Should construction-defect laws be overhauled?

Friday, Jan. 3, 2003 | 5:51 a.m.

By Steve Hill

Steve Hill, president of Silver State Materials Corp., is chairman of the Coalition for Fairness in Construction. The coalition, composed of construction companies and those who rely on the industry for their business, is seeking changes to the state law governing construction defects.

In Nevada, the American dream of homeownership is a reality for thousands of working families. However, an epidemic of costly and unnecessary construction lawsuits is jeopardizing this dream.

In recent years, median housing prices have risen from $123,000 to $189,000 -- forcing many first-time home buyers and working families out of the market. This is largely because of expenses incurred from unnecessary litigation. In addition, construction of condos and townhouses has effectively ceased because of lawsuits -- pricing an entire home-buying population out of the market.

In response, the Coalition for Fairness in Construction is advocating that the 2003 Legislature pass common-sense reforms to help homeowners get real problems fixed and to keep housing affordable in Nevada. Our current system hurts homeowners, potential home buyers, construction-industry employees and the state's economy. The coalition is working to fix problems now to pave the way for Nevada's future.

Trial lawyers say that under the current system, governed by Nevada Revised Statutes Chapter 40, builders have never offered to repair problems. They point to that as proof that builders will not fix problems. In reality, contractors and subcontractors are typically sued before they even know a problem exists. It's the system that is preventing repairs, not builders.

Lawyers opposing the coalition's effort are working toward a different, self-serving goal, trying to maintain the status quo for self-benefit. Just six lawyers have filed more than 50 percent of these construction cases. Two lawyers account for more than one-third. One of those lawyers recently requested $8.9 million in fees from the court in a single case. Those fees are more than the total cost to build the condominium project in question.

Trial lawyers may say that the coalition is trying to take away homeowner rights. What rights are those? The right to be thrown into the court system and not get their home fixed for three to five years? The right to have their home -- their largest investment -- tainted by a lawsuit and see their property values decline as a result? The right to find it nearly impossible to sell or refinance their home?

A homeowner should always have the right to sue, but he should not be forced into a lawsuit without having the opportunity to have a problem repaired. Current Nevada law requires participation from only five homes to generate a lawsuit. Many homeowner-association boards are allowed to enter into a class-action lawsuit on behalf of all members -- even those who do not want to be included.

Additionally, the FHA and VA will not refinance a loan for a home in a lawsuit, nor will they loan money to a potential buyer. Real estate agents often will not show the home to potential buyers.

Because of this flawed system, members of Nevada's construction industry have seen their liability insurance rates skyrocket from 600 percent to more than 1,000 percent over the past few years. This has put small and large employers alike out of business and employees out of jobs.

Recognizing the crisis and determining that the causes were the same as those identified in Nevada, California passed legislation last September providing builders with the absolute right to repair, a clearer definition of a construction defect, shortening the statute of limitations/repose for several components of a house and establishing procedures for alternative dispute resolution.

Sponsored by Senate President Pro Tempore John Burton, D-San Francisco, and Assembly Speaker Herb Wesson, D-Culver City, the legislation unanimously passed both chambers and was signed by Gov. Gray Davis. Because of past inaction, California's average single-family home price has reached an astronomical $323,700 -- out of reach for most working families.

The coalition's proposed changes will include:

The solutions to this crisis must be crafted in the 2003 Legislature. The environment that allows such a harmful and unproductive situation to exist must be changed.

When the number of lawsuits decreases, construction liability insurance availability and affordability improves, home prices stay reasonable, and homeowners get their problems addressed promptly and professionally. It's a system that homeowners and home builders want -- a system that makes sense.

By Scott K. Canepa

Scott K. Canepa, an attorney who represents plaintiffs against contractors, heads the construction-defect department at the law firm of Vannah Costello Canepa Riedy Rubino & Lattie.

With the home builders' agreement, the 1995 Nevada Legislature enacted legislation that governs all residential construction-defect claims. Under this law -- Nevada Revised Statutes Chapter 40 -- before a lawsuit can be filed in noncomplex cases (four or fewer homes), a homeowner must give the builder written notice of all alleged defect(s) and an opportunity to inspect the defect(s).

The law then requires the builder to make a written response to the homeowner. The builder can deny liability, make a monetary offer or make an offer to repair.

If a repair offer is made, the builder must identify the method and adequacy of the proposed repairs. While a homeowner may reject a Band-Aid repair, the law stiffly penalizes those who reject reasonable repair or monetary offers.

In fact, Chapter 40 allows a court to deny all of the homeowner's attorney's fees and litigation costs, and to make the homeowner pay all of the builder's attorney fees and costs.

In 1999, builders asked the Legislature to change Chapter 40 to start complex cases (five or more homes or homeowners' associations) with a lawsuit. Builders claimed their insurance companies were not acknowledging a pre-lawsuit Chapter 40 notice as triggering their legal duty to defend and/or pay claims.

Builders told state legislators that starting complex cases with a lawsuit would foster quicker resolution of claims because all potentially responsible parties and their insurers would be involved at the start. The Legislature, in good faith, made the change.

Now builders claim that the 1999 change is the reason why their premiums are going up. Ironically, they now protest that they are not being given an opportunity to repair before suit is filed.

But rather than simply ask the Legislature to undo the 1999 change, builders want homeowners to be stripped of their right to reject Band-Aid repairs that don't permanently fix things. This, even though builders have yet to produce a single example of an offer to repair that was unreasonably rejected by a homeowner, or a single case where the courts were even asked to make such a finding.

Indeed, in complex cases, the overwhelming evidence is that builders are not making repair offers at all. They are dumping the problems on their insurance companies and demanding they pay the claims.

This is the true reason why insurance premiums are going up. Especially in multifamily, entry-level housing, the quality of construction is so poor that one of the insurance companies asked to provide input to the Governor's Construction Liability Insurance Task Force cited faulty construction practices as the single most important reason for rising insurance premiums. The building industry can't seriously expect the public to believe that when they ask the insurance industry to bail them out over and over again, there won't be higher premiums.

The builders also protest "frivolous" lawsuits, but again can't cite a single example of a case thrown out of court as "frivolous." In response, builders say that whether a case is "frivolous" depends on what your definition of "frivolous" is.

After saying time and again that there are too many frivolous lawsuits, builders now say what they really mean is that while parts of a particular claim may have merit, other parts (the majority, from their perspective) are frivolous, and that's why they're not being thrown out of court. These statements are completely undermined by the absence of a single defense verdict.

Buyers of new homes rely completely on builders to see to it that construction meets code. What most people don't know is that builders have no baseline educational requirement to obtain a contractor's license (not even a high school diploma), have no continuing education requirements and can form separate, limited liability companies or corporations to build and sell a home or a subdivision, after which the entity is collapsed to avoid liability. There isn't even a requirement that a contractor carry liability insurance at all.

There has also been misplaced reliance upon building departments to provide quality control. Building departments, which are statutorily immune from suit, cannot oversee all aspects of construction in our rapidly growing state. Building officials have also confirmed that their departments can't control what happens after building inspectors leave the site.

To improve construction quality and in turn reduce claims, the 2003 Legislature should impose baseline proficiency and continuing-education requirements. The Legislature should also end the practice of forming and collapsing limited liability companies and corporations for the purposes of avoiding liability for faulty construction.

In the end, however, the most effective deterrent to unwanted construction litigation is better construction.

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