June 22, 1998 - Don't expect to see a boom in condominium or townhouse
construction just yet.
Although a recent court ruling helps, construction-defect litigation will
continue to drive homebuilders away from that segment of the market, according to several
builders interviewed by the Business Journal. Indeed, until the costs of indemnity
insurance for homebuilders and their subcontractors is substantially lowered, the current
residential boom will not be bolstered by a sharp increase in condo and townhome
development.
This month, the Fourth District Court of Appeal in San Diego ruled that
homeowners and their associations cannot recover damages against housing tract builders
for construction that does not meet construction codes, unless the defects lead to a loss
by the homeowner. The ruling is being hailed by homebuilders, who long have
complained that strict liability -- holding the homebuilder to the exact specifications
called for in building plans -- led to frivolous lawsuits.
"My lawyers tell me it's a very good decision for us who have been on the
receiving end of these claims," said Mick Pattinson, president of London-based
Barratt American's U.S. operations, which was a major attached-housing builder, but
abandoned that market because of litigation issues. "As far as building condos,
I don't think we're quite there yet. Because the ability to build condos is
controlled by the insurance industry and their willingness to insure not just builders but
trade contractors."
"What this decision did is go right to the heart of the issue, which is
there are too many frivolous lawsuits, which has scared off developers and builders from
producing condos and townhouse and other attached housing." said Christine Diemer,
CEO of the Building Industry Associations of Orange County.
Plaintiff lawyers view the recent Aas v. Superior Court (William Lyon Co.) court
decision as a dangerous precedent that will undermine the ability of wronged homeowners to
recover damages caused by shoddy building.
"It's unfortunate that the builders will be able to walk away from this and saddle
the homeowners with the cost of repairing (faulty construction)," said Newport Beach
based Thomas E. Miller, one of the most successful construction-defect lawyers who is
considered by many a trailblazer in what is essentially a cottage industry.
Miller, who sports a license plate on his while Porsche that reads "DEFECT"
and whose firm's web site address is constructiondefects.com, said his office will
continue to present construction practices that vary from the specific building plans as
examples of defects. "One thing that does bother me is that I think this is an
economic disincentive for builders to follow the building codes," he said.
Previously courts had ruled that homebuilders can include in their sales contracts a
clause binding homebuyers to arbitration.
Based on a 1969 court decision that established strict liability standards for homes,
builders are liable if they build homes that stray from specific guidelines outlined in
their plans.
Pattinson argues that clearly there has been some shoddy construction and that some
lawsuits have merit. But, he adds, lawyers are taking advantage of what he sees as a
blatantly faulty legal system that hold builders to a strict liability standard.
"Let's say plans call for framing at 16 inch centers and some of the nailings are
at 16.5 or 17 inch centers, then the builder has broken the law in terms of strict
liability," Pattinson said.
"That's the nonsense of all of this. I don't dispute that there are some projects
that have leaks and need to be fixed, but that is not why we get these multi-million
dollar judgments."
Some Suits Justified
Roland Osgood, president of Centex Homes' Southern California operations, praised the
recent court decision, but also pointed out that builders have indeed been guilty of some
shoddy workmanship.
"I think (the recent court decision) goes a long way, but it doesn't solve the
problem," he said. "I also think that we have to clean up our act, too, and
build something right. That might seem like an unbuilder-like (thing to say), but a lot of
stuff we built wasn't done right. That said, a lot of (construction-defect litigation)
cases were b.s."
So prevalent have lawsuits become that the number of builders who are willing to build
attached product these days has dwindled by 85%, according to a 1996 study by the Lusk
Center Research Institute at the University of Southern California. The result has been a
dramatic falloff in the production and sales of condos and other attached product,
traditionally the backbone of the affordable home segment.
Indeed, OC's attached product. made up only 18% of new-home sales this year, down from
a high of 53% in 1990. For Southern California, attached product made up 31 % of new home
sales as late as 1992, but made up only 12% last year.
Moreover, as the market has rebounded -- new-home sales have shown steady improvement
since 1992 in OC and Southern California condo and other attached - product sales have
continued to decline.
Despite what is an obvious niche in the marketplace, builders will still stay away.
"(The question is whether) this issue is resolved sufficiently for insurance
companies to become comfortable underwriting condos and other attached construction."
said Juan Acosta. legislative advocate for the BIA. "It probably helps but it's hard
for me to predict whether an underwriter will say this clinches it. I think not, but it's
a step in the right direction."
Angela Warren, counsel of the Western region for the American Insurance Association, a
trade group that represents more than 300 property and casualty insurers, said the case
does not go far enough.
"As far as really affecting the market I think it will have a negligible effect
because that case dealt with narrow issues,' she said. "But I'm hoping the
Legislature will take a clue from the judiciary and be able to, pass something of note
next year."
Local Builders Buy More
The RIA cites a 1996 study that found California builders and subcontractors pay 300 to
400% more than builders and subs in other states for the same or lesser coverage. Not only
have those costs affected builders' ability to service that niche, they also have scared
off subcontractors.
Donna Deller is president of Corona-based Double D Framing, a 500-employea operation
that boasts annual revenue of $30 million. In 1989, she said, 40% of her business was
condo work. Today, that number is less than 10%, mainly because of Insurance costs.
'I just don't want to because it's like knowing you're going to be sued an I don't want
to go through that," she said in an interview prior to the recent court decision.
"It's not worth it for me.
"Believe me if I had the option of doing single-family detached or non-attached
units, I would prefer that because of HOA lawsuits, which are so frequent … that
moneywise, it doesn't behoove us to carry insurance to do it."
She cites one example in which her insurer told her it would add $14,000 to her roughly
$90,000 annual insurance bill if she were to undertake condo construction.
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