged defect. Further, claimants may only include those defects for which the insurer denied coverage.
The statutes of limitations and repose are tolled from the time the claimant submits a claim under the homeowner’s warranty until 30 days after the insurer denies the claim.
HOMEOWNER’S ASSOCIATION
Previously, homeowner’s associations (“HOAs”) were allowed to bring claims for defects in improvements owned by individual unit owners, which led to many well-publicized problems. AB 125 eliminates the ability of HOAs to sue in a representative capacity on behalf of unit owners and now limits their standing to commence action only with respect to improvements that are owned by the HOA. Specifically, AB 125, Section 20 amends NRS 116.3102 (the Common Interest Community Chapter) to now read (emphasis added):
The association may not institute, defend or intervene in litigation or in arbitration, mediation or administrative proceedings in its own name on behalf of itself or units’ owners with respect to an action for a constructional defect pursuant to NRS 40.600-40.695, inclusive, and sections 2 and 3 of this act unless the action pertains exclusively to common elements.
STATUTES OF LIMITATIONS AND REPOSE
AB 125 makes no changes to the existing statutes of limitations; however, AB 125 does eliminate the previous statute of repose periods that were applied, based on the conduct of the builder or subcontractor and whether the defect was known, discoverable or hidden. Now, a single, six-year statute of repose, which begins to run upon substantial completion of the improvement, is applied to all actions for all construction defect claims (subject to tolling for the time a claim is pending under a homeowner’s warranty and for one year after the notice of claim is given).
INDEMNITY AND INSURANCE
Section 2 of AB 125 governs agreements requiring subcontractors to “indemnify, defend or otherwise hold harmless a controlling party from any liability, claim, action or cause of action resulting from constructional defect…” The changes made to existing law invalidate those overreaching indemnity agreements that required subcontractors to indemnify a controlling party in situations where their negligence and actions may not have attributed to the alleged defects at issue.
Furthermore, Section 2 of AB 125 requires that if the controlling party (the party being indemnified) is an additional insured under the subcontractor’s policy, the controlling party “must pursue available means of recovery of its defense fees and costs under the policy before the controlling party is entitled to pursue a claim against the subcontractor.”
As defined within AB 125, “Controlling Party” means a person who owns real property involved in residential construction, a contractor or any other person who is to be indemnified by a provision in a contract entered into on or after the effective date of AB 125 for residential construction.
Finally, AB 125 now expressly permits “wrap-up” insurance policies or other consolidated insurance programs that cover a subcontractor who performs work on residential construction. There are several requirements and disclosures that should be incorporated into contracts moving forward.
CONCLUSION
As set forth above, there are several additions and changes that require revisions to agreements governing developers, buyers, sellers, general contractors, and subcontractors. Should you have any questions relating to AB 125 or other topics, please do not hesitate to contact us. We would be happy to provide additional information and assist in making sure your agreements are consistent with the new law.
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