Reach of Contruction Defect Litigation Extends Beyond Condos

Editor’s note: Following the cover story “Cracks in the Stucco: Construction Defect Litigation Spreads” in our July 24, 2000, issue, several readers called in to share stories of how the problem of construction defect goes beyond multi-family housing in California. The virus of litigation spreads to single-family housing in Northern California, condos in Nevada, soil problems in Colorado and EIFS issues in Washington, to name a few.

“We’re not satisfying probably 50 percent of the need for single-family housing in the Bay Area,” Gary Hambly, president and CEO of the Home Builders Association of Northern California (HBANC), pointed out. “In California it’s estimated we need to [build] about 250,000 units a year, and I think this past year we did about 160,000.”

Why aren’t the needs being met? “There aren’t enough available lots to build on, and then there’s a lot of slow-growth or no-growth policies that have been adopted in many local jurisdictions that have inhibited the ability of the industry to meet demand,” Hambly said.

But the biggest impediment to construction of multi-family and single-family homes is the threat of litigation.

An ‘invitation for trouble’
“I was talking to a marketing person the other day and he said 100 percent of the projects he’s been involved in the last 10 years have been subjects of litigation,” Hambly said. “It’s almost an invitation for trouble, so many companies just won’t do it anymore. For many, there’s no insurance available to do it…There’s a whole lot of market opportunity that’s being missed and a whole lot of affordable housing opportunities that can’t be realized because everyone’s afraid.”

Bill Newton, president of Lemac & Associates Inc. in Los Angeles, said that lawsuits involving single-family housing have always been a problem. Lemac writes close to 1,500 contractors’ policies in California and Nevada, including residential, general, commercial and subcontractors.

“I think it started with homeowners associations and condominiums, but that was six or seven years ago,” Newton said. “It spread pretty quickly to single-family dwellings, and over the last three or four years, single-family dwellings have been as bad as condominiums.”

There are no readily available statistics on the number of cases, according to the California Research Bureau (CRB), but the undeniable growth in litigation could have been caused by several “unusual factors.” These factors include: “years of drought followed by wet winters… earthquakes in both Southern and Northern California and the resulting damage and concern over seismic safety…[and] building on marginal lands.” 1

The growing number of attorneys moving into the construction defect arena is also cause for concern for insurers and builders alike.

“It’s a cottage industry within the state, where attorneys canvas neighborhoods and suggest to people that issues that are fairly common are somehow defects,” Hambly said.

There is no question that construction defect is a growing and profitable area for attorneys. When Patee Barta, public relations director at Anderson & Kriger, started at the San Diego-based law firm 11 years ago, there were seven employees in one office. “Now there are 50-plus employees in five offices, and each office is currently seeing between 50 and 100 cases,” Barta said. “We are trying to be Southern California’s construction defect leader.”

Although Anderson & Kriger’s five offices are located in California, the firm has at least one attorney who is licensed in litigation hotspots Nevada and Colorado.

Spreading out
As bad as things are in California, they are even worse in Nevada, according to Newton. “The loss activity from our Nevada book of business has gotten progressively worse so that it’s worse than what we are now seeing in California,” Newton said.

A recent illustration of the Nevada climate is the $16.25-million settlement reached on Aug. 2 between a Rock Springs, Nev., homeowners association and the builder of a condominium complex.

The Rock Springs Vista 3 Homeowners Association charged the developers of the condominiums with more than 180 types of defects in the architecture, exterior walls and stucco, roofs, chimneys, decks and stairs, windows, doors, Gypsum wallboard, thermal and fire protection, ceramic tile, floors, foundations, water drainage, plumbing, heating, ventilation and air conditioning, and electrical wiring—enough to make any insurer run screaming in the other direction. Several factors contribute to Nevada’s litigious environment: “Nevada’s laws are almost identical to California, the exception being that Nevada has an arbitration process similar to our Calderon process [requiring arbitration prior to onset of litigation] that one has to go through for all construction defect claims…but that doesn’t seem to have had too much effect,” Newton said.

“I think part of what has happened in Nevada is…there has been a tremendous increase in construction—when you have that big of a bubble in construction activity, quality does tend to suffer. It’s hard for subcontractors to find qualified employees.”

Colorado is also seeing an increasing share of litigation. “They have bad soil problems in certain parts of Colorado, and as a result they have a lot of subsidence-related claims,” Newton said. The instability of the soil may cause the home or building to shift—creating reason enough to sue the developer—but fortunately the problem seems to be only in certain types of soil, not widespread throughout the state.

There is also increasing litigation activity coming out of the state of Washington. Much of that is related to exterior insulation and finish systems (EIFS), which are multi-layered exterior wall systems used
on both commercial buildings and homes. According to the EIFS Industry Members Association (EIMA), the product provides superior energy efficiency and offers greater design flexibility than other
cladding products.

However, a spate of lawsuits in the last five years is claiming that EIFS is responsible for problems of moisture intrusion. “There seems to be some degree of dispute whether or not it’s the product or how the product’s applied, but the net result is that moisture gets into the building and gets trapped,” Newton said. “Maybe, for example, the stucco doesn’t go all the way down to the dirt, so it rains and then moisture that leaches through the dirt will come up behind the stucco and get trapped, and as a result you get mold and rot.”

Cosmetic issues
Looks aren’t everything, but when a homebuyer sees a crack in the exterior wall of her house, there’s bound to be trouble. Whether this is actually a defect is debatable, but “cracking is normal,” Hambly said.

“You see it more and more frequently: cosmetic issues, modest cracking in the stucco. People come in and claim they are defects…So a lot of things that happen to a house—which we used to consider to be cosmetic problems—now become litigation issues in the hands of an attorney.”

These types of lawsuits usually take from one to two years to come to trial, and the costs of retaining architects, soil engineers and other experts to investigate each home can add up quickly. The overwhelming majority of cases are settled before reaching court, according to CRB. The typical settlement is between $1 million and $2 million, with the largest reported settlement totaling $34.5 million.

Anderson & Kriger’s Barta disputed the view that attorneys are just out there trying to stir up trouble. “In order to do anything on a contingency basis, because we’re fronting all the costs until the recovery, it would be shortsighted of us to take on something with just one crack here, one crack there.”

Constructing solutions
One of the goals of associations such as HBANC is to help define what is and isn’t a defect in order to reduce the potential for litigation. A member of HBANC is currently writing a manual for workmanship on a statewide basis to help define the defect concept.

“If there’s no definition, then you bring in consultants and experts and they debate in front of regular people whether a defect is or isn’t, and that’s where all these issues become very expensive and convoluted,” Hambly said.

What can insurers do to cut down on construction defect claims?

“A real important thing is to get homeowners aware that they have a responsibility,” Hambly pointed out. “A number of these issues are water-related, often as a result of poor maintenance after the sale.”

Educating the buying public about how to effectively maintain their property will prevent many of the more common problems. “Things like walking on roofs, putting up Christmas lights—there’s a whole bunch of things consumers do that jeopardize the integrity of the structure,” Hambly said. “It goes both ways—it’s not to say that from time to time builders don’t make mistakes, but obviously, builders would like to come in and repair it before it goes too far.”

One of the more common causes of action is inadequate waterproofing, according to CRB. “There’s all kinds of issues there: if you don’t adequately maintain your drainspouts and they get clogged and water goes underneath the roof; if you don’t caulk around your tub periodically, water starts going in those areas,” Hambly said.

Newton said another defense that is becoming more prevalent is the use of a forensic process during the construction phase. The process involves “an outside third party that can come in and document and photograph the work; [and] be able to provide proof so that if a claim does occur years down the road, they can show that…their work was done in accordance with the plans.”

This may sound like a tedious process, but as the old adage goes, “Better safe than sorry,” especially when you’re talking about $34.5-million settlements.

To comment on this article, please send e-mail to sbarnhart@insurancejournal.com.

Topics Lawsuits California Homeowners Construction Colorado Nevada