Originally published in The Legal Intelligencer on August 16, 2022.

The scope of an owner’s claims for damages in construction defect litigation against the general contractor and its subcontractors is often thought of as the costs of repair, plus any consequential damages such as lost profits or rents if not waived in the contract. But what about the ability of an owner to seek recovery for diminution in value to the building or improvement over and above the costs of repair—so called “stigma damages”? Owners’ counsel will sometimes contend that even after extensive repairs to correct construction defects have been completed to bring the condition of the building as was warranted under the contract, the owner is still entitled to damages for alleged diminution in value of the building. Such “post-repair diminution in value” claims often are asserted in relation to claims involving residential, especially condominium, projects, where state law disclosures by sellers (indeed even secondary sellers) of residential units are mandated. Owners’ counsel may contend, for example, that a residential condominium building’s repair history should be a relevant consideration when determining damages, as a result of a stigma associated with buildings where the property’s reputation has been allegedly damaged, often where there have been water infiltration or mold issues. See, for example, Orkin Exterminating v. DelGuidice, 790 So.2d 1158, 1159 (D.Ct.App.Fl. 2001) (the court references diminution in value damages as “stigma damages”).

Little case law specifically allows for an award of damages for both the cost of repairs and diminution in value damages in the construction defect context. Some jurisdictions, in the context of damage to automobiles, have allowed the recovery of post-repair diminution in value damages, but those damages are limited by the extent to which the sum of the diminution in value plus the repair costs is less than the difference between the property’s pre-accident value and its post-accident salvage value. In other words, the outside limit of what one is entitled to recover in a property damage case is always the value of the property pre-accident vs. post accident salvage value. See American Service Center Associates v. Helton, 867 A.2d 235, 243 (D.C.Ct.App. 2005); Rakich v. Anthem Blue Cross & Blue Shield, 172 Ohio App.3d 523, 532 (Ohio 2007); Ellis v. King, 184 W.Va 227, 231 (W.Va. 1990); and Fred Frederick Motors v. Krause, 12 Md.App. 62, 66–67 (Md. 1971). But again, the right to recover “stigma damages” over and above the costs of repairs at all, as in the automobile damage cases, is at best an untested proposition for construction defect cases.

The application of these principles in a construction defect claim seems an inexact fit, particularly where the building is new construction, where no easy comparison can be made between the value of the improvement before the construction defects to the value of the improvement post-repairs. It may well be that some analogy can be made to compare the value that the improvement would have had if it had been completed without construction defects, to the value of the building post-repairs, perhaps by examining the comparative property values of similar new properties in the area. However, there still remains the issue of whether expert testimony on the subject, from appraisers usually, can sufficiently (and without speculation) affix proper values to the construction improvement at the points of comparison that case law would seem to demand, if post-repair diminution in value is even permitted at all in the construction defect context within a particular jurisdiction.

Against this backdrop, we explore the applicable case law, which so far, even if implicitly, suggests that the proper measure of an owner’s construction defect claim is either cost of repair or diminution in value only if it can be demonstrated that repairing the building at the cost estimated would create economic waste. See White v. Marshall, 83 S.W.3d 57, 62 (Mo.Ct.App. 2002) (while in Missouri damage to realty is typically based upon diminution in value, cost of repairs may also be allowed based upon the particular facts of each case); Pennington v. Rhodes, 55 Ark.App. 42, 50–51 (Ark. 1996) (in Arkansas “the preferred measure of damages in construction contract cases involving new structures is to use the cost of repairing the defects … although the other method is to fix damages as the difference in the house’s value as defective versus its value without defects”); and Willie’s Construction v. Baker, 596 N.E.2d 958, 961 (Ind.Ct.App. 1992) (in Indiana, the proper measure of damages in breach of construction contract cases “is either the difference between the value of the building as constructed and what its value would have been had it been constructed in accordance with the contract, or the reasonable cost of curing the defects to make the building conform to the contract”).

Economic waste occurs when the cost of repair substantially exceeds the reduction in the property’s value. Diminution in value damages are most commonly awarded when the structure would have to be torn down and rebuilt to cure the defect. Grossman Holdings v. Hourihan, 414 So.2d 1037, 1040 (Fla. 1982) (tearing down and reconstructing a home built with the wrong exposure would result in economic waste and as such, damages are limited to the difference in value between the house contracted for and the house built). The concept of economic waste is pertinent here as many jurisdictions have found that diminution in value damages are awarded where other forms of damages, such as cost of repair, would result in economic waste.

To determine whether the economic waste doctrine applied, a court of appeals of Maryland opinion identified the rationale behind the economic waste doctrine:

“Sometimes the defects in a structure cannot be physically remedied without tearing down and rebuilding. In many such cases, the structure as it exists, even though it is not exactly in accordance with the contract requirement, is such that it will render substantially all the service that the structure contracted for would have rendered; and reconstruction and completion in accordance with the contract may be possible only at a cost that would be imprudent and unreasonable.”

See Andrulis v. Levin Construction, 331 Md. 354, 371 (Md. 1993) (quoting A. Corbin, Corbin on Contracts Section 1089, at 485–87 (1964)). See also, for example, Correa v. Maggiore, 196 N.J.Super. 273, 285–86 (1984) (the court found that economic waste applied as “the cost of repairs vastly exceed[ed] the contract price and the probable market value of the property. It would be anomalous to compel defendant to provide plaintiff with what essentially amounts to a totally refurbished home, which would be a result far exceeding what is necessary to make plaintiff whole”).

The basis for the economic waste doctrine is predicated on the notion that the purpose of awarding damages is to make the plaintiff whole, or to otherwise put the plaintiff “in as good a position as the plaintiff would have been if performance was rendered as promised,” and not to provide a substantial windfall to the plaintiff property owner. See St. Louis v. Final Touch Glass & Mirror, 386 N.J.Super. 177,188 (N.J. 2006) (quoting 525 Main Street v. Eagle Roofing, 34 N.J. 251, 254 (N.J. 1961)). See also Restatement (Second) of Contracts Section 348 cmt. c (1979) (explaining that economic waste exists when “the cost to remedy the defects will be clearly disproportionate to the probable loss in value to the injured party … thereby giving the injured party a recovery greatly in excess of the loss of value to him and result in a substantial windfall”); Jacob & Youngs v. Kent, 230 N.Y. 239, 244 (N.Y. 1921) (while typically the owner would have been entitled to payment from the contractor for the cost of replacement of the piping, when “the cost of completion is grossly and unfairly out of proportion to the good to be attained … the measure is the difference in value.”).

Several jurisdictions allow a plaintiff to present evidence in support of both cost of repairs and diminution in value, although the plaintiff cannot be awarded both types of damages, so that the plaintiff will not be unjustly enriched, which mirrors the principle behind the economic waste doctrine. See City of Jackson v. Keane, 502 So.2d 1185, 1187 (Miss. 1987) (a Mississippi court noted that a plaintiff “can choose to prove either reasonable cost of replacement or repairs or diminution in value … those damages are allowable, so long as the plaintiff will not be unjustly enriched and the defendant does not demonstrate that there is a more appropriate measure of damages”). See also Nashban Barrel & Container v. G. G. Parsons Trucking, 49 Wis.2d 591, 602–03; and 606 (Wis. 1971) (a Wisconsin court noted that if there is sufficient evidence of both cost of repairs and diminution in value damages, a civil pattern jury instruction requires the jury to award the lesser of the two damages). See, Final Touch Glass, 386 N.J.Super. at 188 (the court highlighted that “specific rules or formulas are subordinate” to the purpose of placing “the injured party in as good a position as he would have been in if performance were rendered as promised”). The Final Touch Glass opinion further stated that the question of “whether the cost of repair or diminution in value is the measure of damages rests in good sense rather than in a mechanical application of a single formula.”

Other jurisdictions have also recognized a fairness-focused and equity-based rationale regarding whether the proper measure of damages in the defective construction context is cost of repairs or diminution in value. See Dixon v. City of Phoenix, 173 Ariz. 612, 619 (Ariz. 1992) (an Arizona court found that diminution in value did not apply as the restoration of vegetation requested by the owners “would not entail tearing down a partially completed building or undoing extensive construction work to correct a minor defect”); and see also Mayfield v. Swafford, 106 Ill.App.3d 610, 615–16 (1982) (an Illinois appellate court, based on the specific factual circumstances that the constructed swimming pool had “no use, function or utility to the owner” and was otherwise unattached to the property, remanded the case to the trial court with instructions to award the owner “the lesser of the amount of the cost of repairing the [subject swimming] pool, … and the amount of the diminution in value of the [owners’] property”).

However, opinions out of Texas and Georgia have indicated that it is possible for a plaintiff to legally recover both cost of repairs and diminution in value as long as the plaintiff asks for “the amount of reduction in value after the repairs were made.” See Royce Homes, L.P. v. Humphrey, 244S.W.3d 570, 582 (Ct.App.Tx. 2008) (quoting Ludt v. McCollum, 762 S.W.2d 575, 576 (Tex. 1988) (emphasis added)). See also Royal Capital Development LLC v. Maryland Casualty, 291 Ga. 262, 264–65 (Ga.Sup.Ct. 2012) (ruling that “it may sometimes be appropriate, in order to make the injured party whole, to award a combination of both measures of damages” … as long as the damages were for cost of repairs and post-repair diminution in value) and John Thurmond & Associates v. Kennedy, 284 Ga. 469, 471 n.2 (Ga.Sup.Ct. 2008).

There is a court of appeals of Texas opinion that allowed a plaintiff’s recovery for both cost of repairs and diminution in value because while the subject home repairs were required as a result of flood damage, “no amount of repairs to the house could correct the flooding problem … There was no double recovery.” See Parkway v. Woodruff, 857 S.W.2d 903, 913 (Ct.App.Tx. 1993). The facts of this case were unique as a developer’s placement of a concrete wall and dirt fill near the subject property caused drainage that put the property on an inevitable “three to ten year flood plain.” Yet when the case went up on appeal, the Texas Supreme Court reduced the damages award and found that allowing the recovery of both cost of repairs and diminution in value damages did constitute a double recovery because the awarded damages did not calculate the diminution in value “after repairs are made.” See Parkway v. Woodruff, 901 S.W.2d 434, 441 (Tex.Sup.Ct. 1995). Texas courts re-stated this important requirement for requesting an award of both damages in 2014 and again in 2020. See Wolf v. Starr, 617 S.W.3d 898, 908 (Ct.App.Tx. 2020) (“where the diminution is calculated by comparing the original value to the value after repairs are made,” cost of repairs and diminution in value damages are not duplicative) (emphasis added). See also Houston Unlimited, Inc. Metal Processing v. Mel Acres Ranch, 443 S.W.3d 820, 825–26 (Tex.Sup.Ct. 2015) (“[t]o recover an award of diminished value in addition to the costs of repair … the permanent reduction in value must refer to that reduction occurring even after repairs are made”).

Only a select few cases have seemingly been receptive to a claim for recovery of diminution of value or “stigma” damages on top of cost of repairs. Most jurisdictions would seem to limit recovery to the cost of repairs, and would allow instead an award of diminution in value only where repairs would cause economic waste. But, while the argument for recovery of diminution in value in addition to cost of repairs has not yet taken hold, claims for post-repair “stigma” damages are likely to be advanced more often in future cases.

Stephen S. McCloskey is the chairperson of the litigation department at Semmes Bowen & Semmes, and a member of the firm’s management committee. His practice focuses on civil litigation including concentrations that include construction litigation. McCloskey is barred in the Federal and State Courts of Maryland and Washington, D.C.

Thomas V. McCarron is the managing principal of the firm. He focuses his practice on various aspects of civil litigation, including in construction litigation. He has experience in litigating in the state and federal courts of Maryland, as well as the U.S. District Court and the Superior Court for the District of Columbia.