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BUILDERS SEEK BETTER PROTECTION

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SACRAMENTO, Calif.-A group of California homebuilders and their insurers are constructing a campaign to limit their exposure to building defect litigation.

The fledgling organization, called the Coalition for Quality Affordable Housing, filed incorporation papers with the Secretary of State's Office last week and is expected to hire an executive director by the end of this week.

Once the coalition is up and running, it will seek legislation to limit builders' liability for construction defects by:

Adding a binding arbitration clause to sales contracts.

Halting the application of the Montrose decision in building-defect cases. The 1995 ruling in Montrose Chemical Corp. of America vs. Admiral Insurance Co. adopted a continuous trigger theory in pollution liability cases.

Instituting a program of home warranties modeled after a program run by the National Home Builders Council in Great Britain.

Providing a definition of "latent construction defect."

An insurance association is supporting the coalition's goals.

Michael Pattinson, president of Barratt American Inc., a Carlsbad, Calif.-based homebuilder, outlined the coalition's 1997 legislative agenda during the recent annual conference of the Orange Empire Chapter of the Risk & Insurance Management Society Inc. in Brea, Calif.

"San Diego County is a hotbed of litigation," Mr. Pattinson told RIMS members.

And the awards and settlements have pushed liability insurance rates for California homebuilders through the roof.

For example, many builders may have to pay $650,000 for a $1 million liability policy with a $250,000 deductible, he said.

Some contractors can't get coverage at all if they ever were involved in housing projects with common areas such as condominiums, townhouses and some single-family communities with homeowners associations. A rise in building-defects suits and several multimillion-dollar settlements with homeowners associations during the past few years have led some insurers to stop underwriting contractors liability coverage (BI, Nov. 11, 1996).

"Even subcontractors saw hefty increases in insurance premiums or, worse, they couldn't get policies because they were involved in condo construction," said Juan Acosta, legislative advocate for the California Building Industry Assn. in Sacramento.

This is because the California Supreme Court in 1995 let stand an appellate court decision granting broad pollution coverage to Montrose Chemical Corp. under a "continuous trigger theory" (BI, July 10, 1995).

As a result of the landmark ruling, a policyholder facing pollution-related claims can tap all of its CGL policies from the time pollution begins until the liability is known.

While the Montrose case involved CGL coverage in the environmental context, it since has been applied to building defects, said Duane E. Shinnick, a partner at Epsten & Grinnell in San Diego. Mr. Shinnick is a plaintiffs lawyer who often represents homeowners in building-defect cases.

In 1995, the California Supreme Court remanded a 1994 building-defect coverage case, Zurich Insurance Co. vs. Transamerica Insurance Co., which had been awaiting appeal, after it upheld Montrose. Numerous other courts have been following the Montrose precedent. The 1994 case still is pending.

Applying the continuous trigger theory to building defect cases "wasn't a surprise to us," Mr. Shinnick said. Like pollution damage, many building defects are not discovered until many years after they begin, he explained. Furthermore, "they can cause continuous and progressive damage," he added.

But the Montrose decision "unduly expands liability," asserts Angela Warren, counsel to the American Insurance Assn. in Sacramento, which has joined the builders' lobbying effort.

"On a progressive basis, this damage may cause more damage, and then subsequent insurers become liable," concurred Mr. Acosta.

"Montrose says the insurer may be on the hook even if the policy was sold 10 years after the product is made," he explained, "because the occurrence is continuing."

The AIA hopes to return to the "loss in progress" trigger that had been applied in construction defect cases prior to the Montrose decision, Ms. Warren said.

"We hope to address Montrose legislatively, but only in the construction defect context," she said.

The coalition is seeking broader support from the insurance industry, including the California Agents & Brokers Legislative Council.

Meanwhile, CGL coverage is becoming increasingly scarce for homebuilders in California. And, because few builders can afford to assume the risk of being sued over construction defects without insurance, construction of affordable single-family housing is down as much as 90% in some parts of the state, Mr. Acosta said.

For example, the Southern California Assn. of Governments recently contacted the California Building Industry Assn. to find out why no builders will bid on contracts for affordable high-density housing.

"Nobody can get liability coverage to build condos," Mr. Acosta said.

In response to the litigation threat, Barratt American has started using private inspectors as construction "risk managers." These independent architects, structural engineers and other construction experts act as consultants to document the building process. The documentation then can be used as evidence in defending a construction defect lawsuit stemming from the project.

"We're trying to have defect-free products and at the same time be able to prove later in litigation that they're defect-free," Mr. Pattinson explained.

Barratt American's risk management approach is similar to that employed by the National Home Builders Council in Great Britain, he explained.

Besides instituting a private inspection program, the British program provides home warranties to buyers and establishes criteria for measuring quality in construction, he said.

"One of the problems we suffer is the inconsistency of quality interpretation," he said. "Without standards, all we have is one person's opinion vs. another person's opinion."

In addition, following building codes often isn't sufficient protection from liability. "You can build to code and still finish up with a problem," he added.

This is because it is difficult to reconcile architectural and engineering plans, the Universal Building Code, manufacturers' specifications and local building regulations, Mr. Pattinson explained.

Many construction experts think adopting the British solution may be preferable to simply limiting builders' liability because it addresses the source of the problem: shoddy construction.

"We're trying to limit liability for builders, but also trying to define the problem," said Steve Litonin, a lobbyist for the Plumbing, Heating & Cooling Contractors Assn. in Sacramento.

This will require talking to homeowners to find out what prompted them to sue and whether they were satisfied with the resolution, he added.

"We're looking at this as a four-year project" that will "raise the consciousness of home-buying consumers and institute a dispute resolution system or warranties," Mr. Litonin said.

And the time to find a solution is now, he said, because "it's spreading to other states."

Indeed, some construction experts fear the recent building boom in the desert Southwest may prove fertile ground for more construction defect litigation.

"I've heard all of the Southern California plaintiffs attorneys are taking the bar exam in Nevada, and there's going to be an attack on Las Vegas homebuilders next," quipped Barratt American's Mr. Pattinson.