2019 Legislative Update

The 86th Texas Legislature passed several new laws affecting the construction and design industries. Here’s what you need to know:

Background:

For several sessions now, there has been a concerted effort to limit lawsuits by school districts brought at or near the eve of limitations or repose. Previous efforts included limitations on how school districts could spend money recovered for design and construction defects. HB 1999 is an attempt to create notice and opportunity to correct as prerequisites to suit by certain governmental entities.

Bill Description:

HB 1999 was signed into law and is effective immediately. The new law requires that governmental entities give contracting parties a reasonable opportunity to correct alleged construction or design defects prior to the public owner filing a lawsuit for defect damages. While opponents say that it adds an unnecessary hurdle for governmental entities to be compensated for construction or design defects, proponents argue the law will reduce the number of lawsuits, and thus the overall cost of contracting with government entities, resulting in a more efficient system to address and cure alleged defects.

The law requires, with some exceptions, that prior to filing a construction or design defect lawsuit, certain governmental entities must detail the alleged defects, the status of the issue, and proposed repairs in a written report, providing a 30-day notice for inspection to the contractor, design professional, subcontractor, and/or supplier, and allow 120 days for a contracting party to either fix the issue, or enter into a separate agreement with the public owner to fix the issue, if they so choose.

If, after filing the report and giving the contracting parties proper time to inspect and correct, the governmental entity is unsatisfied with the solution, it may then file suit. The statute imposes some penalties (including dismissal) if owners fail to issue the required notice, report, and opportunity to correct.

For construction and design participants, the statute also specifies that if a contracting party’s insurance company receives a written notice or report of an alleged defect, the insurer must treat the notice or report as the filing of suit for a claim against their insured, triggering relevant policy terms and coverage provisions. The purpose is to prevent the insurance company from denying coverage on the basis that a suit has not been filed.

Some exclusions to these mandatory procedures apply, including if the contracting party accused of the defect was terminated for cause, if the contracting party had previously made the issue worse in their attempt to fix the problem, or if they were uninsured, unable to bond, or convicted felons.

Significance:

The statute imposes a significant hurdle to suit by governmental entities. The report requires the governmental entity to specify what sorts of modifications, maintenance, or repairs were made to the building once the government began occupying it. The statute also imposes burdens on contractors, requiring them to quickly (within 5 days) submit the reports to all their subcontractors, once received. The opportunity to correct may give contractors and design professionals an opportunity to cure known issues with work prior to suit, potentially reducing attorneys’ fees risks or costs for the design and construction participants. Failure to follow the procedures could result in dismissal of the governmental entity’s lawsuit, which will virtually guarantee some additional procedural posturing in any future lawsuit.

The change to insurance is an important modification for design and construction participants, as it will protect them from insurers who refuse to participate in the defense of a claim until the lawsuit is filed. While many carriers already participate pre-suit, some do not, and the new change will make it more difficult for insurers to ignore a claim until suit is filed.

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Background:

For over 100 years, Texas has followed a legal rule that if the contract between the owner and the contractor is silent as to responsibility for design, the contractor impliedly promises that the building can be constructed as designed. For several legislative sessions, contractors have sought to reverse this rule and limit contractors’ responsibility for alleged design defects. HB 2899 is a narrow attempt to do that with respect to certain horizontal construction (traffic, bridge, tunnel, parking, etc.) for governmental entities.

Bill Description:

The law states that contractors working with certain governmental entities (including TxDOT) on horizontal construction projects are not responsible for the accuracy or sufficiency of the project plans and specifications, and are not liable for damages resulting from defects in the project specifications or from the errors, omissions, or negligent acts of the governmental entity or the governmental entity’s contracted third-party representatives. Any attempted promises to hold the contractor liable for design defects is unenforceable.

Separately, the law states that a governmental entity may not raise the standard of care for engineering or architectural services for horizontal construction beyond what would be provided by an ordinarily prudent licensed architect or engineer.

Significance:

The bill is a win for both design professionals and contractors. Contractors had sought a bill that more broadly protected them from design defect exposure on all projects. Nonetheless, this horizontal construction bill represents a huge victory for advocates of contractors seeking to reverse Texas’s default rule with respect to design liability. They can be expected to return in future legislative sessions with efforts to broaden the scope of projects affected by this law.

For design professionals, the statute essentially mandates a typical standard of care for design services, prohibiting certain governmental entities from requiring a heightened standard of care. This has been part of a broader effort to limit governmental entities generally from requiring a heightened standard of care. Importantly, this will help protect design professionals from promising to perform services to a standard that may cause them to lose insurance coverage.

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Background:

The Supreme Court of Texas had previously held that the certificate of merit statute—requiring a party to file an affidavit of a similarly licensed professional in claims against architects, engineers, and land surveyors—only applied to the party who initiated the lawsuit. The case was very close, with a divided court split virtually down the middle on the result. This bill functionally reverses that decision, and requires any person suing a design professional to obtain a certificate of merit, not just the one who initiates the suit. The legislature had also previously amended the statute to permit persons “knowledgeable” (rather than actively practicing in) the same area as the defendant to sign the affidavit. This bill reverts the statute back to “practices” rather than “knowledgeable”.

Bill Description:

The bill clarifies that all claimants who sue design professionals for damages arising from their professional services must file a certificate of merit affidavit to support the lawsuit. It expands the universe of people to whom the bill applies from plaintiffs to any claimant, including third-party plaintiffs, cross-claimants, etc. It also requires an affiant who “practices” in the same area as the defendant, rather than one who is merely “knowledgeable” in the same practice area.

Significance:

The people most affected by this bill are those sued by owners for design defects. Ordinarily, an architect, for instance, would be able to join its engineering sub-consultants to a lawsuit filed by the owner without having to secure affidavits from licensed engineers blaming the engineering sub-consultants or their work. The same would also have been true for a design-builder sued by the owner.

Now, architects, design-builders, and prime engineers as well, will have to decide whether to join their sub-consultants to lawsuits with a certificate of merit essentially proving up the owner’s claims against the design professional. The bill will probably result in a lot of procedural maneuvering by design-builders’ and prime designers’ lawyers, seeking to add parties to a lawsuit or arbitration while wishing to avoid blaming members of their own team with sworn affidavits.

The bill also appears to drastically reduce the number of people qualified to sign certificates of merit, since purely so-called forensic engineers—who may not be “practic[ing]” in the same area of practice as the defendant—might no longer be qualified to sign affidavits.

Further, the bill rekindles a legal debate as to just what constitutes the defendant’s practice. Under former versions of the statute, which this bill somewhat mimics, courts had inconsistently evaluated just how narrow the affiant’s practice had to mirror that of the defendant.

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Background:

Nominally, this bill is intended to increase construction affordability. Its supporters allege that local governmental entities have adopted overly strict building codes, not for safety reasons, but rather to reward certain construction material and industry vendors. 

Bill Description:

This state-wide bill is designed to prevent local governments from adopting more stringent product and installation standards than approved by national code committees. This may have a profound effect on code and building requirements and is effective September 1, 2019.

As enacted, the bill prohibits political subdivisions of the state (like cities and counties) from adopting and enforcing certain ordinances that are more stringent than requirements under existing national codes. Specifically, political subdivisions would no longer be able to limit the use or installation of building products, materials, or construction methods, if the products, materials, or construction methods have been approved within the last three cycles of an applicable national model code. The bill defines a “national model code” as a publication developed, promulgated, and regularly updated by a national level organization of industry and government building safety officials, including the International Residential Code, the National Electrical Code, and the International Building Code.

The statute does have some narrow exceptions, including for projects receiving federal funding, or windstorm and hail insurance coverage requirements.

Significance:

This bill’s passage into law may well trigger a massive rewriting of local ordinances, which will undoubtedly affect what sorts of construction materials designers and contractors may include in their projects. It will also allow construction and design participants to challenge city or county requirements in contravention of the bill.

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This information is made available by Allensworth & Porter for general education purposes only; it is not legal advice.

Will Allensworth is Board Certified® in Construction Law by the Texas Board of Legal Specialization. He represents a wide range of clients in the construction industry—including owners, general contractors, subcontractors, suppliers, architects, and engineers, with a particular focus on payment claims and construction and design defect litigation.