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Left: Phil Collias, S.V.P Right: Jim Lawrence, E.V.P

Developers and builders have long struggled with costly lawsuits brought by homeowners. Many construction defect complaints are filed by attorneys who simply cut and paste the name of a builder onto a pre-prepared form, overinflating defects without regard to actual issues at individual homes. Oftentimes, homeowners who would typically address construction issues with the builder’s customer service department are not even aware they are part of a lawsuit filed by their Homeowners Association (HOA).

MAJORITY RULES

Thanks to the recent ruling in Branches Neighborhood Corporation v. Calatlantic Group, Inc. (2018) 26 Cal. App. 5th 743, plaintiffs must obtain approval from the majority of HOA members prior to initiating a claim. This means plaintiff attorneys cannot simply file a construction defect lawsuit on behalf of a small Board of Directors, purporting to represent all HOA members. Since builders prepare Conditions, Covenants & Restrictions (CC&Rs) to set forth the rules governing the HOA, they can now look to those rules and force plaintiff attorneys to first abide by them by getting the majority approval.

This ruling makes sense. Attorneys should not be able to represent clients without consulting to determine (1) if they have construction defects and (2) if they want to file a lawsuit to resolve them. Many builders have tremendous customer service departments, maintained specifically to address construction-related issues, nearly all of which are fixable. When you consider that for every $1 of repair, $5 is spent on defense costs, going directly to the builder is the most cost effective approach, assuming the scope of repairs are comprehensive. The Branches ruling makes that clear.

OVERINFLATED DAMAGES

Plaintiff attorneys overinflate damages and demands to reach monetary settlements that pay their fees of 33 to 40 percent of the recovery. Experts are adept at alleging all sorts of problems that never really materialize, such as aggrandizing that a crack in the concrete signals a building is going to collapse. The HOA has to repair the issues with the remaining funds. At least now, with the decision in Branches, these “doomsayers” must get the majority to vote to sue, and hopefully homeowners will turn to their builders and seek reasonable resolutions that focus on repairing legitimate issues, rather than paying lawyers and experts to push paper.

PROTECT AGAINST LITIGATION

Many insurance policies encourage litigation by requiring a formal claim or lawsuit before coverage applies. Policies require the insurance carrier to consent before a builder can proactively make repairs. All policies contain a “volunteer clause” that will not allow a builder to receive insurance reimbursement if they pay without carrier pre-approval. Most policies contain notice provisions that slow down the process of adjusting a claim and, by then, homeowners become disillusioned with their builder.

Drawing on the expertise of a construction risk advisor can be instrumental in developing policies that are sufficiently flexible and tailored to meet the practical realities of the homebuilding arena. For example, certain policies have been crafted that allow a builder the latitude to repair construction defects without having to report first to the insurer. Policies containing a self-insured retention (as opposed to a deductible) allow builders the flexibility to promptly and proactively manage claims without jeopardizing coverage. Policies that give the builder financial credit for addressing construction issues under a Warranty reduces the frictional costs of litigation. Integrating the various contracts—the Maintenance Manual, a transferrable Warranty, and a clear dispute resolution method in the CC&Rs—will allow builders to deliver to their valued customers a cohesive approach to homeownership.

We live in the age of immediate gratification, 100% satisfaction and no room for error. Using the CC&Rs to require a majority vote to sue a builder, as established in the Branches case, will promote working collaboratively with builders to resolve rather than litigate construction matters.

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