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Oregon Court Expands Ability to Bring Negligence Claims

In March, 2011, the Oregon Supreme Court issued a decision in Abraham v. T. Henry Construction, Inc., 350 Or. 29, 249 P.3d 534 (2011). Abraham was a construction defect/negligence case arising from the defendants' defective work on plaintiffs' home. The Abraham decision has three significant implications in construction defect cases: (1) it establishes an exception to the economic loss rule, which prohibits tort claims between parties to a contract when the allegedly tortious conduct arises from performance due under the contract, and allows a tort action when the contract fails to restrict the right to bring a tort action; (2) it suggests that a builder's failure to adhere to the Oregon Building Code may constitute tortious conduct; and (3) it establishes a two-year statute of limitations for negligence claims in construction defect cases, even when the negligence allegedly resulted in property damage. The Abraham decision also has troubling implications outside of the construction defect realm. In particular, it raises questions about the availability of extra-contractual damages in insurance coverage disputes that do not involve allegations of bad faith.

Case Background

Defendant contractors entered into a written agreement to build plaintiff's home. After moving in, plaintiffs discovered the building had sustained damage as a result of water intrusion, and filed suit against the defendants, alleging that the damage was caused by defendants' faulty work and failure to comply with the Oregon Building Code.

"Defendants moved for summary judgment on the grounds that the contract claim was barred by the statute of limitations and that plaintiffs could not bring a negligence claim because plaintiffs did not have a 'special relationship' with defendants that implicated a standard of care independent of the contract. The trial court granted defendants' motions. On appeal, the Court of Appeals held that plaintiffs' contract claim was barred by the statute of limitations, but that their negligence claim could go forward because the building code provided a standard of care independent of the terms of the contract." Id. at 33.

The Supreme Court's Decision

The Oregon Supreme Court affirmed the Court of Appeals' decision, albeit on slightly different grounds. Defendants argued that a party to a contract may bring a tort claim arising out of the breach of that contract only when the parties are in a "special relationship" that implicates a standard of care independent of the terms of the contract (e.g. an attorney-client or physician-patient relationship). Plaintiffs argued that a "special relationship" existed in this case, because the Oregon Building Code created the necessary independent standard of care. The Oregon Supreme Court rejected both arguments, and held that "neither a special relationship nor a statutory standard of care, such as the building code, is necessary to bring a negligence claim," because the contract between plaintiffs and defendants did not "purport to alter or eliminate defendants' liability for the property damage plaintiffs claim to have suffered." Id. at 36.

The defendants argued that the contract required them to perform the work "in a workmanship like manner and in compliance with all building codes and other applicable laws." Consequently, they argued, any violation of the building code necessarily constituted a breach of contract, and not a tortious act. The Supreme Court rejected this argument, and noted that the contract language "simply reiterated the common law negligence standard that would have applied to defendants' work in the absence of a contract." Because the duty to comply with the Building Code exists under the common law, independent of the contract language, the Building Code constitutes an independent standard of care, a violation of which can give rise to tort liability. Id. at 42-43.

Finally, the Court noted in a footnote that "[t]ort claims arising out of the construction of a house must be brought within two years of the date that the cause of action accrues, but, in any event, within 10 years of the house being substantially complete." Id. at 34, n.3. This footnote has led to some controversy in subsequent construction defect cases. Prior to the Abraham decision, many litigants assumed that the statute of limitations applicable to construction defect claims was six years from the date of discovery, rather than two. Plaintiffs (as well as many within the plaintiffs' bar) believed that this footnote was in error, and they requested that the Supreme Court reconsider its decision. After extensive briefing, the Court denied the motion for reconsideration on May 5, 2011.

Implications for Insurers

For insurers, the Abraham decision raises a number of interesting issues. First, the Court's decision regarding the statute of limitations applicable to construction defect claims gives insured defendants the ability to seek summary judgment in cases where the plaintiffs have waited more than two years from the date of discovery to file suit. In fact, several construction defect cases in Oregon have been dismissed on these grounds since Abraham was decided.

More importantly, the Court's blurring of the line between tortious conduct and breach of contract raises questions about extra-contractual claims arising from other types of contracts. If the Oregon Building Code gives customers the right to seek extra-contractual damages from builders, does the Oregon Insurance Code convey similar rights to Oregon insureds? If so, can the insured's right to bring a tort claim in connection with an alleged Insurance Code violation be limited by the terms of the insurance agreement? The Abraham decision offers no hint as to how it should be applied outside the narrow confines of construction defect law. However, given the potential scope of the Abraham decision, insurers should prepare for an increase in Oregon claims seeking extra-contractual damages.

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