The Subrogation Strategist

Arizona recently amended its Purchaser Dwelling Action statute to, among other things, involve all contractors in the process, establish the parties’ burdens of proof, add an attorney fees provision, establish procedural requirements and limit a subcontractor’s indemnity exposure. The governor signed the bill—2019 Ariz. SB 1271—on April 10, 2019.  The following discussion details some of the changes to the law.

Notice to Contractors and Proportional Liability

Under the revised law, a “Seller” who receives notice of a Purchaser Dwelling Action (PDA) from a residential dwelling purchaser pursuant to A.R.S. § 12-1363^* has to promptly forward the notice to all construction professionals—i.e. architects, contractors, subcontractors, etc., as defined in A.R.S. § 12-1361(5)—that the Seller reasonably believes are responsible for an alleged construction defect. A.R.S. § 12-1363(A). Sellers can deliver the notice by electronic means. Once construction professionals are placed on notice, they have the same right to inspect, test and repair the property as the Seller originally placed on notice. A.R.S. § 12-1362(B), (C).

To the extent that the matter ultimately goes to suit, A.R.S. § 12-1632(D) dictates that, subject to Arizona Rules of Court, construction professionals “shall be joined as third-party defendants.” To establish liability, the purchaser has the burden of proving the existence of a construction defect and the amount of damages. Thereafter, the trier of fact determines each defendant’s or third-party defendant’s relative degree of fault and allocates the pro rata share of liability to each based on their relative degree of fault. However, the seller, not the purchaser, has the burden of proving the pro rata share of liability for any third-party defendant. A.R.S. § 12-1632(D).

The determination of whether a construction defects exists, the amount of damages and who may have caused the construction defect shall, unless the court deems it inappropriate, be bifurcated from and take place in a separate phase of the trial or alternative dispute resolution process from the determination of each defendant/third-party defendant’s relative degree of fault. A.R.S. § 12-1632(D). Generally, a court should address all of the bifurcated issues in one trial. A.R.S. § 12-1632(E).

Impact on the Statute of Limitations/Repose

In addition to establishing procedures for notifying and bringing third parties into a PDA, the revised law impacts the statute of limitations and repose. With respect to claims by the purchaser, the revised PDA statute tolls the statute of limitations and statute of repose, including A.R.S. § 12-552 (which relates to actions involving the development of real property), applicable to the purchaser for claims against the seller and the seller’s construction professionals until thirty days after substantial completion of the repair or replacement process. A.R.S. § 12-1363(F). With respect to a seller’s claims for indemnity or contribution against any construction professionals involved in the project, the statute of limitations and statute of repose, including A.R.S. § 12-552, is tolled from the date the seller receives notice of the purchaser’s claim until nine months after the purchaser’s service of a civil complaint or arbitration demand on the seller. A.R.S. § 12-1363(G).

Attorney Fees

The new law allows reasonable attorney fees to the prevailing party in PDAs involving a contested issue. A.R.S. § 12-1364(A). A “contested issue” is one that is contested by a purchaser following the conclusion of the prescribed repair and replacement procedures. A.R.S. § 12-1634(E)(1).

To determine whether requested fees are reasonable, courts should consider:

1) repairs, replacements and offers made by the seller, if any, before the purchaser filed the action;

2) the purchaser’s response, if any, to the seller’s repairs, replacements and offers;

3) the relation between the fees incurred during the action and the value of the relief obtained with respect to the contested issue; and

4) the amount of fees incurred in responding to any unsuccessful motions, claims and defenses during the action.

A.R.S. §12-1634(B).

The revised law also allows a court to award expert witness fees in actions involving a single purchaser. To decide whether to award such fees, the court should consider the same criteria it uses to determine the award of attorney fees. A.R.S. § 12-1364(D).

Despite the statutory provisions dealing with attorney and expert witness fees, the revised law does not alter or prohibit contractual provisions providing for attorney or expert witness fees. A.R.S. § 12-1364(C).

Procedural Changes

In addition to requiring that construction professionals be added as third-party defendants, the new law requires a purchaser pursing a PDA to file an affidavit. Pursuant to A.R.S. § 12-1633(N), a purchaser who files a contested dwelling action has to file an affidavit stating that the purchaser has read the complaint, agrees with its allegations and, unless authorized by statute or rule, is not receiving and has not been promised anything of value in exchange for filing the dwelling action.

Indemnification Only for a Contractor’s Own Fault

In addition to making changes to PDAs, the new law revises the indemnity provisions in Title 32, Chapter 10 of Arizona’s statutes. Notwithstanding A.R.S. § 32-1159, which addresses, generally, indemnity agreements in construction and architect-engineer contracts, pursuant to A.R.S. § 32-1159.01, subcontractors involved in the construction of a dwelling need only indemnify others for their own negligence. A clause in a dwelling-related contract that “purports to insure, to indemnify, or to hold harmless the promisee from or against liability for loss or damage is against public policy . . . and is void . . . to the extent that it purports to . . . indemnify . . . the promisee from or against liability for loss . . . resulting from the negligence of the promisee . . . .”

Although some states do not void agreements to provide insurance covering a promisee’s negligence, Arizona’s statute specifically states that such agreements in dwelling construction contracts are against public policy. Insurers should note that, while an insurer may have a duty to defend an additional insured pursuant to the language of any additional insured endorsement in its policy, an additional insured endorsement furnished pursuant to a dwelling construction contract does not obligate the insurer to indemnify the additional insured for its percentage of fault. A.R.S. §§ 32-1159.01(C); 32-1159.01(F)(5).

The indemnity provisions are subject to certain exceptions. For instance, Section 32-1159.01 does not apply to an agreement where the state or a political subdivision of the state is a party. To find out more specifics regarding the exceptions in Arizona’s revised law, including exceptions discussing insurance, interested parties should look at A.R.S. § 32-1159.01(F).

Moving Forward

Arizona’s revisions to its PDA statute serve as a reminder that, when faced with construction defect claims, subrogating insurers should review the applicable state’s construction-related statutes. These statutes often impose notice, time limitation, procedural and other requirements that subrogation professionals need to consider before proceeding with a subrogation claim.

[*] All citations are to the applicable laws, as revised.