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Massive Overhaul of Nevada Construction Defect Statute

March 17, 2015

On February 24, 2015, Governor Brian Sandoval signed Assembly Bill 125 (AB 125) into law. AB 125 substantially changes Nevada’s construction defect laws and will likely change the landscape of both litigation and construction practices. As one of the leading Nevada firms representing builders and general contractors we have been monitoring the legislative efforts and compiled responses for what we expect will be the “Frequently Asked Questions.” While we cannot anticipate all issues that may arise with these new statutory provisions, we are available to answer your specific questions as to how these changes may impact you and your business operations.

1) What are the major changes that AB 125 brings to Nevada law?

AB 125 brings significant changes for developers, contractors, insurers, subcontractors and homeowners including, but not limited to:

Refinement and limitation of the definition of what constitutes a construction defect
Shortening the statute of repose
Limitations on HOA Standing
Elimination of attorneys’ fees as a recoverable damage
Elimination of the “common construction” defect notice
Changes to the pre-litigation notice procedures and the claims that a homeowner may bring against developers and contractors
Limitations on indemnity
2) How does AB 125 affect the potential for risk transfer?

With AB 125, the Nevada Legislature brought about the first anti-indemnity statute in Nevada. AB 125 does not prohibit all indemnity agreements in residential construction. Instead, AB 125’s prohibition on indemnity and defense agreements only applies to indemnity and defense provisions that require a subcontractor to indemnify and defend the general contractor or the developer for their own negligence or intentional acts. In fact, AB 125 specifically states that its anti-indemnity provision does not apply to indemnity and defense agreements that require a subcontractor to indemnify and defend the general contractor or the developer for claims based on the subcontractor’s scope of work.

This change to Nevada’s indemnity and defense law, however, only applies to contracts that are entered into after February 24, 2015. Going forward you should review your construction contracts for compliance with AB 125 in order to maximize your ongoing ability to transfer risk.

3) When is the subcontractor’s duty to defend triggered?

Under AB 125, a subcontractor’s duty to defend under the contract arises when a Chapter 40 Notice containing a claim of construction defect that implicates the subcontractor’s work, negligence or wrongful act or omission is sent to the subcontractor by the contractor. But, even though a subcontractor’s duty to defend arises when it is provided notice of the claim, in certain circumstances AB 125 imposes additional requirements that must be met before a contractor or developer can pursue a subcontractor when the subcontractor fails to defend. In cases where the subcontractor has general liability insurance coverage and the contractor/developer is named as an additional insured (AI) under the subcontractor’s general liability policy, AB 125 requires the contractor/developer to seek a defense from the subcontractor’s general liability insurer before pursuing the subcontractor for its defense obligations. This change also only applies to contracts that are entered into on or after February 24, 2015.

AI issues are not always resolved before a case is settled or a final judgment is entered. In the event that an AI tender is still pending at the conclusion of a case, AB 125 allows the contractor to bring suit directly against the subcontractor for reimbursement of the attorney’s fees and costs that are attributable to the defense of the claims implicating the subcontractor’s scope of work.

4) Can HOA’s still bring claims under Chapter 40?

AB 125 modifies NRS Chapter 116 to expressly prohibit homeowners associations from pursuing claims from anything other than construction defect claims pertaining to common elements under Chapter 40. This change is in response to recent Nevada Supreme Court decisions allowing homeowners associations to bring Chapter 40 claims for alleged defects within the individual members’ homes or units. Pending HOA Chapter 40 notices do not appear to be affected by this change which will only apply to new Chapter 40 notices given by HOAs after the effective date of AB 125.

5) How has the definition of a “constructional defect” changed after AB 125?

AB 125 narrows the definition of a “constructional defect.” The prior definition of a “constructional defect” under Chapter 40 was extremely broad. Now, “constructional defects” will be limited to defect claims which present an unreasonable risk of injury to a person or property; or which are not completed in a good and workmanlike manner and proximately cause physical damage to the residence or appurtenance at issue. This change only applies to claims arising on or after February 24, 2015. It is unclear at this time when a claim “arises” for the purpose of this amendment.

6) What about homeowners’ warranty policies?

Prior to the adoption of AB 125, a homeowner was only required to “diligently” pursue a claim under the policy and there were no consequences to the homeowner if he or she fails to do so. AB 125 requires homeowners who have homeowner’s warranty coverage to tender the claim to the warranty policy first. Only in the event that the insurer denies the claim may the homeowner provide a Chapter 40 Notice to a contractor/developer. Note that AB 125 also tolls the statutes of limitations and repose for a construction defect claim from the time the homeowner tenders the claim to the homeowner’s warranty insurer until 30 days after the insurer rejects the claim in writing. Furthermore, it is unclear whether this requirement only applies when there is a possibility of coverage for the particular defect claim. The requirement for a homeowner to tender the claim to his or her homeowner’s warranty insurance company applies to any homeowner who provides a Chapter 40 Notice on or after February 24, 2015.

7) Does AB 125 make changes to the form and requirements for construction defect notices?

Yes. AB 125 eliminates the common constructional defect notice procedure, i.e. a notice given by one or more homeowners for themselves and other ‘similarly situated’ homeowners in their community. AB 125 also requires a Chapter 40 notice to identify in specific detail each defect and the associated damage and injury, including the exact location of each defect, damage and injury. The homeowner must also provide a signed a verification statement stating that he or she has verified the existence of the defect, damage and injury in the notice. Finally, if the claimant is a homeowner association, the verification statement must be signed by a member of the association’s executive board or an officer of the association under the penalty of perjury. The new requirements for a Chapter 40 Notice will apply to any new Chapter 40 Notice issued on or after February 24, 2015.

8) Does AB 125 change how inspections under Chapter 40 must be conducted?

Yes. With the adoption of AB 125, the homeowner must be present during the contractor’s Chapter 40 inspection and must identify the exact location of each alleged construction defect specified in the notice. Furthermore, if the Chapter 40 Notice includes an expert opinion, the expert, or a representative of the expert, must also be present and must identify the exact location of each alleged construction defect he or she provided an opinion. These new requirements relating to Chapter 40 inspections apply to all inspections occurring on or after February 24, 2015.

9) Can statutory offers of judgment be made during Chapter 40?

Yes. Prior to AB 125, there was a lack of clarity regarding whether offers of judgment could be made during the pre-litigation process. AB 125 clarifies that offers of judgment can now be made, and will be enforceable, if issued during the pre-litigation process. Additionally, if accepted, AB 125 provides a mechanism for the parties to record the accepted offer of judgment with the Court.

10) What damages are recoverable by a Claimant under AB 125?

Claimants can still recover the reasonable cost of repair, loss of use and interest. Additionally, claimants can still recover expert costs but AB 125 imposes a limitation requiring the costs must be reasonably incurred for constructional defects actually proven by the claimant, not merely alleged. Most significantly, AB 125 eliminates attorney’s fees from the enumerated recoverable damages. These changes apply to claims arising on or after February 24, 2015. However, it is unclear at this time when a claim “arises” for the purpose of this amendment.

11) Does AB 125 change the statutes of repose?

Yes. AB 125 simplifies the statutes of repose by creating one universal statute of repose. Prior to AB 125, Nevada had a complex statute of repose scheme for construction defect claims. For a long time, Nevada imposed a different statute of repose based on whether the defect was patent, latent, known to the contractor or was caused by “willful misconduct” of the contractor. Furthermore, each statute had a saving clause where if an injury or damage occurred in the last year of the statute of repose, the homeowner had an extra two (2) years to bring the claim. Under the new law, ALL actions for construction defect must be commenced within six (6) years of the substantial completion of the home, unless tolled. This new statute of repose applies retroactively to actions where substantial completion of the home occurred prior to February 24, 2015; however, the legislature provided a one year grace period for homeowners to bring claims under the prior statutes of repose for homes completed before the effective date of AB 125 that would otherwise be time barred.

12) How does AB 125 change the tolling of the statutes of limitations and repose?

Under the old version of Chapter 40, the giving of a notice tolled the applicable statutes of limitation and repose practically until the conclusion of the required mediation. There was, however, no requirement for the homeowner to diligently pursue the pre-litigation process. In fact, there has been cases where the Chapter 40 process lasted several years. AB 125 limits any allowable tolling to no more than one year. There is one exception. The tolling period can last more than one year if a homeowner commenced an action after the expiration of the statute of repose or limitation, and the homeowner can show good cause for the tolling to last for a longer period. The change in how a Chapter 40 Notice tolls the statutes of limitation and repose applies to any Chapter 40 notice that is issued on or after February 24, 2015. AB 125 simplifies the statutes of repose by creating one universal statute of repose.

13) Does AB 125 address WRAP/OCIP Policies?

Yes. AB 125 establishes numerous disclosures that will need to be made by the contractor to subcontractors including but not limited to policy limits, scope of coverage, policy term, how many units are covered by the policy, among other disclosures. Failure to comply with the mandatory disclosure requirements may allow a subcontractor to back out of a bid. We anticipate that many builders using WRAP/OCIP policies are already providing much of the required information to the subcontractors, however, for those who are not care should be taken to ensure compliance. Notably, this new provision attempts to limit any self-insured retention or deductible allocated to the subcontractor under the WRAP/OCIP to an amount that cannot be greater than the self-insured retention or deductible that the subcontractor would have been required to pay under a traditional CGL policy. This new requirement is effective only as to contracts entered into after February 24, 2015.


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