Editorial: State of the Industry, Part 1 – Construction Defect Litigation

Here in California the weather is cold (relatively speaking), but the climate is electrifying. Construction defect litigation remains active despite numerous changes to legal strategies and continues to be shaped by the insurance carriers. CA SB800, our Builders Right to Repair laws, under Civil Code §895, et seq., has failed to achieve its stated goals as it enters the eighth year of enforcement. And among most construction defect lawyers, a “green building” is one that features a verdant exterior paint color. This is the state of the industry in the first full week of 2011, as I see it.

Construction Defect Litigation In The U.S.

This is me inspecting an attic in Las Vegas in the middle of Summer as a part of a Chapter 40 construction defect lawsuit - Brian Hill
This is me inspecting an attic in Las Vegas in the middle of Summer as a part of a Chapter 40 construction defect lawsuit - Brian Hill

In past economic cycles, it has been observed that as recession sets in and prices are driven down, quality suffers. In construction, this certainly appears to be the case. And the concept isn’t hard to grasp. A contractor lowers bids to become more competitive. Material prices don’t go down usually, so the labor cost must be decreased. As profit margins are further eroded, workers also face cutbacks. Getting paid less to do the exact same amount of work you did last year kills drive and morale. Corners are cut and the likelihood of sub-standard or defective workmanship increases. This is one factor that impacts construction defect litigation. But rarely are most construction defects discovered early after completion of construction – it often takes years of a home being inhabited before defects and resultant damage become apparent.

Another factor that impacts construction defect litigation is the effect of the economy on occupants of newer homes. As pay cuts, layoffs, declining home prices resulting in decreased equity and other factors affect homeowners, tolerance and satisfaction generally decrease as well. That small corner bead separation or the faint stain in the sill/jamb corner of the upstairs bedroom window is now a an emotional reminder of the inequities faced by the common citizen. In other words, as the economy tanks, law suits soar, and construction defect litigation is no different.

Unfortunately for homeowners hoping to bring in a little extra money through litigation, filing a construction defect lawsuit offers no guarantees. Regardless of what laws are in place, the financing of construction defect awards comes by and large from major insurance carriers. Any money paid out by a carrier against a construction defect claim is strictly regulated by the terms of the policy between the carrier and the specific contractor named in the claim. So while a serious defect that requires remediation is discovered, if the policy excludes coverage for that particular issue, the carrier is under no obligation to pay. The contractor would be required to pay for that portion out of their own pocket – that is, if they have any money to pay the demand. If the policy does not cover a particular issue, and the carrier does not have a duty to defend the policy holder for that claim, there is not much point in pursuing the issue in trial.

The current economic cycle has seen much in the way of construction loan defaults, construction defect claims, contractor insolvency and even the collapse/reorganization of a few insurance carriers. While construction defect claims (even when for legitimate damage) have continued to be filed, most attorneys and experts in the industry have seen a reduction in work. Why? Insurance carriers. AIG led the construction defect industry and set the standards for defending those claims. Following AIG’s well-publicized problems, all insurance carriers put the brakes on, so to speak, with regards to paying out money. Every bill is scrutinized. Limits are strictly enforced. And approval of payment takes at least three times as long as it once did. Defense counsel and their experts are on a much tighter leash, and for plaintiff counsel and experts, what took months to get paid is now taking years in some situations.

Perhaps the time for change has come.