HIGH PRODUCTION CEOS ARE WATCHING the rising cost of construction-defect litigation with growing concern. Litigation—even the risk of potential litigation—pushes up the cost of housing. These costs are typically built into the price of a new home, and that means consumers are seeing a significant increase in home prices as a result of what many see as a litigation crisis.
In 2004, home builder liability costs increased the average price of a new home by $2,700. In some more litigation-prone states, liability costs pushed up the price of a new home by as much as $15,000 a unit.
The extent of the litigation problem raises some seemingly obvious questions: Is contentious litigation the only way to resolve construction defect disputes? Where does all the money go? Is there a better way?
The NAHB asked these questions of NERA, an economics consulting firm. NERA research yielded interesting answers and some encouraging news.
Though anecdotal evidence had suggested that these laws are working for both home builders and home buyers, no research had previously been done to demonstrate the effectiveness of these laws in the real world.
The new research from NERA demonstrates that the NOR process is working. Where enacted, NOR laws have reduced litigation and resolved cases more quickly. Perhaps most important, these laws have made the process more accessible for consumers, making it easier for them to get their complaints resolved without involving a lawyer and going through costly, stressful, and time-consuming litigation.
NERA used data collected in Colorado to assess the early impact of that state's NOR law, which was implemented April 27, 2003. The researchers found that prior to enactment of the NOR statute, the three most active construction-defect law firms in Colorado collectively filed, on average, six cases a month. And in the month before the law went into effect, there was a rush to file lawsuits. But after the effective date, homeowners were required to give builders the opportunity to repair the alleged defects before pursuing litigation. The average monthly number of suits filed by these same law firms dropped by 60 percent to about two and a half cases a month.
Under Colorado's NOR law, 20 percent more homeowners filed notices than had filed lawsuits the previous year, and almost two-thirds were resolved without cash awards. About half of the defect claims were resolved within six months. Further research found that when homeowners do receive settlements, the money is often not used to repair the alleged defect.
The research also confirms that legislative reforms have measurable benefits that include more efficient resolution of disputes, better containment of liability costs, and increased availability of affordable housing.