Builders hammer away for changes in defect law

By Steve Kanigher

Friday, May 2, 2003 | 5:08 a.m.

WEEKEND EDITION: May 4, 2003

An attempt to overhaul Nevada's residential construction defect law, which has been hotly debated in every legislative session since it was passed in 1995, faces an uncertain future in the Nevada Legislature.

The fight pits home builders, who want to change the law to reduce the number of lawsuits they face, against plaintiffs' attorneys, who like the law the way it is. On the sidelines are homeowners associations, many of which are siding with the lawyers.

The original law was designed to strike a balance between the rights of homeowners to have defective homes repaired and the opportunity for builders to make those fixes.

Home builders now concede they made a mistake in 1999 when they supported amending the law to allow associations representing five or more homes to file lawsuits immediately without first giving contractors a chance to make repairs.

That amendment, they say, has been abused by plaintiffs' attorneys and resulted in a barrage of high-dollar class-action lawsuits that has caused their liability insurance costs to skyrocket and driven up the price of new homes.

The builders now want up to 150 days to make repairs before any lawsuits are filed, regardless of the number of homes involved. That's more time than they had in the original law, which provided that homeowners had to wait only 60 days after complaining in writing about defects to file a lawsuit.

Also, if the builders agreed to make repairs they only had 45 days to do so once their offers were accepted by the homeowners before a lawsuit could be filed. The 45- and 60-day provisions still exist in the current law but only apply to cases involving four or fewer homes, which represent the minority of lawsuits.

To make the changes they desire, home builders and developers are banking on passage this session of Senate Bill 241, which they say will give them a better chance to repair construction defects before getting sued. They won the first round with passage of the bill in the Republican-controlled Senate, which has been friendly toward builders.

But SB241 is expected to run into a tougher audience on Thursday when it will be heard by the Assembly Judiciary Committee. Based on the fact the committee has already killed three other construction defect bills this session, it is possible the panel will at a minimum water down SB241 because the Democratic-controlled Assembly is friendlier with plaintiffs' attorneys.

And plaintiffs' attorneys oppose SB241 because, they say, it would encourage builders to delay necessary repairs and would be worse for homeowners than the original law.

SB241 would:

Both current law and SB241 provide for mediation of disputes and also cover defects involving common areas such as sidewalks, walls, recreational facilities, driveways and landscaping.

"SB241 was designed to give contractors the opportunity to repair homes," Jim Wadhams, lobbyist for the Southern Nevada Home Builders Association, said. "They want an opportunity to make repairs before they get sued.

"What this does is set up a 150-day fuse. I suspect there will be some contractors who won't fix the problems and some who can't because some of the subcontractors are gone or because there is a soil problem. But I think a substantial percentage of home builders will seriously consider fixing the problems within the 150-day period."

Lawyers say that SB241 goes too far and would actually make it more difficult for homeowners to get defects fixed.

"Our problems with the bill are the things that have been left out," Scott Canepa, lobbyist for the Nevada Trial Lawyers Association, said. "SB241 says homeowners are not entitled to recourse for defects if they do not result in property damage or personal injury. Present law says homeowners can get defects corrected before they cause damage or injury. To us, this is a major step backwards.

"Under current law, builders can be held liable for punitive damages if they don't respond to complaints in a timely manner. Under SB241 they are insulated from punitive damages in all cases. I also believe that under SB241 a homeowner could no longer retain a lawyer on a contingency fee basis."

Homeowners are divided on the issue. Reno salesman Paul Hulett, who testified against the bill before the Senate Commerce and Labor Committee in March, said SB241 would simply give builders more excuses to delay repairs.

Hulett said his year-old $300,000 home has major structural defects. He said a gap between the foundation of his house and the soil has caused one corner of the residence to sink nearly four inches. He also said inch-wide cracks running four to five feet in length cover some of his walls and that he has windows that don't fit frames or close properly.

Despite these problems he hasn't heard from the builder in nearly three months. He said he is getting ready to file a lawsuit.

"What I read into SB241 is that it gives the contractor the opportunity again and again and again to try to make things right," Hulett said. "The bottom line to the builder is that it will depend on how much it will cost to do the repairs. They're going to drag things out and try to get by as cheap as they can to solve the problems.

"The only way to solve the problems with my house is to tear it down and rebuild it."

While many homeowner associations have lined up against SB241, Las Vegas resident Lois Ostraat, who testified in favor of the bill, has a different perspective as president of the 272-unit Southern Vista Condominium Property Owners Association. Ostraat said builders should be given more opportunity to fix defects, especially when they have had a good working relationship with an association.

She said one problem with suing a builder is that it can make it harder for association members who want to sell their residences while litigation is pending, a process that can take up to five years. Ostraat said that federal mortgage programs typically deny low-interest loans to people wishing to buy homes that are involved in litigation.

While Southern Vista has had building defects, Ostraat said they have been fixed in a timely manner by the builder, whose representative attends association meetings.

"We just happen to have a good builder who has been with us every step of the way," Ostraat said. "SB241 gives builders the opportunity to fix problems and, if they don't, the homeowners can still sue them. The way the bill is written it protects both sides."

Tom Warden, spokesman for Summerlin planned-community developer Howard Hughes Corp., said the company supports the bill because builders have become more reluctant to construct multifamily units out of fear of facing class-action defect lawsuits.

Warden said Hughes sees an economic benefit in being able to market master planned communities with a mix of housing. By giving multifamily unit builders more opportunity to fix defects to avoid litigation, Hughes would benefit by being able to attract such builders to its communities, Warden said.

"It's getting harder to find people who will take that risk," Warden said of multifamily unit builders. "What you want in a master planned community is to try to serve all different levels of the market. You want an economically diverse array of products."

He said it is also a plus that SB241 would extend its protections to developers who construct common amenities for housing developments.

Construction defect litigation developed its roots in Southern California during that region's housing boom of the early 1980s. By the mid-1990s, that type of litigation spread to other fast-growing Western cities, including Las Vegas. Many lawyers involved in such litigation are specialists in construction defects.

Southern Nevada home builders said litigation didn't become much of a problem for them until after the 1999 amendment that allowed the "complex matter" cases involving at least five homes to result in immediate lawsuits. Builder representatives testified before the Legislature at the time that because they figured they were going to get sued anyway it was best to have such cases go through the referee process provided by the courts as soon as possible.

Las Vegas building supplier Steven Hill, chairman of a coalition of builders and developers that supports SB241, said the industry now realizes that that amendment was a big mistake for them because it resulted in a flood of class-action lawsuits.

"The industry did not anticipate abuse of that law," Hill said. "The industry played a role in trying to improve that law. We just didn't know what kind of loophole that would turn out to be."

A precise number of construction defect lawsuits filed in Clark County District Court was not immediately available. But District Judge Nancy Saitta, one of three judges assigned to construction defect cases, said at least 200 defect lawsuits have been filed against builders and developers since fall 2001. Most involved five or more residences and roughly two-thirds were settled out of court, she said.

Wadhams, who also lobbies for the insurance industry, said SB241 "was not designed to solve insurance problems." Lawyers scoff at the notion that the bill has nothing to do with a desire by builders to lower their liability insurance costs.

Bruce King, owner of Las Vegas home building subcontractor Pete King Corp. and a lobbyist for the Nevada Subcontractors Association, blames the litigation for his skyrocketing liability insurance costs. He said his general liability insurance, good for up to $2 million per occurrence, rose from $125,000 in 1999 to $976,000 this year. His deductible also rose from $1,000 to $25,000 over that time.

"It would be way too hard for a new guy to get into this market because it would be hard to get insurance," King said. "No one wants to write construction defect insurance in Nevada anymore."

Nevada once had at least 15 licensed insurers who sold construction liability insurance to home builders, but Wadhams said there are now none. Instead, he said builders must now rely on coverage from out-of-state and offshore companies that offer those contractors little protection if the insurers go out of business.

While insisting that SB241 is not designed as an insurance fix, Wadhams said he believes it could result in insurance rate decreases of at least 10 percent because more builders will be able to avoid litigation. If the insurer doesn't have to pay out so much for attorneys' fees and court costs, the insurance premiums ought to drop, he said.

But Canepa said a state task force he served on last year to review Nevada's construction defect laws learned from insurers that the skyrocketing insurance rates had more to do with "substandard construction practices and poor workmanship by the contractors" than with the severity of claims against the builders.

King said that because builders' liability premiums represent 3 percent to 4 percent of the cost of a new home, he hopes insurers will react positively to SB241 if it becomes law. He said they could do that by making insurance "more accessible and then more affordable."

"I've never been notified of a problem beforehand in any of the lawsuits I've been involved in," King said. "The first I hear of a problem is when I get sued. SB241 gets me back to my customers. I need to reconnect with those customers and I want the opportunity to go back and fix those problems."

The flip side of that argument comes from retired California prison official Herb Goldsmith, president of the 336-unit Duck Creek Village Homeowners Association northwest of Boulder Highway and Russell Road. Goldsmith said that in its 14 years of existence, Duck Creek Village has agreed to two out-of-court construction defect settlements. The homeowners association has made nearly $2 million in repairs to roofs, streets, plumbing systems and interior fixtures with the settlement money.

He said one fix was construction of a flood retention wall on one side of the property after a June 1999 Duck Creek flood resulted in damage to 22 of the residential units and destruction of eight vehicles, one boat and a motor home.

Goldsmith estimated that the condominium owners have had to pay more than $360,000 not covered by the court settlements to help make repairs, which are ongoing. As a result, association dues per unit have risen from $55 a month to $115 a month, he said.

"I don't like SB241 because it gives the builder opportunity to make non-specific repairs," he said. "If you have a crack in a wall, he can put in putty and then in two years you'll have to do the same repairs again.

"SB241 gives the contractor the ability to not be responsible for construction defects, instead putting it all on the homeowner, who does not know what is involved to correct the problems. It does a lot for the benefit of the builder and absolutely nothing for the homeowner."

The issue of construction defect law has become so emotional in Nevada that two nonprofit special interest groups were formed last year to address that issue. One group, the Coalition for Fairness in Construction, has spent slightly more than $100,000 on newspaper and radio advertisements this year in support of SB241.

Hill, who is the coalition chairman, is president of Silver State Materials Corp., a Las Vegas company that supplies ready-mix concrete. His coalition, which represents builders, suppliers, real estate agents and developers, was the primary architect of SB241.

"The biggest concern that we have is that there are a huge number of very large lawsuits that have come about as a result of the law that we have in place," Hill said. "Once you get into these lawsuits builders can't make repairs, which doesn't help anybody."

The opposing group, Safe Homes Nevada Inc., has spent roughly $50,000 on ads in an effort to kill the proposed legislation. Headed by Dave Duritsa of North Las Vegas, who owns a residential cleaning business, that group is made up mostly of homeowner associations.

Duritsa also happens to be a resident and former board member of Craig Ranch Village, whose homeowners were awarded $7.8 million in damages in February by a jury in a construction defect class-action lawsuit against Beazer Homes.

Duritsa said he has numerous complaints about SB241, including several examples of what he considers vague language. He said one of his biggest concerns is that the bill requires a majority of members of a homeowners association to agree to a lawsuit, rather than leave that decision up to the association board, as is the case now.

"If SB241 were law when we started this lawsuit, it is highly doubtful we could have brought it to court," Duritsa said. "My interpretation of the bill is that it would exclude anything that a builder does not deem a construction defect. The bill also allows the builder to interpret if something is 'functioning as intended.' If there is a leak in the plumbing but water is still coming out of the tap, is that functioning as intended?

"This whole bill is designed to get rid of attorneys and not help homeowners."