By Kimberly L. Karr, K&L Gates, Pittsburgh
A Federal Court in Pennsylvania has handed down a ruling that may expand the pool of potential plaintiffs in construction litigation. See AMCO Insurance Co. v. Emery and Associates, 926 F. Supp. 2d 634 (W.D. Pa. 2013). In AMCO, the court allowed the second owner of a building and its insurer to file suit for negligence against a builder, even though privity of contract did not exist between the parties. See id. at 643.
The case stems from damage to property in Armstrong County, Pennsylvania. The original owners of a property hired a general contractor, Emery, to build a hotel. The owners then sold the hotel to a second owner. Seven years after that, a fire occurred that caused significant damage to the hotel premises. See AMCO, 926 F. Supp. 2d at 637-38.
The second owner filed a claim with its insurance company, AMCO, to recover the cost of the damage due to the fire. AMCO paid their insured $4 million, and then sued the contractor for the claim amount. Among AMCO’s causes of action was an argument that the builder, Emery, acted negligently when it constructed the hotel. Specifically, AMCO alleged that Emery’s failure to comply with local and state building codes attributed (at least in part) to the fire. See id. at 637-39.
Emery petitioned the Federal District Court to dismiss AMCO’s negligence claim, with one reason being that it owed no duty to the second owner and its insurer. See id. at 642. Emery seemed to rely on the lack of direct relationship between the parties to support its claim. See id. at 642-43.
However, the court disagreed. It held that under Pennsylvania law, a “duty of care” could extend from a builder to a second owner and its insurer, even in the absence of a direct relationship (including privity of contract). Quoting a Pennsylvania Superior Court decision, F.D.P. ex rel. S.M.P. v. Ferrara, 804 A.2d 1221, 1231 (Pa. Super. 2002), the AMCO court weighed five factors to determine whether a duty of care was present: (1) the relationship between the parties; (2) the social utility of the actor’s conduct; (3) the nature of the risk imposed and foreseeability of the harm incurred; (4) the consequences of imposing a duty upon the actor; and (5) the overall public interest in the proposed solution. See AMCO, 926 F. Supp. 2d at 643. Applying these factors to Emery, the court ruled that it is reasonable for a builder to assume that a commercial building may have more than one owner, and negligent acts on the part of the builder could affect subsequent owners. The court also emphasized that it is in the public interest to impose a duty on those who are negligent in following required building codes. See id.
Owners, developers, and builders should be mindful of the AMCO decision before starting a construction project in Pennsylvania. If privity of contract is no longer the sole avenue for recovery, parties must consider all potential plaintiffs who might be owed a duty of care.