Long & Levit LLP Construction Update

Issue No. 1

June 1998

Developers and Contractors Escape Liability For Purely Economic Losses, While Design Professionals Remain Responsible

by Mike Higginbotham & Marc Eckardt

On June 12, 1998, the California Court of Appeal held in Aas v. Superior Court of San Diego County, 98 C.D.O.S. 4465, that homeowners associations and individual homeowners cannot recover purely economic damages in a negligence action against developers, general contractors, and subcontractors for construction defects in mass-produced housing. Unless reversed by the California Supreme Court, the Aas ruling signals increased liability exposure for design professionals in construction defect lawsuits.

Purely economic losses are damages which have not yet caused personal injury or physical damage to the property. In construction defect litigation, such losses include violations of the governing building, fire and electrical codes which have not caused actual physical damage. While the Aas ruling severely limits homeowners' rights against developers, general contractors and subcontractors, it does not affect homeowners' rights against design professionals, including engineers and architects. Homeowners and developers will now shift their attention to design professionals when seeking damages for purely economic losses.

In Aas, the homeowners sued developers and contractors for negligence for failing to construct their homes pursuant to the governing building codes (e.g., insufficient shear walls, inadequate fire walls, and faulty electrical installations). The homeowners were unable to show that those construction defects caused physical injury to persons or property other than the defectively constructed portion of the real property itself. The court held that under the "economic loss doctrine" (adopted by the California Supreme Court in Seely v. White Motor Co. (1965) 63 Cal.2d 9) the homeowners association and individual homeowners could not recover for purely economic damages from developers, general contractors, and subcontractors of mass-produced housing projects.

In its opinion, the Aas court noted that the "economic loss rule" does not apply in the case of design professionals performing design services. In Cooper v. Jevne (1976) 56 Cal.App.3d 860 (cited with approval by the Aas court), the Court of Appeal held that a design professional may be sued for negligence in the rendition of services even though the sole damage is a purely economic loss. Cooper specifically distinguished the malpractice liability of a design professional for negligence from that of a developer or builder of mass-produced housing for defects in its product, holding that the former can be liable for purely economic damages while the latter may not.

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