Texas Residential Construction Liability Act 101

Texas Flag on Brick WallPicture this. You build your dream home, or you add a new room onto your house. The first time it rains, you end up with a leaky roof, damaged walls, water on your floors, and your belongings require cleaning or replacement. If your loss occurred in Texas, and you wish to seek recovery, you will be subject to a little known but highly complicated law known as the Texas Residential Construction Liability Act (“RCLA”). For us subrogation professionals, we too will be subject to the rules and regulations within the Texas RCLA.

The Texas RCLA was passed by the legislature and signed into law in 2003. It is contained in Chapter 27 of the Texas Property Code. The Act sets out the formal process that must be followed for bringing a suit against a contractor for a residential construction defect. The term construction defect is broad. “Construction Defect” is defined as (1) the failure of the design, construction, or repair of a home, an alteration of or a repair, addition, or improvement to an existing home, or an appurtenance to a home to meet the applicable warranty and building and performance standards during the applicable warranty period; and (2) any physical damage to the home, an appurtenance to the home, or real property on which the home or appurtenance is affixed that is proximately caused by that failure. In simple terms, this is a construction or an alteration to a residence.

A “Residence” under the RCLA is defined as real property and improvements for a single-family house, duplex, triplex, or quadruplex or a unit and the common elements in a multiunit residential structure in which title to the individual units is transferred to the owners under a condominium or cooperative system. Simplified, a “residence” is any residential structure that is a house, townhome, or condominium.

Confused PersonAs part of the RCLA, there are notice requirements and timeliness issues that must be followed in order to be able to proceed against a contractor for damages. First and foremost, the notice to the contractor must be sent via certified mail, return receipt requested. The notice must specify in reasonable detail the construction defects that are the subject of the complaint. Once the contractor receives the notice, all relevant timelines begin to run. As part of the RCLA, a minimum of 60 days must elapse from the date the contractor receives notice before a claimant is able to file litigation. Once the notice is received, a contractor has 35 days to make a written request to inspect the subject property to determine the nature and cause of the defect and the nature and extent of the repairs necessary to remedy the defect. The next deadline arrives 10 days later, wherein the contractor has 45 days from the date they receive notice to make a written offer of settlement. Once the offer is made and received, the claimant will have 25 days to accept or reject the offer. The claimant has the opportunity to advise why the offer is unreasonable and, if no formal rejection is made within the 25-day period, the offer is deemed to be automatically rejected. We are not done yet. The contractor then has 10 days from when they receive the rejection to make a supplemental offer in writing. In the event that an offer is accepted, the repairs must be made within 45 days from acceptance.

Are you thoroughly confused yet? These are just the basics of the RCLA. There are additional requirements and nuances within the statute which may affect your ability to recover on a residential loss.

So how does this all apply to subrogation professionals? Let’s take a look at how a successful case would look under the following hypothetical:

Your insured calls and reports a new loss. The adjuster assigned to the file is a regular subscriber to MWL’s newsletters and immediately recognizes that the loss has subrogation potential, and the file is referred to the subrogation department. What should be the first step?

The first step would be to call your insured, explain the subrogation process, explain that the loss is subject to the Texas RCLA, and the initial notice letter to the contractor should be sent out. It would also be wise to engage your subrogation counsel to assist you with the notice requirements and to make sure that the timelines and notice provisions required by the RCLA are met.

The RCLA-compliant notice letter is sent, and the claim moves forward. All relevant parties are placed on notice and joint scene inspections proceed forward. The claim is eventually resolved, your insured’s house is repaired, your insured is happy, and your insured is now a lifelong customer.

Now let’s take a look at what will happen if the requirements of the RCLA are not met. Your insured calls and reports a new loss. The adjuster assigned to the file does not recognize the subrogation potential and repairs are authorized. A few months down the road, someone reviews the file and realizes that there was subrogation potential. Subrogation counsel is contacted, and you are told that the claim is still subject to the RCLA, so proper notice must be given. This will immediately halt the progress of any repairs already underway because the notice provisions still apply. As a result of the repairs already being underway, the defense now makes an argument of spoliation, and that the contractor was not given proper notice under the RCLA. The claim is now delayed for at least 60 days to allow compliance with the RCLA and the potential for a successful subrogation against the contractor is minimum at best. The claim may be closed from a subrogation standpoint as the loss may be too far into the process to allow for any chance at recovery.

We have seen too many cases in Texas where insurers have waived claims and defeated their own subrogation claims for failing to comply with the RCLA. Many times, the failure to comply with the RCLA results in a closed file without a recovery. The RCLA as a statute is favorable to contractors. It is a burden to overcome for subrogation professionals and makes recovery on residential construction defect cases difficult. However, with the right knowledge and practical know-how, you can take claims from low potential for recovery to high potential for recovery by having an understanding of the RCLA. Knowing how to comply with the requirements within the Act will increase recoveries, make claims go smoothly, and will keep your insureds well-informed and happy.

This is a very brief introduction and overview of the Texas RCLA and what potential issues may arise for subrogation professionals when handling a residential construction defect claim. The statute is highly complicated and requires a detailed understanding of the effects of the provisions contained therein.

MWL will be hosting an one-hour Texas Residential Construction Liability Act 101 webinar on September 21, 2021, at 10:00 a.m. (CDT) to provide a deeper analysis of the Act and how best to handle these losses when they are encountered. The webinar will offer one (1.0) hour of Texas CE for anyone holding a Texas license. We encourage you to sign up, attend the presentation, learn about the RCLA, and learn how to increase recoveries on residential construction subrogation claims in Texas. To learn more about or to register for this complimentary webinar, click HERE.

If you should have any questions on the Texas RCLA or subrogation in general, please contact Mark Solomon, managing partner of MWL’s Austin office, at [email protected].

SHARE THIS:
Mark A. Solomon
Partner

Mark A. Solomon is an insurance trial lawyer and the managing partner of Matthiesen, Wickert & Lehrer’s Austin, Texas branch office. Mark is licensed to practice law in Texas,  Colorado, and Georgia. Mark’s practice focuses on complex property and casualty subrogation, workers’ compensation subrogation, and automobile subrogation.