Shoddy Construction Lawsuits Are Booming

Corrie M. Anders
San Francisco Examiner - June 18, 1995

Condominium owners in Santa Rosa had a number of serious complaints about the construction of their 160-unit complex. Shear walls didn't have the proper strength. Parts of the foundation didn't have anchor bolts.

Water intrusion from leaky windows, leaky roofs and leaky decks was so severe in some condos that it caused serious molding--and one homeowner's daughter was hospitalized because of an allergic reaction to mold spores, according to William Gillis, the homeowners' attorney.

The condominium's homeowners association sued the developer to recover damages. The initial estimate to repair the alleged defects at the complex, built in 1984, was more than $10 million.

That case is one of a plethora of lawsuits throughout California charging developers with shoddy residential construction. And many more lawsuits are expected over the next five years at a potential cost of hundreds of millions of dollars in claims.

Construction defect litigation will be a major focus of attention at the Pacific Coast Builders Conference in San Francisco. An estimated 12,000 convention-goers are expected to attend the four-day affair which starts Wednesday.

Though lower than the record 14,000 attendees in 1991, this year's anticipated crowd is nearly 30 percent higher than last year--despite a sluggish year for the construction and sale of new homes.

"The building industry is still in the doldrums, but people are still optimistic," said Robert Rivinius, chief executive officer of the California Building Industry Association.

The convention will sponsor more than 50 educational programs, and two of them are devoted to construction defect litigation issues: "Please don't feed the lawyers: Practical solutions to liability threats," and "If you build it they will sue: Don't litigate, mitigate."

Big issue for the '90s

The hyperbole of those eye-catching titles is indicative of how complaints of shoddy construction and the lawsuits they engender have become the hot button of the '90s for the home building industry.

The issue affects everyone--from homeowners who can't sell or reinforce condos or town homes in their stigmatized complexes to builders and architects who have gotten out of the attached housing business. And lawyers have come under fire from some home-building representatives who charge them with filing overblown and needless lawsuits.

"I imagine, like any other are, that there might be frivolous lawsuits," said Santa Monica attorney Joel Castro, who's filed a lawsuit against the developers of a Northridge complex that collapsed, killing 16 people, in the January 1994 earthquake.

"But the reason we have so much litigation is that the construction that went up in the '80s is a crime," he said.

Tyler Berding, whose Alamo law firm represents homeowners and homeowner associations, said that the home-building industry shouldn't blame lawyers.

"This idea that the bulk of litigation comes from the imagination of the lawyer is absolutely false," he said. "Litigation exists because construction defects have been epidemic and rampant."

Berding said his firm has handled 150 to 200 cases since the late 1970s, and "every one of them has had a significant recovery."

The most prevalent complaints involve water intrusion, soil instability, foundation problems and seismic strength of shear walls. While no group or organization keeps tabs on the number of lawsuits statewide, both plaintiff and defendant attorneys say that both cases and damage amounts awarded are rising.

Numbers going up

In the last six months, the courts have awarded plaintiffs more than $20 million in six separate Southern California cases, said Jeffrey Masters, a real estate attorney whose firm represents developers. Statewide, the total might be as high as $60 million, said Masters of Cox, Castle & Nicholson in Los Angeles.

In 1994, a total of 106 construction defect cases were filed in San Diego County--at an average cost of $100,000 per case, according to Assemblyman Jan Goldsmith, (R-Poway).

Until the last few years, most of the lawsuits involved mass-produced, attached residential units in Southern California. Now, lawsuits have spread to single-family detached homes and moved into the Bay Area.

There are several reasons for the increase in lawsuits.

One is timing. Residential construction was booming during the red-hot real estate market between 1985 and 1989. Because homeowners can file construction defect claims for up to 10 years after a home is built, a larger number of claims can be expected over the next four years before the statute of limitations expires.

Two other factors are an "aggressive" plaintiff's bar and a "cottage industry" of their experts and consultants, according to Masters and other representatives in the home-building industry.

They contend that plaintiff attorneys often solicit clients by mailing defect surveys or offering free inspections to homeowners--even if there is no history of construction problems.

"All of this has resulted in large numbers of multimillion-dollar claims, which now are becoming routine," said Masters. "Literally hundreds of these construction defect cases are pending in California and the Western United States alone."

Alternative ideas

Gov. Wilson last month signed one tort reform measure, and another is pending in the Senate. Both are designed to encourage homeowners to discuss alternatives to litigation.

AB 463 by Goldsmith now requires the board of a homeowner association to notify all owners if it intends to file a lawsuit. It also requires homeowner approval of any special assessments needed to pay for the cost of the lawsuit.

SB 1029, sponsored by Sen. Chuck Calderon, would require homeowner associations to notify builders of design and construction problems before lawsuits are filed. The builder would have the opportunity to inspect the alleged defects and make a good faith effort to repair them or provide a cash settlement.

The rise in construction defect complaints and lawsuits has reached beyond the principal players.

Several architectural firms no longer handle construction plans for attached housing. The prominent San Francisco firm of Sandy & Babcock Inc. got out of the business six years ago, according to John Eller, chief executive officer.

"It became a very common thing that if you designed a condo, downstream the association will institute litigation," said Eller. "We've defended ourselves against many, many frivolous suits that are so insignificant as to be laughable."

Insurance also is a problem, said Gillis, who has represented both homeowners and builders and is chairman of a construction defect task force sponsored by the California Building Industry Association.

"Because of the plethora of lawsuits and the magnitude of the claims, there are no rated carriers that offer insurance policies to anyone involved in the construction or design of common-interest development," Gillis said. "The last rated carrier moved out of California last November."

The number of town homes and condos built in the last two years has fallen significantly, Gillis said.