Statute of Repose and Insurance Company Construction Projects

John Craig Howell

May 9, 2018

Statute of Repose and Insurance Company Construction Projects

A contractor’s “preferred contractor” relationship with an insurance company does not necessarily mean the insurance company can recover under a breach of contract theory when it seeks relief in subrogation from the contractor for faulty work. Such a claim has to be clearly specified as a breach of contract in the insurance company’s complaint. Recently in Tennessee Farmers Mutual Insurance Company v. Southern Damage Appaisals, LLC, the Tennessee Court of Appeals applied the subrogation statute of repose to dismiss a lawsuit brought by an insurance company against a contractor seeking recovery of payments the insurance company made to its insured homeowners for damage resulting from that contractor’s alleged faulty work.

In this case, homeowners sustained water damage after a tree fell on their house during a storm in December of 2009. The homeowners made a claim for the damage under their homeowner’s insurance policy with TN Farmers. TN Farmers had a contractual agreement with Southern Damage Association (the “Contractor”) for it to be TN Farmers’ preferred contractor. TN Farmers hired the Contractor to replace the homeowners’ roof, which was completed in February of 2010. In April of 2012, the homeowners found water damage believed to be from faulty roof repair performed by the Contractor. TN Farmers repaired the roof again, presumably with a different contractor, and in March of 2015 sued the Contractor claiming subrogation under the insurance policy.

The trial court granted summary judgment to the Contractor, finding that the construction industry four-year statute of repose applied to TN Farmers’ subrogation claim (Tennessee Code Annotated Section 28-3-202), and that TN Farmers’ payments to the homeowners were voluntary payments for losses that could not be recovered by subrogation under the insurance policy.

The Tennessee Court of Appeals upheld this decision. TN Farmers argued that its lawsuit was for breach of a contract between TN Farmers and the Contractor and not for subrogation, and therefore, TN Farmers asserted the statute of repose for subrogation should not be applied. Under Tennessee Code Annotated Section 28-3-109, the statute of limitations on a breach of contract claim is 6 years, which would have provided TN Farmers with a timely lawsuit. However, the statute of repose in Tennessee generally cuts off any lawsuits filed 4 years or longer after substantial completion of the construction project (there are some exceptions).

The Court applied a two-step approach to determine which statute should be applied. First, a court must consider the legal basis of the claim. Second, a court must consider the type of injuries for which damages are sought.

The Court analyzed the complaint and determined that all of the allegations in it reference a contract between the homeowners and the Contractor, not between TN Farmers and the Contractor. While a contractual agreement may have existed between TN Farmers and the Contractor, the complaint did not reference it. The complaint did allege that TN Farmers had a right to subrogation under the insurance policy with regard to an alleged contract between the homeowners and the Contractor. On appeal, TN Farmers relied upon an alleged contract between TN Farmers and the Contractor. However, the Court found there was no proof on record of the contract; only an estimate of recorded damages subject to review and approval from TN Farmers. The Court found that even if the contract did exist between TN Farmers and the Contractor, such a contract would have been for construction or repair of the 2009 storm damage and subrogation claims were excluded from the applicable insurance policy in the first place.

Accordingly, the Court noted that the trial court had before it a complaint for subrogation based upon an alleged contract between the homeowners and the Contractor. However, there was no contract on record between TN Farmers and the Contractor, and TN Farmers had no right of subrogation as to an alleged contract between the homeowners and the Contractor in any event. If TN Farmers would have alleged a breach of contract between TN Farmers and the Contractor in the lawsuit, we might be looking at a different result.

This decision shows that the existence of a contractual, preexisting, or working relationship between parties cannot win the day if the legal theory and damages sought are not truly based in those agreements or relationships. It also shows that a court will examine the specific language of a complaint and referenced agreements if a procedural issue arises, as in this case where the Court determined which limitations statute to apply.

Photo: bloomsberries