Construction Defect Litigation

CAS Ratemaking Seminar

2005

Peter S. Mack, Markel Corporation

SCOPE OF PRESENTATION

• Background

• Legal Developments

• Emerging Issues

1

BACKGROUND

• California Population Growth between 1980 – 1996

– United States Population grew by 16.7%

– California Population grew by 36%

– 2.8 Million New Housing Units Built (1 for each 3 new residents)

– Demand For Housing Exceeded Supply By Over 600,000 Units

2

WHEN HOUSING DEMAND OUTPACES SUPPLY

• Builders Rush to Meet Demand

• Unskilled Construction Labor Enters the Market

• Laborers Are Unsupervised

• Short-Cuts are Taken

• Construction of Multi-Family Units

• Construction on Difficult Sites

3

IN MATHEMATICAL TERMS

Unskilled Labor

+ Poor / No Supervision

+ Unrealistic Deadlines

____________________________________

= Substandard Housing

4

WHAT HAPPENS WHEN SUBSTANDARD HOUSING IS SOLD?

• Got Litigation?

5

HERE COME THE SUITS

• Owners Paid a lot of Money for the Homes

• Lots of Lawyers

• Early Suits Were Successful

• Suits Brought in the Name of HOA

• You Better Sue or Get Sued

• Plaintiff Only needs to Sue the Developer

6

GENERAL CHARACTERISTICS OF THE SUITS

• Fact and Documents Intensive

• Long Statutes of Limitations (Latent & Patent)

• Expert Driven

• Numerous Site Inspections

• Destructive Testing

• Many Cross-Complaints

7

GENERAL CHARACTERISTICS (Continued)

• Extremely High Defense Costs

• Numerous Coverage Issues & Disputes

• Strict Liability for the Developer

• Difficult to Settle

8

WHAT ARE THESE CONSTRUCTION DEFECTS?

9

CATEGORIES OF DEFECTS

• DEFECT

• Framing

• Roofing

• Poor Soil Prep

• Window Install

• Electrical

• Masonry

• Plumbing

• EFFECT

• Structural Failure

• Water Intrusion

• Cracked Foundations

• Water Intrusion

• Fires

• Retaining Wall Failures

• Water Damage

10

ARE THESE DEFECTS INSURABLE?

• Per Policy Holder – “I bought insurance to cover me for everything”

• Per Insurance Company – Yes & No. Resultant Damage is Covered but Work Product is Not

• Courts – We Will Do Everything We Can to Find Coverage

11

LEGAL DEVELOPMENTS

• Montrose I (1993)

• Montrose II (1995)

• Calderon Act (1997)

• Presley V. American States (2001)

• Chapter 40 - Nevada

12

MONTROSE CHEMICAL vs. SUPERIOR COURT

• Issue – Is an Insurer Obligated to Defend With Respect to a Proceeding Related to a Discharge of Hazardous Substances

• Ruling – Complaint Only Needs to Allege that Damages May Have Occurred to Trigger a Defense Obligation

• Impact – Leads to the Defense of More Claims, More Frequency

13

MONTROSE CHEMICAL vs. ADMIRAL INSURANCE

• Issue – Is There a Continuous Injury Trigger for the Duty to Defend Hazardous Waste Actions

• Ruling – All Insurers “From Shovel to Gavel” Have Potential Liability. Many Policies for Each Party May Apply

• Impact – Increases Claims Frequency & Makes Them More Complicated

14

CALDERON ACT

• Legislative Effort to Reduce CD Litigation

• Required Communication Between Owner & Builder as Pre-Requisite to a Suit

• Encourages Mediation Efforts

• Plaintiff Used as Tool to Get Information

• Generally Ineffective In Resolving Claims Without Litigation

15

PRESLEY HOMES vs. AMERICAN STATES INSURANCE

• Issue – Does an Additional Insured Endorsement on a Sub-Contractors Policy in Favor of the Developer Require that the Issuing Carrier Defend Developer?

• Ruling – A Duty to Defend the Entire Action Applies if there is a Mere Potential for Coverage

• Impact – Shifts Much of the Defense Costs to Subs, Some Peripheral

16

CHAPTER 40 – NEVADA LAW

• Cumbersome Rules & Deadlines

• Puts Onerous Duties on Builder

• Right to Repair but Owner Must Approve Repair

• Allows Plaintiff to Recover Attorney’s Fees, Costs and Interest if Successful in Trial

17

EMERGING ISSUES

18

MITIGATION EFFORTS

• Settlement Efforts

• Coverage Restrictions

19

SETTLEMENT PRIOR TO TRIAL

• Specialized Mediators Appointed by the Court

• Creative Approaches Such As CPR

• Extremely Expensive to Try

• Jury’s Biased Towards Homeowners

• Be Prepared to Try a Case that is Winable

20

COVERAGE RESTRICTIONS

• Montrose Exclusions – Many Variations

• Wasting Limits Policies – Expense in Limits

• SIR’s, Deductables

• Prior Defects Exclusions

• COE Requirements

• Subsidence Exclusions

• Mold Exclusions

• BE SURE TO MAKE IT CLEAR!!

21

OH… THOSE CREATIVE LAWYERS!!

• So Much Money at Stake

• Mold BI and PD Claims

• Sulfate Claims

• WHO KNOWS WHAT ELSE!!

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