THE NAHB'S METHODICAL, STATE-by-state approach to solving the general liability insurance crisis by passing notice and opportunity to repair (NOR) laws nationwide is starting to make headway.
As of June, a full 26 states had NOR laws on the books, and an NOR bill was waiting to be signed by the governor of Missouri. At least 12 other states are actively pursuing NOR bills this year.
The NAHB put some real teeth into this effort: It pumped in $12 million over three years to enact and defend NOR laws across the country. Much of the money went to devise model legislation that was endorsed by the American Legislative Exchange Council in late 2003. The goal of the NOR laws is to curb annual double-digit jumps in general liability insurance premiums caused by excessive lawsuits and to offer an alternative method of solving a construction defect case other than going to court.
Time frames vary by state, but NOR laws require homeowners to notify builders of a construction defect before filing a lawsuit. The process gives builders the opportunity to inspect the defect and offer to repair the problem or settle the claim with a cash payment (see “The NOR Process,” page 54).
“What NOR says is to get in the house, figure out the problem, and fix it,” says Clayton Traylor, the NAHB's senior staff vice president for state and local political operations.
Traylor, who has been managing the NAHB's effort nationally, says that in a recent study, the NAHB found that in litigation-intensive states such as Arizona, California, and Nevada, general liability insurance fees tack on $15,000 to the cost of a house.
High general liability costs just about shut down the condo industry in California a few years ago, which is why the California Building Industry Association (BIA) was able to form a broad coalition of real estate, general business, and affordable-housing groups to get its NOR law passed in 2002. The California law, SB 800, went into effect Jan. 1, 2003.
“It's a much bigger hit when you pass $15,000 on to the cost of a $160,000 house,” says Traylor. “Frankly, the litigation on these matters is very focused on the condo/townhouse market, where trial lawyers can roll up large numbers of plaintiffs.”
BREWING CRISIS Keep in mind that the general liability insurance crisis had been brewing for 20 years. The issue came to a head in 2003 following the major losses insurance companies took after the Sept. 11 attacks; the investment income loss the industry experienced due to the stock market decline when the Internet bubble popped; and the culmination of more than two decades of million-dollar jury awards in construction defect cases.
“By 2002, the insurance carriers said, ‘I'm done, I can't make any money in this niche business,' ” says Mike Stretch, director of risk management and insurance for the California BIA, who adds that insurance rates are finally starting to stabilize this year in California.