Wayne Colmer stopped building condos eight years ago. Not because there was a lack of demand, but rather because he couldn't afford triple-digit increases in insurance rates.
Colmer isn't alone. Homebuilders throughout Los Angeles and the state have backed away from the condominium market due to skyrocketing insurance costs.
Rates have soared, builders agree, due to an explosion of lawsuits that arise when homeowner associations are encouraged by lawyers to sue over real or imaginary defects.
"It's very hard, if not impossible, to get insurance to include coverage for attached houses," said Juan Acosta, a lobbyist for the California Building Industry Association. "Most insurance agencies will write general liability, but will exclude coverage for condos because litigation is so expensive."
The spate of suits, coupled with construction defect laws that allow condo owners to sue up to 10 years after their units are built, has sent a chill through the industry and scared off many would-be condo builders.
Statewide, condominiums represented only 9.7 percent of new home sales in 1998, compared with 31 percent in the late '80s, according to the Construction Industry Research Board, the research arm of the state Building Industry Association. The problem is especially acute in Los Angeles, where there is so little land to develop.
"What you have in the city of L.A. is very limited space, where what space you do have is infill space," said Ray Pearl, of the Los Angeles/Ventura Chapter of the Building Industry Association. "Without condos there, what you have is housing in the inner area that is less affordable."
The number of new condos has dropped steeply, despite steady, if not increasing, market demand.
The median price of a condominium in the San Fernando Valley rose to $123,000 in January, up 19.4 percent over January 1998, according to the Southland Association of Realtors.
Meanwhile, Acosta said, condo lawsuits have grown exponentially for several reasons. First, California law is vague concerning what a construction defect is.
"It's anything you can convince a jury of," he said. "Both sides end up relying heavily on expert witnesses. The cost is very expensive."
Costs are also driven up by the class-action feel of condo litigation. Unlike single-family home suits, condo homeowner associations can sue as one for all residents of a development. "That gives it greater financial capacity as a plaintiff, much more than the average homeowner," Acosta said. "The association can also dip into reserves for the suit."
California law allows homeowners to sue for defects for up to 10 years after a home is built. The insurance agency Colmer worked with raised rates 500 percent, from $30,000 a year to $180,000, for coverage on 8-year-old townhomes.
Insurance rates for Pacific Charter Group's 141-unit Carriage Town Homes are double those of single-family tract homes, according to Jim Guthrie, the company's president. And Pacific Charter has to hire added inspectors and take pictures to protect against defect litigation.
"It's a very expensive process," Guthrie said. "We paid a (low enough) price (on the land) that allowed us to build the product." He added that the company turned down five other condo projects in the last six months because insurance was too high.
The CBIA is pushing legislation to clearly define construction defects, and wants a revision in state law to allow for warranties. Homeowners would then be encouraged to go through arbitration before filing a lawsuit.
Builders acknowledge that many of the suits were justifiable, especially during the building boom in the late '80s, when quality was sometimes compromised for quantity.
George Dale, a Los Angeles-based attorney and chair of the CBIA construction defect task force, said part of the solution would be to take lawyers out of the process.
Dale, who has represented builders in 1,500 defect cases, said there could be as many 30 or 40 lawyers in a single case representing homeowners, general contractors, subcontractors and insurance agencies. This drives up the cost of settling such cases.
At the same time, builders could avoid lawsuits by doing a better job of satisfying customer complaints, which are at the root of many defect lawsuits, he said.
Dale, who also runs a consultant business for builders, said the lawsuits have improved the way condos are built. "They're not building things crazy like they did in the '80s," he said.
Bill Ehrlich, of Encino-based Larwin Co., agreed the quality has improved in the construction business over the past 20 years. Builders have brought in third-party inspectors to review work and some have built detached condos on smaller lots than single-family homes.
"The system of building has changed," Ehrlich said. "I think they're doing higher-quality work. Things are being built better today than in those days."
Ehrlich's firm stopped building condos in the '80s when company officials anticipated the problem with increasing lawsuits.
Colmer's company hasn't been sued for construction defects, one of the reasons he can still get condo insurance. But he says he won't get back into the condo market until there are changes in the law.
"Until I'm sure my insurance rates won't be affected, this or the following year, I can't risk it," he said. "The chance of litigation is very, very huge."
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