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Legislature Hearing

Reforms required in construction defect litigation

November, 1999

SACRAMENTO -- While home builders were engaged in a ballot battle this week over housing in the East Bay, lawmakers have begun to turn their attention to tort reform remedies for what they say ails the state's housing supply.

On Wednesday, a legislative hearing zeroed in on construction defect litigation and its role in blocking new housing -- especially condominiums -- from going up.

"Construction defect litigation is our modern-day whiplash suit: As soon as you file you get money," said Assemblyman Dick Ackerman, R-Fullerton. "Horror stories are not the exception but the rule here."

Assemblyman Tom Torlakson, D-Antioch, who chairs the Select Committee on Jobs-Housing Balance, said, "The key is how to incentivize urban renewal and to mitigate sprawl -- but the point always comes back to construction defect litigation."

The committee hearing gathered researchers, builders, insurers and condo owners to offer solutions Torlakson said could be a part of a comprehensive jobs-housing package he will offer in 2000.

A lone consumer attorney, partner Tyler Berding of Alamo's Berding & Weil, was present to contend that plaintiffs lawyers are not the problem, and to offer his own suggestions for improvements.

Torlakson will consider measures that would:

Tighten the definition of construction defect, now characterized only as "patent or latent" defect in the Civil Code but otherwise left undefined.

Streamline an often-protracted dispute resolution process required prior to litigation.

Generally reduce the time and money spent resolving such disputes.

In addition, a Silicon Valley trade association is sponsoring legislation, AB 1221 by Fremont Democrat John Dutra, that would offer condo buyers a state-approved warranty guaranteeing repair of construction defects for 10 years as an alternative to litigation.

Building industry representatives testified that the construction of much-needed high-density, attached homes like condos and townhouses nose-dived after the mid-1980s, in response to increased litigation and insurance carriers' subsequent abandonment of the market.

Condominiums made up only 9.7 percent of new home sales in 1998, down from nearly a third in the mid-1980s, said George Dale of the California Building Industry Association. In Orange County, he said, none at all have been built in the past three years.

Dale, a partner in Los Angeles-based Dale, Braden & Hinchcliffe, said that his firm alone had defended 1,500 defect cases since 1989, many originating in Southern California. The cases have followed development patterns throughout the state. "Their numbers are not leveling off," Dale said in an interview, "merely migrating."

An analyst from the California Research Bureau, Jennifer Swenson, acknowledged the negative impact of a string of multimillion-dollar construction defect cases, beginning with a $34.5 million settlement in San Diego in 1986. That case involved Villa Martinique homeowners who sued the builder, The Christiana Companies, over soil and construction problems at the site. But she pointed out that other factors, including the strength of the market and changes in tax laws, also contributed to the decline.

However, she agreed with building industry representatives that insurance companies willing to write policies covering construction of multi-family housing had shrunk from 40 in the early '80s to just a handful in 1999.

Linda Mandolini of the Silicon Valley Manufacturers Association, representing some 150 of the area's leaders, said her group is sponsoring Dutra's warranty bill in an effort to bring builders and insurance carriers back into the affordable housing market.

"Since 1990, [SVMA members] have produced 250,000 new jobs but only 50,000 homes have been built," she said. That imbalance has driven up median home prices to $411,000, often making them inaccessible even to the Valley's relatively well-paid work force, with its median income of $82,000 annually.

Mandolini cautioned builders, however, about quality control. "We believe consumers should have a good product and get defects fixed -- but through a home warranty program," she said.

She also noted that as a former official at Eden Housing, one of the state's premier nonprofits building affordable homes, "We did one condo project and faced six years of lawsuits. We would never do another."

Dale, the attorney for many builders and spokesperson for the CBIA, urged the committee to legislate a clearer definition of "construction defect" and provide an alternative dispute system like that proposed in Dutra's bill.

California law, he said, fails to define what constitutes a defect, including anything from major flaws in a home's safety and habitability to minor cosmetic problems. He also asked the committee to strengthen "the Calderon process" requiring homeowners associations to try to resolve disputes with builders before filing suit.

"Through inaction," Dale said, "consumers are being hurt, though lawyers on both sides are thriving."

Berding, the plaintiffs attorney whose firm represents some 2,000 homeowners associations, acknowledged that "there is no question there is a problem in California." But he said it stemmed from low-quality construction undertaken in the free-wheeling 1980s, when savings and loan associations distributed loans to "builders who took on projects they didn't have the experience to build."

Builders who don't address mounting problems trigger lawsuits, Berding said, and then insurance carriers for the myriad subcontractors delay resolutions by fighting among themselves.

"We sued a general contractor once and he dragged in 25 parties, including the security guards and the Port-o-Potty man," said Berding. He also urged an effective warranty process, saying homeowners would choose that "and you don't have to take away their tort rights."

Berding urged Torlakson's committee to mandate more rigorous quality control in the insurance underwriting process, and to beef up the ranks and duties of public building inspectors so they could serve as neutral third-party construction inspectors. Now, local building inspectors are limited to enforcement of the Uniform Building Code, and thus do not routinely detect defects that may be beyond the code's purview but that frequently become the source of litigation.

At the close of the hearing, Torlakson said he would focus on more clearly defining construction defects, streamlining the "Calderon process," and generally increasing opportunities for alternative dispute resolution. "Without fixing the jobs-housing imbalance," he said, "we'll continue to see runaway housing costs and long commutes."