The Idaho Supreme Court was recently called upon to determine whether or not a developer was liable to a homeowner for damage caused to a house built on improperly compacted fill. In Blahd v. Richard B. Smith, Inc., et al., 05.6 ISCR 284, the Supreme Court held that the developer was not responsible for damage to the home due to the developer’s alleged negligence.

In 1996 the homeowner purchased (from a private party) a home built in 1988. During the process of inspecting the house, the homeowners noticed a crack in the unfinished basement, but proceeded with the purchase anyway. In 1997, the home underwent a remodel and shortly after completion of the remodel the newly installed improvements were damaged by settling. In 1999 the homeowner brought a lawsuit against multiple parties, including the original developer of the lot.

Because the homeowners did not purchase the property from the developer, they were unable to bring an action for breach of contract, a typical remedy asked for in this type of circumstance. Without this remedy, the homeowner was left with a negligence claim against the developer for improper preparation of the lot. The first problem with this approach was that Idaho law generally prohibits negligence actions for “mere economic loss.” Basically, the rule prevents a party to a transaction from bringing a negligence action relating to the quality of the goods or services received in the transaction, absent damage to other property or personal injury. Allegations that the subject matter of the transaction did not deliver the expected value are generally not recoverable in negligence. An example of the general principle is as follows: If a homeowner were to hire a contractor to trim his trees and in the course of trimming the contractor caused damage to the tree itself, such damage would be recoverable in contract but not in negligence. However, if a limb were to fall upon a parked car causing damage to property outside of the transaction, or a passerby causing injury, a negligence action would be permitted.

In the Blahd case, the homeowner had to convince the court that the preparation of the defective lot was separate and distinct from the construction of the home on the lot. The Idaho Supreme Court rejected this contention citing a long list of cases where the term “transaction” had been construed broadly.

Having failed to convince the court that they were outside of the “no economic loss rule,” the homeowners attempted to argue they were entitled to an exception to the rule in cases where a special relationship exists between the alleged wrongdoer and the aggrieved party, commonly referred to as malpractice cases. The classic example of such a special relationship is providing professional services. Attorneys, architects, engineers, physicians and other professionals who negligently provide services are responsible to those receiving the services based upon the reliance that their specialized training creates. There are also a limited number of cases where the courts have extended the special relationship exception to non-professionals, such as insurance agents, but the party seeking relief must demonstrate it reasonably relied upon the non-professional’s special and unique expertise.

In the Blahd case the court seemed open to the idea that a developer was a quasi professional. Ultimately though, a decision on this issue was not made because the homeowner could not demonstrate reliance upon any act of the developer because the homeowner did not interact with the developer nor purchase the home directly from the developer. The lesson from Blahd seems to be that developers and contractors do not have malpractice liability to third parties they have not dealt with. The practical value of such a decision is that developers and contractors who may be subject to various claims from subsequent purchasers of their products have an additional shield to utilize in defending themselves. This may be of particular value in defending the proliferating claims against developers and contractors for mold and wet crawl spaces.

What is not known however is whether developers and contractors have malpractice liability to parties with whom they have dealt directly. With the entry into Idaho of large scale developers and the increasing sophistication and advertising present in the industry, contractors and developers are more and more likely to be subject to malpractice liability. Further, recent efforts by trade groups to enact legislation to register contractors, could have the inadvertent result of creating professional status, and thus malpractice liability. Contractors and developers should review their contract forms with an eye towards reducing or eliminating any such potential liability with the use of waivers and releases. The economics of the industry are premised upon developers and contractors providing a warranty of limited scope and duration. Malpractice liability, if not properly managed, could impose significant increased claims costs upon contractors and developers, upsetting the business model.