6-year statute bars contractor indemnity
By Steven G. Wraith

Washington’s six-year statute of repose for construction claims applies to claims of both written and equitable indemnity, the Washington Court of Appeals has held in Ledcor v. Nidash, 48337-4-I (Oct. 2002). The case could have far-reaching implications for the defense of construction-defect claims.

The Ledcor court held that the six-year contractor’s statute of repose, RCW 4.16.300 - .320, bars such indemnity claims if the underlying settlement or judgment on which indemnity is based occurs six years after substantial completion of the project. That statute bars all claims "arising from" constructing improvements to real estate that do not "accrue" within six years after substantial completion. The court also reaffirmed that the "discovery rule" applies to breach-of-contract claims in such cases.

In Ledcor, apartment owner Parkridge Associates sued Ledcor, a contractor, for workmanship failures and construction defects. Ledcor, in turn, sued subcontractor Freeman Roofing for breach of contract and contractual and equitable indemnity. The date of substantial completion on the project was December 30, 1993, but Freeman continued to work on the project until December 5, 1994.

Parkridge sued Ledcor on November 29, 1999. On May 19, 2000, Ledcor tendered defense of the suit to Freeman, which provided roofing, waterproofing, and other work on the project. Freeman did not accept that tender, so Ledcor commenced a third-party action against Freeman on August 19, 2000. On December 22, 2000, Parkridge and Ledcor reached a mediated settlement. Freeman did not participate in the settlement. Ledcor then pursued its third-party claim against Freeman, alleging that Freeman’s defective work accounted for a significant portion of the settlement payment to Parkridge.

Freeman moved for summary judgment based on the six-year statute of repose and the six-year statute of limitations for claims based on written contracts. The trial court granted the motion, dismissing all of Ledcor’s claims against Freeman because its settlement with Parkridge occurred more than six years after substantial completion. Ledcor appealed.

The Ledcor court affirmed dismissal of the indemnity claims. The court rejected Ledcor’s argument that the claims for written and equitable indemnity were beyond the scope of the statute. The court ruled that claims for contractual indemnity in construction do "arise from" construction and therefore fall within the scope of the statute. The Court of Appeals also ruled that the claims "accrued" not when Parkridge sued Ledcor but when Ledcor later paid money in settlement of the claims against it.
Ledcor did not settle with Parkridge until a few weeks after the statute of repose expired on December 5, 2000. Thus, the court ruled that the statute of repose barred Ledcor’s contractual and equitable indemnity claims against Freeman.

However, Ledcor did win reversal of the trial court’s dismissal of its claims against Freeman for breach of contract arising out of construction defects. Citing its recent decision in Architechtonics Construction Management, Inc. v. Khorram, 111 Wn. App. 725 (2002), the Court of Appeals ruled that the statute of limitations for contractual construction-defect claims begins to run when a party knows, or reasonably should know, of the other party’s breach. Thus, applying this discovery rule to Ledcor’s claims, the court ruled that issues of fact as to when Ledcor knew or should have known of Freeman’s alleged defective work precluded summary judgment on that claim.

More bad news for insurers on consent judgments
By Jeffrey P. Downer

An agreed judgment between a claimant and a policyholder is presumed to be reasonable and enforceable against the policyholder’s liability insurer where the insurer has acted in bad faith, the Washington Supreme Court has held.

In Truck Ins. Exchange v. VanPort Homes, no. 70747-2 (Nov. 2002), the policyholder, VanPort, provided consulting services for customers who wanted to build their own homes. VanPort would assist with budgets, schedules, and compliance with government requirements.

Several of VanPort’s customers sued it, alleging construction defects and that VanPort negligently failed to detect those defects when inspecting subcontractors’ work. In July through October 1992, VanPort tendered defense of the lawsuits to Truck, its comprehensive general liability (CGL) insurer.

More than a year passed before Truck issued a letter declining coverage. Although the letter quoted extensively from the policy, it did not explain Truck’s coverage analysis. Truck’s letter said that it based its coverage decision on a "thorough investigation." In fact, an internal memo showed that Truck had refused the tender of defense without beginning to investigate the liability issues.

In an April 1994 letter, VanPort asked Truck to explain its coverage denial. Truck never responded. In February 1996, Truck filed a declaratory-judgment action seeking a declaration that it had no duty to defend VanPort. VanPort counterclaimed for bad faith and other claims. VanPort and the claimants later agreed to a settlement of about $489,000. VanPort assigned most of its counterclaims to the claimants, who agreed to collect only against VanPort’s insurer and not against VanPort itself.

The trial court then decided on cross-motions for summary judgment that Truck did have a duty to defend, which it breached in bad faith. The Court of Appeals affirmed most of the trial court’s rulings, and the Supreme Court then accepted review.

Truck contended that because a CGL policy is not a performance bond, its denial of coverage was correct; the claimants alleged only that VanPort had failed in its contract obligations, not that it caused any resultant property damage. Truck also asserted a policy exclusion for damage to realty on which the insured or contractors working on its behalf are performing operations.

The Supreme Court disagreed. The claimants sued in tort, not just in contract, so that the claims were within the terms of the insuring agreement. The Court also found that the exclusion might or might not apply depending on unresolved facts, so that Truck owed at least a duty to defend. The VanPort Court also concluded that Truck committed bad faith based on its tardy and inadequate response to the insured’s tender of the claims and its failure to investigate before rejecting that tender.

The Court therefore held that this settlement was fully enforceable against Truck if it was reasonable, based on its recent decision in a similar case, Besel v. Viking Ins. Co., 146 Wn.2d 730 (2002). If the trial court finds the settlement to be reasonable, it is presumptively reasonable, and the burden then shifts to the insurer to show that the settlement resulted from fraud or collusion. Overcoming this presumption could prove difficult for insurers.

The VanPort Court also seemed to find Truck’s coverage-denial letter lacking, despite its lengthy excerpts of policy language on which the denial was based, implying that insurers must state in detail their reasoning supporting all coverage defenses.

VanPort was a 5-4 decision. The four dissenting justices agreed with the majority that Truck owed VanPort a duty to defend. But the dissent argued that the majority erred in concluding that Truck had committed bad faith, because Truck possessed a reasonable basis for its denial of coverage. The dissent cited many Washington decisions in which courts rejected coverage on the same policy language that Truck relied on here. Under those decisions, a CGL policy does not cover faulty workmanship or products, but only damage to other property that results from such work or products.

Employer liable for tax effect of damages
By Charles P.E. Leitch

Plaintiffs may recover additional sums for the income-tax consequences of damages they are awarded in discrimination cases, the Washington Court of Appeals recently held.

In Blaney v. Intl. Assn. of Machinists, no. 48444-3-I (Oct. 21, 2002), a plaintiff won a jury verdict under Washington's Law Against Discrimination WLAD). She then sought a supplemental judgment that would compensate her for federal income tax that she would owe on the judgment. The trial court denied that request. Plaintiff appealed.

The Court of Appeals held that the scope of "actual damages" under the WLAD includes federal tax consequences arising from discrimination. The defendant argued that tax consequences are not proper "damages" within the WLAD. But the court concluded that this expanded interpretation of "actual damages" under the WLAD is consistent its goal to deter discrimination. Taxes can eliminate or substantially reduce a compensatory-damage award to discrimination plaintiffs. The court held that "so long as the damages flow from the discrimination and are neither nominal, exemplary nor punitive, they are compensable" under the WLAD.

After Blaney, defendants in WLAD cases now should consider the tax implications of a WLAD judgment in assessing their exposure and selecting expert witnesses on damages issues.

Around The Firm

Washington Law & Politics magazine has named not one, not two, but eighteen Lee Smart lawyers as "Rising Stars." The magazine bestows that designation of excellence in the profession on approximately four percent of Washington lawyers under the age of 40 or with less than 10 years of practice. Lee Smart’s 2002 Rising Stars are Karen A. Kalzer, Tammy L. Williams, Charles P.E. Leitch, David F. Betz, Michelle A. Corsi, Toni Y. Davis, Aaron P. Gilligan, Michelé M. Haaseth, Jason C. Hawes, Stacy D. Heard, Jennifer M. Ilenstine, William R. Kiendl, Melia A. Mauer, Dirk J. Muse, Eric S. Newman, Shahzad Q. Qadri, Aaron V. Rocke, and Marc Rosenberg. … Lee Smart also is proud to announce that it has named Karen Kalzer, Tammy Williams, Charles Leitch and Kenneth E. Hepworth as shareholders with the firm. Congratulations to all.

Joel E. Wright and Melia Mauer won summary judgment of dismissal in Wick v. Fultz. Plaintiff claimed employment discrimination against a company manager and minority shareholder, individually, for allegedly discriminatory acts of the company’s president, even though the manager did not supervise the claimant. The court agreed with Joel and Melia that an individual manager cannot be liable for employment discrimination where no evidence existed that the manager herself participated in the alleged discriminatory acts. The court also agreed that there was no evidentiary basis to pierce the corporate veil and find shareholder liability. … Joel Wright and Jennifer Ilenstine also won summary judgment in DeLeon v. Brandal. Plaintiff bought a house and had septic problems after the sale closed. Plaintiff sued the seller and real estate agents for misrepresentation. The court agreed with Joel and Jennifer that plaintiff had no proof that her real estate agent actually knew of problems with the septic system. Plaintiff argued that her agent failed to provide her with a certificate of occupancy from the Department of Health. But the court agreed that this was not enough to prove actual knowledge, especially since plaintiff agreed in writing at closing that she elected to close the sale without the certificate.

Jeffrey P. Downer and Aaron Rocke won summary judgment in Slaughter v. Jordan. A home buyer sued her real estate agent, who also acted as the buyer’s mortgage broker. Aaron persuaded the plaintiff’s attorney to dismiss several causes of action and moved for summary judgment on the remaining claims. The court rejected plaintiff’s plea for more time to conduct discovery because it would be futile, agreed that there was no factual basis for the claims, and dismissed the claims. … Michelle Corsi won partial summary judgment dismissing a Consumer Protection Act claim in Nielsen Brothers v. Solid Trading v. Sun-Mark Realty. Michelle’s client, Sun-Mark Realty, was dual agent in Solid Trading’s sale of property to Nielsen Brothers. After signing the purchase and sale agreement, Solid Trading failed to comply with the closing date. Nielsen Brothers sued for specific performance. Solid Trading in turn sued Sun-Mark, claiming that Sun-Mark’s actions during the transaction were unfair and deceptive in violation of the CPA. Michelle argued that Sun-Mark complied with all of its duties and that the alleged breaches did not amount to a CPA violation. The Court agreed and dismissed the CPA claim.