Alliance: Spell Out Building Defect Laws
NU Online News Service, April 3, 1:59 p.m. EST? An insurance industry trade group is urging carriers and builders to lobby hard for legislation to reform the murky legal situation that has allowed a nationwide explosion in construction defect claims.
"Until there is a constant definition of where a contractor can be held liable, there is no end in sight to the spiraling litigation cycle," said Rodger S. Lawson, president of the Alliance of American Insurers in Downers Grove, Ill.
As an example of the problem, the Alliance noted that one of its member firms specializing in contractor insurance has seen such claims grow annually from $2 million to $100 million in the last five years.
The Alliance said the claims involved in defect cases are generally big ones because they frequently involve class actions by homeowners associations or condominium groups, which is spurring a lucrative set of lawsuits by trial attorneys.
Legal deadlines for bringing defect cases that stretch up to 10 years, and extended periods before construction flaws appear are other factors, the group advised.
Mr. Lawson said the Alliance is working with industry coalitions and building/manufacturing associations at both the state and national levels to seek legislative reforms, "but to be truly successful, reform needs to happen on the national level."
The Alliance leader said legislative remedies at a minimum should:
? Establish a definition of "construction defects" and a corresponding standard of liability.
? Resolve conflicts between state and federal law by allowing the use of arbitration in certain real estate contracts.
? Require local governments to certify that contractors are licensed by the contractors' state licensing board before issuing a local business license or building permit.
? Reduce statutes of limitation, as well as limitations on damages for construction defect actions.
? Allow warranty programs with alternative dispute mechanisms.
The Alliance said its biggest push is for warranty programs with alternative dispute mechanisms because that "appears to be the most feasible solution from a political perspective."
However, the group said it was cautious with this concept "because in some cases arbitration has been mandated and hearings held without the insurer even being present."
"The insurance industry will undoubtedly be under attack this year, and that speaks to the need for an aggressive and proactive joint-industries effort in fighting for the best solutions to the problem of construction defects," said Mr. Lawson.
The Alliance said the litigation trend has forced companies to reduce the number of commercial general liability policies for residential building contractors, and some commercial building contractors across the country have decided to discontinue coverage for subcontractors who are involved in new construction of multi-family housing projects in selected states.
"Where contractors can secure general liability coverage, the cost of that coverage has been rising so sharply that many developers have either stopped building in certain areas of the country or have gone out of business," the Alliance reported.
Claims, the Alliance said, can range from allegations of faulty exterior construction, to buckling support beams, to inadequate roof supports, or buildings that fail to meet local code requirements.
The organization reported that the leading state in construction defect litigation has been in California, which may be linked to the extremely high price of housing there.
According to the Alliance, there is little case law, and courts have been struggling with issues including whether "construction defect" falls within CGL insurance policies, what constitutes property damage, and what is the trigger of coverage that activates the right of an insured to receive coverage under an insurance policy.
The Alliance noted testimony before a California legislative committee late last year that liability coverage for builders has become difficult to obtain, and that premiums in some cases have risen 30 to 100 percent or more over the previous year.
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