Builders, Defect Exposures Go East

Homebuilders in California, who became frequent targets of construction defect lawsuits a decade ago, have seen the litigation pendulum swing back in their favor more recently, an insurance market expert says.

But as these same builders eye construction projects in the Southeast, and even in the Midwest, the past could repeat itself in these new locations, according to Robert Gore, director of insurance operations for Aon Construction Services Group in Irvine, Calif.

“We see our clients moving into these areas–exploring land purchases and joint ventures,” Mr. Gore said, referring to large homebuilders and developers who are opening satellite offices, relocating members of land acquisition staffs and hiring people who previously worked for real estate firms throughout the South, especially.

Particularly in Florida, there's been more speculative buying by home buyers, he added, explaining that these investors are not people who necessarily live in the state.

“We're becoming more homogeneous as a nation,” he said, dismissing the once common notion that underwriters should price policies differently for rural and urban areas, or that litigation trends should reflect cultural and regional values. “The idea that people in Iowa, Louisiana [are] salt-of-the-earth people who don't file lawsuits is wrong. They do.”

Helping them file lawsuits now are California, Nevada and Arizona lawyers specializing in construction defect litigation, who have “so saturated the market here [in the West] that they're looking for more fertile ground,” he said, noting that some have opened offices in Florida.

California, he believes, has become a less fruitful climate. In the last 12 years, building codes have strengthened, he noted, adding that courts have come to realize the damage that defect suits did to the state's economy.

Right-to-repair laws (giving builders and contractors an opportunity to repair defects before suits are filed) and the proliferation of wrap-ups have also made suing California builders “a more difficult and less profitable proposition,” he said.

As for construction liability insurance market conditions, Mr. Gore said it has been relatively easy even for subcontractors to get insurance in the South and Midwest.

“There were a lot of small regional insurance carriers that would offer it,” he said, but historically–in states like Florida and Texas–a lot of subcontractors did not buy the insurance, adding that builders traditionally haven't asked for additional insurance endorsements. “They were just not used to getting them,” he said.

“It's a different environment,” he said, noting that these will benefit from the advice of insurance experts who have lived through the problems on the West Coast.

Aon Vice President Bill Marutsos, who specializes in the residential market, and Vice President Danette Jones, who specializes in commercial, discussed another trend causing them to team up on coverage placements and risk management services–an increased number of mixed-use projects.

Mr. Marutsos said a typical mixed-use project–one with both a residential and commercial component–could be a high-rise apartment tower that has a first floor consisting of retail shops, or a two-story project with commercial space. Developers, he said, are concentrating on urban areas, or areas near train stations, because people want shorter commutes to work and relief from spending hours in traffic.

Ms. Jones reported that the trend is not just evident in Chicago, Los Angeles and New York, but also in south Florida and Lexington, Ky., where she recently worked on a project.

With these mixed-use projects comes the potential for construction defect litigation because of the residential component, the two experts said.

With the need for the risk management and wrap-up administration expertise that Aon's 36-member construction team has built on the West Coast spreading across the country, Mr. Gore announced that Aon recently bolstered its expertise with the acquisition of a similar firm–DBH Resources. DBH not only has a presence in places like Florida, New York and Texas, but also has catered to smaller middle-market clients than Aon has in the past.

DBH Resources will continue to offer its risk management consulting and wrap-up administration services to clients using brokers other than Aon, he said.