Arizona Supreme Court Imposes Major Restriction on Tort Claims in Construction Cases

By Kirk H. Hays

The Arizona Supreme Court recently handed down a landmark decision limiting both an owner and contractor’s rights to sue design professionals for malpractice. In Flagstaff Affordable Housing L.P. v. Design Alliance, Inc. (SCt. CV-09-0117-PR), Flagstaff contracted with Design Alliance to design eight apartment buildings. The plans were allegedly defective because they did not provide for ADA access and the cost of correcting the all-ready built defective work was significant. Flagstaff sued Design Alliance for professional malpractice in tort and for breach of contract but then dismissed the contract claim because it was outside the statute of repose.

The Supreme Court extended the “Economic Loss Doctrine” to construction cases. The Doctrine says that you cannot recover in tort for a negligence claim unless there is some accompanying personal injury or property damage. In other words there has to be some damage to something other than the building itself. For example, if a chimney falls down the cost of repairing it is not recoverable in tort. But if the chimney hits your car, then there is some other property damage and you can sue in tort for negligence. To recover economic damages you must sue in contract. The Court reasoned that negotiated contracts better allocate risks between the parties than the implied at law default rules of tort.

This decision has some important ramifications. First, it may limit recoverability in cases where the building is older than 8 years. The statute of repose prevents bringing a contract claim concerning most buildings older than that, but a tort claim can still be brought. After Flagstaff the type of damages recoverable in cases concerning older buildings is now limited to secondary property damage.

Second, it may have serious implications for insurance coverage. Generally, tort claims are covered by insurance but contract claims are not. By forcing some damages to be recovered only in contract, the decision may make it easier for insurers to deny coverage for construction defect claims.

Third, the Supreme Court invited parties to contract around the case by including a provision in their contracts making wholly economic damages recoverable in tort. Owners should consider modifying their contracts to do so.

For more information on these cases contact Kirk H. Hays khays@holmwright.com or (480) 961-0586.