Construction defect litigation

Bluestone and Hockley Real Estate Services

Yesterday, Pam the manager of our Condominium/HOA department came into my office and casually mentioned that 20% of our homeowner/condominium association portfolio is currently engaged in some sort of construction defect litigation. This information did not catch me by surprise given the speed in which these properties have been constructed over the past five years.

In our marketplace land has been snapped up by developers to build condominium or shared-wall homes in Home Owner Association (HOA) environments. Low interest rates and Uncle Sam’s tax shelters have encouraged former apartment renters – especially young families and single people – out of apartments and into condominiums and HOAs.

In order to keep the cost of this housing affordable, developers and contractors are usually very price-sensitive in regards to their subcontractors who frame, insulate, sheetrock, and roof their projects. This sensitivity means they usually choose the subcontractor who is lowest priced and can get the job done the quickest, often with immigrant, well-meaning but not well-trained labor.

In order to take advantage of the momentum in the marketplace, many developers will also have more than one project under construction at a time. This makes it easier for them not to have quality control checks in place to make sure that codes as well as good quality construction standards are being met at each step of construction. A lack of construction oversight frequently leads to construction defects.

Who are the Players in construction defect litigation?
Those potentially involved in construction defect litigation include: builders, developers, contractors, subcontractors, material suppliers, product manufacturers, homeowners, homeowners’ associations, attorneys, forensic inspection services, municipal inspectors, etc. What is a Construction Defect?

The topic is somewhat multi-faceted, and determined by many variables. In other words, here is no short answer to this question.. There is, however, a big difference between a nuisance claim (such as a squeaking floor or conditions resulting from lack of maintenance or normal wear & tear) and a construction defect.

Construction defects can range from complex foundation and framing issues which threaten the structural integrity of buildings, to aesthetic issues such as improperly painted surfaces and deteriorating wood trim around windows and doors. Faulty foundations, serious moisture intrusion, and shoddy framing are often at the root of problems, which manifest themselves as gaping cracks, rotting walls, and windows and doors that don’t close right.

Some recent examples we have inspected include:

  • Water intrusion into garages
  • Mold and mildew as a result of poor quality flashing
  • Flashing not installed or installed incorrectly
  • Roofing installed incorrectly, or roofing not actually fastened down (so it flaps in the wind)
  • Windows and siding installed without the use of sealants and not wrapped properly to prevent water intrusion
  • Buildings built so tightly that the new owners cannot breathe, due to VOC (Volatile Organic Compounds) off-gassing of the carpets and plastics or varnishes used in construction.
  • Exterior wood surfaces not painted to protect the wood from the environment
  • The use of Eifs (synthetic stucco-like Dri-vit) installed improperly which leads to cracks in the surface of the material and results in dry-rot in the wood underneath.

The trial courts have recognized that construction defects are tangible and can typically be grouped into the following four major categories:

1. Design Deficiencies
Design professionals, such as architects or engineers, design buildings and systems that, from a performance standpoint, do not always work as intended or specified. The motivation for the design may be form, function, aesthetics, or cost considerations, but the completed design could result and/or manifest into a defect. Problems are typically encountered with roof systems (pitched or flat) which due to their design complexity, are prone to leaks. A majority of roofing problems are a direct result of inadequate specification of building materials which can result in water penetration, intrusion or other problems. Poor drainage design and/or the inadequacy of structural members can result in cracks and deterioration of roofing components and materials.

2. Material Deficiencies
The use of inferior building materials can cause significant problems, such as windows that leak or fail to perform and function adequately, even when properly installed. Leaking windows are a common defect and prevention requires good workmanship. Window leaks can result from many things including: framing not being flush with outside openings, improperly flashed windows, incorrectly applied building paper, window frames racked during storage/moving, the lack of a sheet metal drip edge above window headers, etc. Common manufacturer problems with building materials can include: deteriorating flashing, building paper, waterproofing membranes, asphalt roofing shingles, particle board, inferior drywall and other wall products used in wet and/or damp areas, such as bathrooms and laundry rooms.

3.Construction Deficiencies (Poor Quality or Substandard Workmanship)
Poor quality workmanship often manifests as water infiltration through some portion of the building structure. This can result in: cracks in foundations, floor slabs, walls, dry rotting of wood or other building materials, termite or other pest infestations, electrical and mechanical problems, plumbing leaks and back-ups, lack of appropriate sound insulation and/or fire-resistive construction between adjacent housing units, etc.

4. Subsurface / Geotechnical Problems
California, Colorado, and other parts of the country have a significant amount of expansive soil conditions. As a result of this type of terrain, there have been many problems when housing subdivisions and/or developments are built into hills or other sloping areas where it’s difficult to provide a solid and/or stable foundation. If subsurface conditions in these subdivisions and/or developments are not properly compacted and prepared for adequate drainage, problems will inevitably result. Problems can include: vertical and horizontal settlement (subsidence), movement (expansion), slope failures, flooding, and in extremely wet/rainy climates, landslides, etc. These conditions typically lead to cracked foundations, floor slabs, and other damage to a building. A worst-case scenario in some instances could render a building uninhabitable, as well as uninsurable.

The courts have typically used these categories and associated standards to determine responsibility for construction defect problems. C-Risk, Consultants in Risk Management, note “The standards used to measure whether the specific condition under review have violated any applicable building codes, are the direct result of construction means, methods, or practices that are below the standard of care in the building industry, and resulted from a deviation from the Permitted/approved plans and specifications, or the specific condition is below the reasonable expectation of the home buyer/owner.”

Key to deciding if a construction defect actually occurred or if the property just wore out, is the statute of limitations. American Reinsurance Company has spelled this out:

  • Statute of Limitations The period of limitation does not typically begin to run until the defects are discovered or reasonably should have been discovered. The potential liability of a builder or developer can continue for an extended period of time. In order to place a reasonable limitation on the builder’s exposure, most states have imposed a maximum limitation period that applies, regardless of any conflicting statutory limitations. If the defect discovered is patent, meaning it is apparent by reasonable inspection, any action arising from that defect to real property must be commenced within a specified time after the improvements are substantially completed. When the defect is latent, meaning it is not apparent by a reasonable inspection, any action to recover damages to real property must be commenced in many states within 10 years after the improvements are substantially completed. Finally, a project is deemed substantially complete upon the first of the following to occur: (1) final inspection by the applicable public agency; (2) recordation of a valid notice of completion; (3) use or occupation of the improvement; or (4) one year after termination or cessation of work on the improvement.
  • Tolling the Statute of Limitations In some states, the statute of limitations is suspended during the time in which the builder or developer attempts to make repairs of the defects. Thus, depending upon plaintiff’s proof of same, plaintiff’s time to sue may be extended beyond the statutory period.
  • Standing Issues — Who Is the Proper Plaintiff? Class actions and representative/HOA actions are very similar. Both are equitable in nature and permit persons or entities to sue on behalf of others based on necessity and/or superiority to separate lawsuits by individual members of the group. Such actions are allowed as exceptions to the usual rules governing permissive joinder of parties and the real party in interest requirements.Direct standing of an association under the applicable covenants, conditions and restrictions will give an association the standing to pursue the separate interests of the homeowners integrally related to the exterior surfaces and/or common areas.

    Class actions and representative actions are generally subject to the same procedures. The only distinction is that plaintiffs in a class action must be a member of the class and their claims must be typical of those asserted by other members of the class.

    In a representative action, the plaintiff is usually an association suing on behalf of its members and the claims are those of the members, not the association.

    A construction defect case is fundamentally different from a typical class action where all class members have sustained the same damage or been the recipient of a uniform misrepresentation. Defendants may be able to prevent the certification of a class action if the defects affecting the various homes in a particular project are all different and do not have the requisite similarity of claims to become certified.

  • The Typical Defense — “Someone Else Did It” — Comparative Negligence/Cross-Complaints For Indemnification In addition to opposing plaintiffs’ claims, most building defendants will also seek to lay off/assign any liability for various damage claims to the parties responsible for either designing or performing the work that is being criticized.This results in the numerous cross-complaints that are filed in virtually every construction defect case. Typically, based upon the indemnification clause contained in the subcontract agreement between the general contractor and its subcontractors, they are also based upon the certificates of additional insurance that have been provided to the developer and general contractor by the various subcontractors at the time the work was performed.

    When additional insured endorsements/certificates are present, the express contractual indemnification claims against the subcontractors who signed the indemnification clauses set forth in the standard form subcontract (between the general contractor and the subcontractors) are generally significantly stronger and usually easier to prove.

Attorneys are motivated to sue in the Plaintiff’s behalf
It is not unusual for a construction defect claim to take up to two years to settle. Simple math will explain to you why this segment of the industry is growing. At $250-$300 an hour for the principals’ time and a long-term discovery process, the average law firm can make a lot of money representing the plaintiff, the defendant or their insurance companies. Even for attorneys that have no experience, all they have to do is go on-line and get a handbook that will lead them through the process. I have pieced in a sample of such a listing found on the internet:

“Construction Defects: Litigation and Claims explains how to investigate, prosecute, or defend cases that address construction defects-one of the most active areas of litigation in the United States.”

“The dollars involved in construction defect litigation have grown exponentially. If a problem exists in a multiple unit condominium association or a housing tract, minor repairs of the defects multiply over the various units to millions of dollars. In addition, the complexity of a construction defect suit usually results in hundreds of hours of work for lawyers and awards are often extremely large.”

“Part I discusses the construction contract, plans and specifications, and defects. Part II examines property insurance and insurance policies. Part III offers guidance on alternative dispute resolution, litigation, and indemnity.

“The Guide includes checklists that step you through an analysis of construction defects, the process of purchasing and later invoking construction defect insurance, and the prosecuting or defending of a construction defect case. It also provides helpful sample forms to assist in the identification of defects and numerous case studies to illustrate the state of litigation. To ensure that the publication is current, quarterly updates are included.”

How to choose an attorney if you are the harmed association
As we helped our clients come to grips with this very expensive litigation, we developed a list of questions they needed to ask each firm they evaluated.

  • Who is the point person that we will interact with? (An experience attorney or a paralegal?)
  • What are your billing practices? How do you bill for a Principal? Associate? Paralegal? Investigator? Clerical? Copies? Monthly reports? Do we need to pay a retainer, monthly, or upon settlement. Will you take this case on a contingent fee basis? How do you require to be paid, progress payment or after the claim is settled?
  • Please provide details on how you would staff for a construction defect claim. Please map this out for us in detail.
  • Please provide information regarding your existing construction defect practice.
  • Please provide history of successful construction claims in the past year.
  • How big does a claim need to be for you to be interested?
  • How long does an average construction defect claim take, does it usually go to court or is it settled?
  • Which companies do you use to inspect the property? What inspections would you require before we get started?
  • Which insurance companies do you represent? Are you a plaintiff’s attorney or a defendant’s attorney?
  • How would you like to communicate with us (our board) for key decisions.
  • Are you willing to come to our night meetings to make a presentation to us regarding your services and for regular updates regarding the claim?
  • Please map out for us how you see the progress of the claim from initial inspection and filing of the claim to hiring a project manager to supervise the replacement/ repair of our problems.

In making the decision, it is important to call references and to get a good handle on the process. Each attorney has a different style that works for them. It is important to find an attorney that can work with your style and your board’s style, and most importantly, can achieve the best settlement for you.

Oregon and California
Due to the huge increase in construction defect litigation, laws such as Oregon Senate Bill 909 have been passed in Oregon and California that first require notice of defects to the builder / developer to give them a chance to remedy the problems rather than end up involved in extensive litigation.

This process has encouraged the development of a new business called “forensic inspection services,” that inspect building envelopes in particular and assemble a significant detailed study to the Plaintiffs for use in encouraging the Defendants to either repair the problems or pay for the problems incurred by their lack of attention to detail during the construction process. These inspection services are usually staffed by experienced engineers or architects that will later act as professional industry experts/witnesses in potential litigation. These reports are very detailed and usually serve as a call-to-action and to settle for the developer/contractor/subcontractors.

Insurance
Insurance rates have climbed astronomically in the last five years as a result of claims discussed in this article – especially in condominium and home construction. These claims are forcing many contractors and developers out of business either by having to defend the claims, or by charging so much insurance that they cannot afford to develop a cost-effective product. This does not have as much of an impact in states such as California for example, where the cost of housing is already very high, but in other areas the cost impact is significant.

Due to the vagaries of this type of litigation, developers and contractors now must buy 10 year trailing insurance before they commence construction, as that is the period during which can be sued. This additional insurance adds significantly to the cost of construction.

Summary
Many defendants assume that all of their repairs will be paid for if they are successful in litigation, but that may not always be the case. They will need to be prepared to come up with additional finds to remedy the problem – especially if the defects are detected 7 or 8 years down the road.

It is unfortunate that upon the initial purchase of the condominium or townhouse in an HOA, many home inspectors do not catch the simplest issues that erode homeowner value. They miss poor installations, earth-wood contact, and poor roofing installs. If the initial inspectors did a better job, much heartache and extra expense could be avoided.

Bluestone and Hockley Real Estate Services

It is a moderate day of 55 degrees. Your name is Pablo Smith, and you are the owner of the White Lily Apartments. Today is the day you have chosen to tour your twenty-unit apartment complex. You are relaxed and happy. The rent has been coming in on time. The tenants have been quiet. You vacant units have filled fast. You feel like a true capitalist. It is a great day, that is, until you visit the first unit.

You knock on the door and seven-year-old Nicole lets you in. Her mother is on the couch watching TV. The unit looks clean. As required, you have posted notice on all the doors in advance to let the tenants know you were coming. On this trip you brought your maintenance man Jack with you to fix the minor problems and make note of the major ones so you can budget the future repairs.

You can smell dinner cooking. It smells like chicken soup. As you walk out of the living room into the bathroom you notice some mold on the walls. You quickly walk into the bedrooms and see even more mold, especially on the outside walls. Your look puzzles Jack. He says, “We have this problem in all of the units.” The blood drains from your face. You quickly complete the inspections of all of the units and then walk out into the sunshine.

Your brain tells you that you must do something right away and that this cannot be healthy for the inhabitants of your apartments. Your maintenance man tells you that this is not an unusual problem, especially in the winter when it is colder outside and the humidity rate on the inside increases. He recommends installing a fan in the bathroom and making sure that the fans in the kitchens work. You are shaken to the core. You chose to buy this building because it was built out of concrete. You figured World War III could come and your building would survive. You never expected mold to invade first.

Jack recommends that you check the roof first to make sure it is draining and the downspouts to make sure they are clear. Then he suggests checking if the humidity was caused by broken water pipe. You doubt it because your water bill has been very stable. You decide to go home and do some research on the Internet.

You log on and find helpful information: the State Health Officer in California, James Stratton M.D.,M.P.H., says in a bulletin, “There are hundreds of different kinds of mold and fungi that can grow indoors, and they come in different colors, including white, pink, orange, brown and black. Almost all molds are known to produce substances or chemicals that emit a characteristic odor that can cause allergies or make them worse. Molds can also irritate the eyes, nose or throat.”

You find out from the EPA that molds lack chlorophyll and must survive by digesting plant and other organic materials for food, and that without molds, our environment would be overwhelmed by large amounts of dead plant matter. Molds produce spores and these spores float by us in the air. They tend to land in damp areas, and tend to destroy the things they land on.

The Key to Mold Control Is Moisture Control
High humidity and condensation problems as well as water leaks, maintenance problems, and HVAC system problems can cause mold to grow. Humidity is the key. You keep digging and find some resources you can use to solve your problems. You think about your options:

  • You could call your insurance company if the cost is going to exceed your deductible. They could cover the costs, but have vendors they may want to use. Your policy may cover the problem and the clean up.
  • Wash down the walls with a mold killing enzyme and then seal the wall and paint over it. Allow the mold killing enzyme to stay in contact with the walls for 15 minutes before you wash it off. Make sure the area dries off; otherwise, mold will grow on it again. You also need to clean the carpets and the drapes. Make sure Jack is wearing protective clothing (rubber gloves and long-sleeved shirt) and a respirator. If the problem is located on an outside wall, Jack should look to see if the gutters are plugged or rain or water is coming into the building. If that is the problem, the gutters and downspouts need to be cleared, and the walls still need to be washed, primed and painted.
  • Good airflow is critical to avoiding this problem. Jack may need to retrofit fans or blowers into the kitchen and bathroom. Communicate with the tenants in writing the steps they need to follow in order to reduce the humidity in their leased apartment.

Finally, you decide to write the tenants a letter to enlist their aid in cleaning up. You retrofit the windows so that they can be opened safely about two inches to let the air in, and you have all of the walls washed down and sealed, the drapes cleaned, and the carpets cleaned. After a month of work, you feel good. You have made progress, and the tenants are very happy, so happy that they all pool for a small gift of thanks.

The next step is to install air-fans in the bathrooms. This is not inexpensive, but since you have decided to make other upgrades in the property, you finance them all together. You wonder if all of your efforts were worth it . . . but in the end you realize that your tenant turnover has reduced to nothing and that the tenants you have are with you to stay.

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