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
• EFFECT
• Framing
• Structural Failure
• Roofing
• Water Intrusion
• Poor Soil Prep
• Cracked Foundations
• Window Install
• Electrical
• Masonry
• Plumbing
• 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 PreRequisite 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 SubContractors 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!!
22