Builders across the country have been asking their state legislatures for relief from construction defect litigation for quite some time. Previous efforts have been hampered by the inability of builders and insurance carriers to articulate a comprehensive reform scheme and by the political power of the plaintiffs attorneys bar.

Prior to 2002, legislatures in California, Nevada, Colorado and Texas responded to the crisis by enacting litigation reforms that addressed the process once an adversarial relationship was created.

California enacted Civil Code Section 1375, the so-called Calderon Process, Nevada enacted Section 40, Colorado extended its consumer protection statutes, and Texas utilized its own consumer affairs statute to try to speed up the process.

While it is clear that all prior "process" reforms had an impact on reducing litigation costs once a problem arose (although the Colorado statute made the situation worse), these laws had no impact on the number and severity of the construction defect losses.

California Leads the Way!

Appropriately, California builders lead the way with their legislature. With the strong support of large builders, a new law, SB 800, was passed. SB 800 was designed to restore and maintain the relationship between the builder and the homeowner, and minimize the need for attorney intervention. The law, which applies to all new construction first sold after January 1, 2003, contains the following key elements:

1. A finite definition of what is and what is not a construction defect. If it is not listed as part of the 45 standards for the performance of the homes, it is not actionable.
2. The opportunity to provide a comprehensive "fit and finish" warranty for the first year of ownership.
3. Many lower statutes of limitations.
4. An affirmative obligation on the part of the homeowner to maintain the home according to a manual provided by the builder. Failure to do so impacts the ability of the homeowner to recover.
5. Provisions requiring specific notice to the builder prior to any litigation, detailing the exact nature of the claimed deficiencies (available in later evidence).
6. An opportunity for the builder to inspect the home at least twice and offer to make repairs. A builder has the option of requiring that the homeowner accept the repairs and mediate any disputes prior to litigation.
7. An acknowledgement that a builder may require binding contractual arbitration provisions in lieu of court litigation.

Colorado followed California's lead by passing HB#1161, which amends their consumer protection statute as follows:

1. Requires a certified list of defects to be provided prior to commencing litigation.
2. Requires access to the home by the builder to inspect the claimed defects.
3. Allows builders to enforce non-binding arbitration provisions prior to filing litigation.
4. If alleged defect causes actual damage, then there is a viable action.
5. Makes it harder for homeowners to obtain attorneys' fees and certain damages if builder makes a good faith offer prior to litigation.

Nevada has just passed 241, which takes effect for new claims first presented after August 1, 2003 (regardless of when the home was built or sold).

This bill amends Section 40 by adding a right to inspect and repair system to Nevada law. This complex bill contains the following significant provisions:

1. A notice requirement by the claimant to the builder detailing the specific problems on each unit and the cause thereof prior to filing an action for "constructional defects."
2. The builder is obligated to notify potentially responsible subcontractors and design professionals of the claim. (Failure to do so waives the builder's claims against the subcontractors.)
3. The builder, subcontractors and design professionals have the right to inspect the premises.
4. The builders, subcontractors and design professionals have the right to offer and conduct repairs within 105 to 150 days after the builder first received notice. The repairs may not be conditioned upon a release. The homeowners' association must provide a copy of any builder's response to every member of the association.
5. The State Contractors License Board may be used by the parties, in a non-binding, non-admissible fashion, to resolve complaints or controversies regarding construction defects.
6. If a contractor chooses to notify its carrier of the pending claim, the carrier must respond as if the claim were a lawsuit. If an insured chooses not to notify the carrier, this cannot be held against the contractor by the carrier.
7. Nevada law continues to have mandatory mediations unless waived by both parties. Fifteen days prior to the mediations, the parties must exchange relevant, non-privileged reports to the other side, including plans and specifications.
8. "Constructional defects" are defined as violations of law, including building code violations, which proximately cause physical damage to the property, which were done in a negligent fashion or which present an unreasonable risk of harm or injury to a person or property.
9. If a homeowner's warranty applies to a residence, the claimant must pursue contractual remedies. If a warranty denies coverage in bad faith, the claimant under the warranty is liable for attorneys' fees and costs.

Florida Passes SB 1286

In June of 2003, the Florida legislature passed SB 1286. This bill, which took effect immediately upon its signing, has the following provisions:

1. Pre-litigation notice to the builder and subcontractor of any construction defects.
2. The opportunity for the builder and other potentially responsible parties to conduct testing on the premises.
3. The opportunity for the builder to make an offer to repair the defects or make a monetary offer to settle and compromise. The homeowner may reject this offer without penalty.
4. Defines construction defect utilizing a negligence or code violation standard. The definition does not require physical damage.

Also in June of 2003, Texas passed extensive legislation (HB 730) establishing a new Texas Residential Construction Commission empowered to:

1. Establish new warranty standards for residential construction.
2. Set maximum statutes of limitations for one year for workmanship and materials, two years for plumbing, electrical, heating and air conditioning delivery systems and 10 years for major structural components of the home.
3. Establish warranty standards for the major functions of the home in conformity with national standards.
4. Establish a definition of "habitability" in addition to the technical standards of the home.
5. Establish a third-party inspection process, administered by the new commission.
6. Provide for state-sponsored and supervised arbitration prior to litigation.
7. Mandate the right to inspect the premises during the pretrial processes and the opportunity to offer to make repairs or monetary offers.
8. Encourage the making and accepting of reasonable offers through a series of incentives tied to the types of recoverable damages.

Other states that have passed similar "notice" bills include West Virginia, Kentucky and Idaho.

As indicated above, these legislative efforts are important since they promote continuation of the relationship between homeowners and builders. Prior to these types of laws, it was too easy for plaintiffs' attorneys to inject themselves into the process and force consumer disputes into litigation, raising costs.

These bills are not a panacea, and undoubtedly, there will be additional attention paid to particular areas (California continues to work on issues relating to subcontractors and lower litigation costs in the current session). However, strong national builders have the increased opportunity to enforce their corporate customer service and quality control efforts in an effort to keep these matters away from plaintiffs' attorneys.

There will still be cases where builders choose to fight frivolous construction defect actions or some builders will not adequately respond to keeping their homeowners happy. We believe, however, that there will be a significant reduction in construction defect cases leading to much lower exposures for builders and their carriers.