Bills target rising and costly lawsuits on new-home defects.
April 4, 2004 - New-home construction costs could go through the roof, say specialty contractors, if something isn't done to curb construction-defect lawsuits.
They blame lawsuits for their escalating costs on general liability insurance. Some specialty contractors, who are the plumbers, roofers and others hired to build new houses, say their premiums have increased 300 percent to 500 percent in the past three years. They say increases wind up being passed on home buyers, adding tens of thousands of dollars to a new home's price.
If the problem continues, "it will affect the ability to develop housing at a price level people can afford," said Tim Coyle, senior vice president for the California Building Industry Association.
Some consumer lawyers, however, say the problem of lawsuits and rising insurance rates rests with builders and contractors.
"That has been their mantra for the past decade, that lawsuits are driving up the cost of insurance," said Rachel Miller of the Miller Law Firm in San Francisco and Newport Beach.
Consumer attorneys have tried to work with builders and contractors to address the issue of the high number of lawsuits, Miller said. "But the bottom line is that they're continuing to build the same product and homeowners are stuck with shoddy construction," she said.
Miller practices law with her father, Thomas E. Miller, who she said has recovered more than $450 million on behalf of homeowners with construction-defect claims. He has also written a book on the issue, "Construction Defect Law for the Western States."
Given this standoff, the California Building Industry Association is sponsoring Assembly Bill 2812 and Assembly Bill 2689, designed to reduce the number of construction-defect lawsuits.
The Professional Association of Specialty Contractors is sponsoring Assembly Bill 2333, which would require builders and contractors to make a joint settlement proposal.
Most builders require subcontractors to carry insurance that makes the subs part of any construction-defect lawsuit, whether or not it involves the part of the home they worked on.
Everyone - from the builder to the landscaper - gets sued when a homeowner alleges construction defects. Lawsuits typically list 50 to 60 defendants, but some list as many as 100.
The list of plaintiffs also is usually large. Law firms blanket subdivisions with newsletters, alerting residents to potential problems with their homes and offering representation without upfront costs.
"The typical complaint will list anything and everything just to get the ball rolling," CBIA lobbyist Kimberley Dellinger said. "They allege everything in an attempt to bring every (contractor) in and shake them down and settle the case."
Excessive litigation has made claims' costs unpredictable for the insurance companies that cover specialty contractors, said Nicole Mahrt, spokeswoman for the American Insurance Association.
Most insurers for these contractors have left the California market, Mahrt said, forcing contractors to buy less coverage at higher prices. Of the nearly 100 insurance companies that are licensed by the state to sell general liability insurance to specialty contractors, only one is still doing it, Mahrt said.
The high cost of liability insurance "is caused by one thing, and that's lawsuits," Mahrt said.
Jeff Wilson, president of the Northern California Chapter of the Professional Association of Specialty Contractors and chief executive of A-1 Door and Building Solutions in Sacramento, said his company has been a defendant in more than 50 lawsuits in the last two years - typical for the industry.
"It's legalized extortion, is what it is," he said. "They name everyone they can name because the more insurance carriers, the more money."
Roseville attorney Robert Haney has represented homeowners in construction-defect lawsuits for nine years. Before that, he defended home builders for the same amount of time.
"The real problem in my book is the lack of old-fashioned craftsmanship," Haney said.
Often the homes go up too fast for the work to be adequately supervised, he said, and shoddy workmanship is the result. By the time clients come to him, they are fed up with trying to get the builder to fix the home, he said.
But that's different from what some law firms are doing, he said.
"We have some law firms that have created this stir. They're filing mass lawsuits that aren't the greatest," he said.
The proliferation of construction-defect class-action lawsuits in the last few years has been driven by Southern California law firms that take clients on a contingency basis. Some of these suits are filed shortly after the home goes up and before real defects are uncovered, he said.
Another problem is that when the case settles, the homeowners may not get enough money to fix the problem. They must split the settlement after paying attorneys' costs.
But letting home builders and contractors off the hook isn't the solution and hurts consumers, Haney said.
"Build the house right in the first place, and none of this legislation would be necessary," he said.
A state law that went into effect in 2003 lets buyers demand that a builder make repairs before defects result in permanent damage. Builders have a right to make repairs before a homeowner can file suit.
But the law doesn't apply to new homes sold before Jan. 1, 2003. That's why the California Building Industry Association is backing AB 2812, which would let builders have a chance to repair these older homes before they can be sued.
Another bill the CBIA supports - AB 2689 - would require plaintiffs' attorneys to disclose to homeowners that they can give the builder a chance to fix the problem. It also would require that attorneys tell homeowners that they may not receive a settlement large enough to fix the problem and would have to tell future buyers about defects and lawsuits.
Louis Ferrari, president of Ferrari Plumbing in Rocklin, hopes legislation can curb lawsuits and protect the business he wants to pass on to his children.
Ferrari has been sued four times for construction defects. As a result, his insurance increased from $30,000 in 2002 to $140,000 in 2004.
"I've been lucky so far," he said. "I deal with (homeowner disputes) out of my own pocket and that saved us," he said, referring to resolving the issue with the homeowner before any insurance claim is made.
When litigation does arise, Ferrari said, his insurance company pays just to make it go away. That's how it works, Ferrari said. "They (lawyers) can get X amount from so many subs and they make out."
Consumer attorney Miller said that a number of contractors come into the suit because the homes often have a multitude of problems. Miller disputes the idea that these suits are frivolous, as evidenced by the multimillion-dollar verdicts and settlements in these cases.
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