SAN FRANCISCO 08/30/2002 - The shortage of capacity for liability insurance in California's construction industry has the state Legislature considering a bill some feel would cause more damage than good in the market.
The Alliance of American Insurers said that the bill, SB 800, would "flood California's already overburdened court system with litigation."
"SB 800 popped up on Monday (Aug. 9), and this is the first time anyone has heard of this legislation," said Peter Gorman, vice president of the Alliance's western region. "We've been told it's a done deal and that the governor may sign it." The Legislature ends its session on Aug. 31, and the Alliance fully expects the bill to be passed, even though it hasn't gone through normal channels such as public hearings to debate the measure, Gorman said.
The bill, co-authored by Senate President John Burton and Assembly Speaker Herb Wesson, both Democrats, is reported to provide relief from lawsuits for builders of entry-level housing in California. This consists of low-end or low-income housing such as townhouses and condominiums. For at least the past five years, various bills attempting to improve the situation have been presented but not passed.
Contractors in California's entry-level housing market have been finding it difficult to get liability coverage in the standard market because of the construction-defect laws and increases of as much as 81% in jury awards (BestWire, Jan. 9, 2002). Construction-defect laws allow as long as 10 years to file suit for latent defects after a project is completed.
The provision the Alliance likes least is that a builder can name the insurance company as part of the cause for any defect caused during construction, opening the insurance company up to litigation. "It strips (insurers) of the ability to defend through the provisions of the policy," Gorman said. "Many of the large insurance companies offer loss-control specialists to ensure that corners aren't cut during the building process and lawsuits won't ensue," he said. Some construction is done without an insurance company's oversight, but the insurer can still be named as part of the defect's cause.
A provision requiring builders to offer a warranty program doesn't address the 10-year backlog of building that is exposed to class-action lawsuits, Gorman said. As well, builders will be asked to meet standards for building "the perfect house," which invites more complaints and opportunities for litigation if a homeowner doesn't feel the house is perfect.
If a builder agrees to make repairs, that agreement is seen as an automatic admission to violating the new standards, and that suddenly exposes the builder to class-action lawsuits, Gorman said. And even if repairs are completed, the builder could still be sued for other damages, such as mold caused by a leaky roof or for not completing repairs in a timely fashion.
"Our members have read (the bill) and have said this will not solve the problem," Gorman said.
The bill offers several changes to the existing law, according to Gorman:
- Builders are required to offer a warranty program that takes the repair process out of the legal system.
- Builders must construct to a list of standards that homeowners can ask to be remedied if not satisfied.
- The statute of limitations for filing a lawsuit is reduced from 10 to four years.
- Builders can be held responsible for economic damages only, such as repair costs and loss of use.
- The builder's insurance company can be held liable for any defects caused during the construction process.
If the legislation is passed, the Alliance plans to appeal to the governor not to sign the bill into law. Failing that, the Alliance plans to educate the state's builders that they should review the provisions and think twice before trying to take advantage of the new legislation, because it could be very expensive for them and their insurance companies, Gorman said.
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