In yesterday’s post we talked about the recent case of Federal Insurance Company v. Konstant. That’s the recent Illinois case upholding the section of an American Institute of Architects (the “AIA”) architects agreement that imposes an early start to the statute of limitations on owner design defect claims. Today we’ll talk about how that case could affect you if you’re:
- An architect, other design professional, or one of their insurers.
- A prime contractor, subcontractor, one of their insurers, or a subcontractor default insurer.
- An Owner.
How Could This Case Affect You?
- If you’re an Architect or other design professional. Those sections in your architects agreement imposing an early start on statutes of limitations will probably work. This is a big benefit because the
Illinois statute of repose on design and construction defects is 10 years after the defective act or omission. But if those sections of your agreement work you turn the 4 year statute of limitations into a 4 year statute of repose. With only the most extraordinary exceptions, once 4 years passes after substantial completion, you’re scott free. There’s no compelling reason to think this would not apply to other design professionals like engineers. And because cases like this reduce the time that their insureds can be sued, this case benefits design professional errors and omissions liability insurers too.
- If you’re a prime contractor or a subcontractor. Like the architect in this case, prime contracts and subcontracts often have sections in their contracts providing an early start of the statute of limitations on construction defect claims and other claims related to a project. The prime example is
Section 13.7 of the AIA’s A201 General Conditions of the Contract for Construction (1997 Edition). This case and others like it suggest that courts, at least the ones in Illinois, will enforce these terms, greatly shortening how long an owner may pursue claims against a prime contractor or how long a prime contractor may pursue claims against a subcontractor.
Because cases like this reduce the time that their insureds can be sued, prime contractors’ and subcontractors’ liability insurers should like this case too, especially those insuring projects in states like Florida where courts have held that Commercial General Liability insurance policies insure against defective work provided by the insured’s downstream subcontractors. Because this case could help shorten the duration of the risk they insure – subcontractor default and defective work, I expect subcontractor default insurers (i.e., Subguard®) will like this case too.
- If you’re an Owner. This case is not good for you. The homeowners were lucky their insurer paid for the water and mold damage. If it had been them suing the architect themselves in 2005 they would have been out of luck. More generally, this case means that those sections in architects agreements and construction contracts saying that statutes of limitations start early (usually at substantial completion) will cut off your claims early. In Illinois it’s going to be only four years after substantial completion.
Illinois already has a statute of repose cutting off claims 10 years after substantial completion. An early start on the statute of limitations section in a contract combined with this case effectively shortens the statute of repose down to 4 years. That’s 60% less time for an owner to sue.
4 years is a pretty short time, especially considering that what an owner usually buys is a building with a useful life of 30 or more years. You can get better warranty coverage on a cheap car with a useful life of about 7 years.
Most design and construction defects usually become apparent within 6 years after substantial completion. But if an owner doesn’t file their lawsuit until after the fourth anniversary of the substantial completion date, they’re out of luck. When I represent owners, terms like those in Section 9.3 of the architects agreement in this case usually get removed. The architect and the prime contractor still enjoy a 10 year statute of repose under Illinois law. That’s still a short amount of time on a project with a 30+ year useful life, but most owners are willing to live with it.
Fortunately for owners, at least when negotiating construction contracts, the AIA changed
Section 13.7 of the 2007 edition of the A201 General Conditions. The change removes the early start of the statute of limitations. Instead, the new edition establishes a private 10 year repose period. Under the private repose period, the owner must commence claims against the prime contractor within 10 years after the substantial completion date. But change brings new problems. I’ve gone on long enough for now, so I’ll come back to them in a future post.
This case should:
Remind architects that at least for now in Cook County, Illinois, they should expect those statute of limitations early start provisions in their agreements to work. I have to limit this to Cook County and qualify it with “for now” because:
The court that decided this case only hears appeals coming from Cook County. Illinois has four other appellate districts. Any of them could decide a similar case the opposite way.
This decision is not final. The court could re-hear the case and reverse its own opinion. The odds of that are about as good as the Bears coming home next January with a Lombardi Trophy, but hey, it could happen.
The insurer could appeal this case to the Illinois Supreme Court. The Supreme Court could decide to hear the case and then reverse this decision.
Remind that contractors that those early start sections in their construction contracts will probably work too.
- Remind owners to approach these early start provisions with extra caution. Before agreeing to leave an early start provision in a contract, owners should first ask themselves whether they’re willing to either:
Pay their own way for the cost to repair design and construction defects if they don’t sue within 4 years after substantial completion; or
Pay for some other means to pay repair costs (e.g. insurance, extended warranty excluded from the early start provision).