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CONSUMER ATTORNEYS OF CALIFORNIA
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Bruce A. Broillet
President
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Robert E. Cartwright,
Jr.
President-Elect
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Donald C. Green
Chief Legislative Advocate
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Nancy Drabble
Senior Legislative Counsel
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Nancy Peverini
Legislative Counsel
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Lea-Ann Tratten
Legal Counsel
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April 6, 2001
The Honorable John Dutra
State Capital, Room 3091
Sacramento, CA 95814
RE: AB 600 (Dutra) Opposed
Dear Assembly Member Dutra:
Consumer Attorneys of California strongly opposes AB 600, which will be heard by the Assembly Committee on Housing and Community Development on April 25, 2001.
Developers who build shoddy homes should be held accountable. Unfortunately, under AB 600 homeowners who suffer from water intrusion, cracked foundations, or beetles boring into their houses from substandard lumber would lose their legal right to sue for negligence. Instead, they would be forced to navigate a new labyrinth, with their only recourse to file a claim with the developer's insurance company which has a strong incentive to delay or deny. Consumer Attorneys respectfully opposes AB 600 for the following specific reasons.
1. AB 2112 eliminates home buyers' long standing legal rights and remedies for shoddy construction.
The most basic problem with the statutory warranty in
AB 600 is that it would supersede almost all
other homeowner's legal rights -- rights that have evolved
since the 1950s to protect homeowners against defective
construction. In Sabella v. Wiseler (1963) 59
Cal.2d 21, the California Supreme Court held that a
homebuilder can be held responsible in negligence
for negilgent construction. In Kriegler v.
Eichler Homes (1969) 269 Cal.App.2d 224, the California
Supreme Court held that a mass producer of homes can
be held responsible in strict liability for defects
in the construction. In Pollard v. Saxe & Yolle Development
Co. (1974) 12 Cal.3d 374, the California Supreme
Court established the implied warranty of reasonable
workmanship. The Court held that:
"Builders and sellers of new construction should be held to what
is impliedly represented -- that the completed structure
was designed and constructed in a reasonably workmanlike
manner."
Is this unfair? Of course not. And yet in the name of promoting construction,
this bill would entirely eliminate California
home buyers' legal rights (except for bodily injury,
wrongful death, fraud, or intentional misrepresentation,
see section 17845 at page 28), and supplant those
rights with a warranty that is part of a form contract.
AB 600 states:
"[T]he contractual provisions of that warranty
shall be deemed to be the exclusive election
of recourse by that homeowner and the participating
homebuilder for the claims covered by the warranty.
The parties to the warranty contract are deemed to
have waived any tort remedies, including negligence,
strict liability, implied warranties, or any other
common law remedy other than for breach of warranty
contract and the provisions therein. To the extent
that a home construction warranty does not contain
coverage for certain alleged defects, there is no
election of recourse. The homeowner who is party to
the warranty contract, should the warranty so provide,
waives any noncontractual claims against
any design, professional, or trade contractors
covered by the warranty who performed professional
services or works of improvement on the subject property."
(page 28, lines 20 to 34).
This language means that all the homeowner's normal legal rights are wiped out
and the limited warranty is the homeowner's only recourse.
Developers can offer a consumer a warranty right now,
but they need a new statute to eliminate homeowners'
long standing tort remedies.1
2. Home buyers will lose control over the
repair of construction defects in their own homes.
AB 600 takes power and control from the consumer and
gives it to the builder. Under this bill builders, not
homeowners, will dictate when and how construction defect
repairs are done. The builder who has already performed
shoddy work gets to decide whether to repair, replace
or simply pay for the damage he caused. ("The choice
between repair, replacement, or payment is the builder's..."
at page 21, lines 24 to 26.) Fundamentally, homeowners
will be at the mercy of the builder not only to repair
the defect, but to make the correct assessment of the
defect and a fair decision on how to correct the problem.
In light of the ten year statute of limitations on defects
and the likely ten year term of home buyers' warranties,
homeowners; are more likely to be repeatedly victimized
by half measures and cosmetic fixes chosen by the home
builder with no other available legal remedy. AB 600's
laborious complaint and claims procedure, followed by
judicial arbitration, means very little when the statute
already hands all the cards to the builder.
3. Current California law, through the Calderon process, already sets up an alternative dispute resolution procedure.
Current law already encourages the settlement of construction
defect claims and discourages homeowners from refusing
reasonable settlement offers from builders, Under the
Calderon statute, homeowner associations must notify
developers of any construction defects before a lawsuit
is filed.2 The developer
has the option of triggering an elaborate procedure
under which it can meet with the board of the homeowner
association, conduct inspections and testing, and make
a settlement offer. In the meantime, the homeowner association
can not pursue its legal rights. This novel pre-litigation
procedure already restricts homeowners who are trying
to get their homes repaired.
In addition, under another law, if either party rejects
a settlement offer and then fails to get a more favorable
judgment, that party will be liable for the opposing
parties post-offer cost and expert witness fees.3
The purpose of this act is to encourage the settlement
of claims and to punish parties who refuse to accept
reasonable offers of settlement.4 As
a practical matter, a homeowner association's costs
for expert witnesses and litigation is already a strong
consideration in the initial decision whether to start
litigation. The added factor of having to cover the
builder's post-settlement offer expenses creates an
even stronger incentive for the home owner to avoid
unnecessary litigation and to accept a builder's reasonable
settlement offer.
4. Forced arbitration undermines home buyers' rights.
AB 600 allows builders to impose pre-dispute arbitration
on homeowners. Arbitration can work for consumers if
it is freely chosen after a dispute has arisen. Instead,
AB 600 hands homeowners a one-two punch: first, it takes
away their right to sue for negligence, and then sends
them to a forced arbitration, with limited recourse
to court only to enforce the warranty. The practical
effect is that homeowners will be at the mercy of home
builders and their insurers when the home buyer seeks
the repair of construction defects under the warranty.
The obvious disincentive for builders to fix their own
costly construction defects should raise an alarm about
the developer's drive to eliminate home buyers' legal
remedies for construction defects.
5. Home buyers will be disadvantaged in the actual arbitration process.
Once in arbitration the consumer is at a severe disadvantage.
The average home buyer lacks specific knowledge of building
codes and other relevant expertise. The builder has
the engineering and construction expertise and better
knowledge of the building trade. The insurance companies
have experience in arbitration, knowledge of market
data and in many cases have considerable control over
the arbitrators. Often the issues in arbitration are
whether the claim is a result of a defect or homeowner
neglect and, if it is a defect, whether the defect is
even covered under the warranty.5
If the home owner happens to have an immediate emergency
repair of a defect, the buyer's chances of getting an
actual reimbursement from home buyers' warranties are
slim.6
6. Home buyer warranties are not much of a benefit for consumers.
The benefits of home warranties are often illusory.
The first problem is that insurance companies will sell
liability insurance to the builder while selling warranty
coverage to the home buyer through the same builder.7
An obvious conflict of interest is evident under the
initial sale of the warranty and a conflict will certainly
arise when the home buyer tries to file a claim with
the warranty insurer. In fact, the insurer will be partners
with the home builder in any dispute between a home
buyer and the insured home builder.8
The insurer has a strong economic interest in not paying
large liability claims. Home buyers already find it
very difficult to actually collect against the shorter
warranties that are currently in the marketplace.9
For example, under some current warranties, a homeowner who is forced to make a repair caused by a construction defect must then hire a specialist to prove the existence of the problem and then must submit the specialist's report that definitively rules out any fault by the home owner.10 Then the homeowner must pay a $250 fee to the warranty provider just to file a claim with the warranty provider.11 Finally, if the claim is denied that same homeowner must pay for arbitration."12 "According to our procedures,...arbitration is necessary to properly determine whether the item is a covered defect".13 By the time the homeowner has hired a specialist and paid the arbitration fee and deductible, the value of the claim has been eclipsed by the costs associated with filing a claim and going through arbitration.
7. The shortage of affordable housing is caused by many complicated factors in the real estate market, not law suits.
The actual cause of the shortage of affordable housing
is much more complicated then the narrow reasons proposed
by the sponsors. First, the value of the land is a critical
factor in the value of the home and affordability of
a home. With the rise in demand for new homes and the
resulting rise in land value, the normal consequence
is a rise in the cost of housing and a shortage in affordable
housing.
Insurance is a very small percentage in the sales price
of a single family home or condominium. The escalation
of home prices is not driven by insurance costs, but
by the imbalance of supply and demand. Next, the costs
of repairs and maintenance affect the true affordability
of a home. A lack of quality control and the resulting
rise in defective construction of mass produced housing
results in serious added costs for homeowners for repairs
and maintenance. Because of a ten year statute of repose
on latent construction defects, homeowners are often
stuck with the high repair bills associated with defective
construction. The nature of many construction defects
means that the defects are often hidden and are not
readily identifiable by the homeowner until after the
running of the statute. Moreover, many of these defects
are hidden and not discovered until and after serious
and costly damage to the home has occurred.
In the case of multi-family dwellings numerous market
factors are likely involved. The California Research
Bureau studied the decline of multi-family housing development.14
The CRB reports that the overall decrease in the relative
price of single family housing compared to multi-family
housing occurred after overbuilding in the 1980's followed
by a severe and prolonged recession.15
The growing affordability of single family housing along
with the buyer preference for single family housing
caused the demand of multi-family housing to drop.16
Other factors include reluctance on the part of lenders,
opposition by neighborhood residents and the deterring
effect of construction defects.17
Examples of construction defects reveal the high costs
associated with their repairs and the impact that those
repairs have on the owners' equity in their homes. "A
285-unit project in Daly City, California was about
nine years old when the structural supports for a portion
of one building collapsed, taking parts of two units
with it.... The cost of that one repair exceeded $60,000
and, prior to failure, was completely invisible from
outside the building".18
"Inspection of the remainder of the project revealed
extensive rot in other buildings. The cost of repair
for the entire project is expected To exceed $8,000,000!"19
The average cost of repair to each home is over $28,000
and The overall costs of repairs "probably exceeds all
of the owners' equity in the project".20
This problem runs all across California and the result
is that what is supposed to be affordable housing is
not so affordable; owners are often left holding the
bag.21
8. Construction defect litigation is caused by poor quality construction and a refusal by the builders to fix their costly mistakes.
Construction defect litigation is caused by poor industry
practices, with numerous factors that contribute to
shoddy construction. These factors include: 1) the almost
exclusive use of low bidder construction; 2) per phase
competitive bidding; 3) use of un-detailed "builders
sets" of plans and specifications; 4) pressure from
lenders to sell and close escrows quickly; 5) lack of
qualified, trained workers, particularly in construction
boom periods; 6) difficulties in coordinating the work
of the various subcontractors while trying to stay on
schedule; and 7) cost cutting resulting in insufficient
use of sheet metal and other more costly materials.
Next, construction defects litigation would not occur
if the builders and contractors resolved the problems
rather then forcing homeowners to use litigation as
their last resort. The nature of construction defects
means that busy builders have to come back to a project
that was finished years earlier in order to fix construction
defects. Builders have to choose between spending valuable
time on new projects for today's profit or fixing their
mistakes from years earlier. Not surprisingly, many
builders try to stonewall their old customers or pacify
them with shoddy cosmetic repairs until the ten year
statute of limitation runs. For homeowners, litigation
is only the last resort after negotiation with a home
builder has failed and the cost of repairs is significant
enough to warrant the costs of litigation.
Conclusion
AB 600 is extremely harmful to California consumers.
If enacted, this bill would strip away a homeowner's
right to sue for shoddy construction and substitute
a warranty that will frustrate and limit homeowner claims.
These warranties are more about immunizing home builders
and their insurers then truly protecting home buyers
from the high costs of construction defects. Home buyer
warranties already exist in the market place and do
nor work very well. This bill would allow developers
to escape liability for construction defects they never
should have caused in the first place.
For the reasons stated above, the Consumer Attorneys
of California must oppose AB 600. If you or a member
of your staff would like to discuss this issue further,
please contact me or one of our legislative representatives
in Sacramento.
Sincerely,
Bruce A. Broillet
President
1 AB 600, Section 17845 
2 Id.
3 See generally, CA Code
of Civ. Proc. Section 998.
4 See generally, Brown
v. Nolan (1979) 159 Cal. Rprr. 469. "The purpose
of this section relating to withholding or augmenting
costs following rejection or acceptance of offer to
allow judgment is to encourage the settlement of litigation
without trial; its effect is to punish the plaintiff
who fails to accept a reasonable offer from a defendant."
5 "Story Lacking Some Facts".
Sacramento Bee, April 13, 1997. At pg. D2. by Patricia
R. Angelbello, Officer and Director of Home Buyers Warranty
VI.
6 Id.
7 For example Specialized
Risk Services L.L.C. Of Atlanta Georgia has offered
to its insured builders a home buyers warranty product
in conjunction with their construction defects liability
insurance policy for builders. See Letter, "Construction
Defects Litigation and coverage Conference 1998". Dated
February 3, 1999 By Bruce E. Harrell Chief Executive
Officer of Specialized Risk Services written To John
J. Nicholas of JN Consulting Company, Inc. of Orange,
CA. The letter states that "The program offers the following
substantial benefits to the builders: a) provides the
builder with a partner to aggressively and proactively
address workmanship, system and structural defects before
the homeowner begins litigation. b)requires the homeowner
To accept mandatory arbitration vs. litigation... d)
Provides the builder financial protection against defined
structural defects,...."
8 Id.
9 "Buyer Beware", Sacramento
Bee, March 30, 1997 at page G1
10 Id. See also a
rebuttal by a warranty provider in "Story Lacking Some
Facts", Sacramento Bee. April 13, 1997. At pg. D2. by
Patricia R. Angelbello, Officer and Director of Home
Buyers Warranty VI.
11 Id.
12 Id.
13 Id.
14 "Construction Defect
Litigation and the Condominium Market", by Roger Dunstan
& Jennifer Swenson. California Research Bureau Reports.
Vo. 6 No. 7. November 1999. pg. 3
15 Id.
16 Id.
17 Id. "The unanswered
question is whether it is the litigation, or the underlying
defects that caused the problem...of lower values, slower
sales, and more bankruptcies [that plagued projects
with construction defects].
18 "The Affordable Housing
Myth" by Tyler Berding, Esq. EchoJournal February 2000.
19 Id.
20 Id.
21 Id.
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