The legal profession wants to form a symbiotic relationship with your business. You provide the exposed flesh. They'll provide the butchers.
By Matthew Power
Sloppy record keeping. Fast-paced production. Stilted communication with poorly trained laborers. To a growing pack of consumer attorneys, the home building industry looks like a fatted, clumsy calf that has wandered away from the herd.
"They think this is fresh meat," notes Mary DiCrescenzo, senior staff vice president for legal affairs at the NAHB. "They assume that there are deep pockets to be had--and that's not the case at all. Very often, the case is brought simply to get a settlement. If you're looking at $20,000 in legal fees, and you can settle for $10,000--even if you're right--you may take it."
Times have changed. Your subcontractors speak their own language--literally--causing miscommunication, and mistakes, on the jobsite. Product technology can blow up in your face. And a new generation of smarter, more aggressive attorneys keeps watching and circling.
Even a good insurance policy may not fully protect you from a determined legal attack--although it certainly helps. But that's a story unto itself--one we'll cover in more detail early next year.
For this story, we asked legal experts from coast to coast to cut to the heart of the litigation threatening your business--and identify areas of greatest vulnerability. To our surprise, regional differences proved less influential than national trends. Lawyers across the country, it seems, have their eye on the same weak links in the home building process. And they're coming to a courtroom near you.
Dealing in defects
Sheila Adkins at the Council of Better Business Bureaus, in Arlington, Va., says that complaints about home construction companies rose from about 3,980 in 1990 to more than 5,000 in 1998 and leveled out at 4,071 in the year 2000.
That's one of the highest levels of complaints for any industry, on a par with Internet service providers and credit card companies. Why the continued bad rap?
"What really stimulates defect litigation in 60 percent to 80 percent of cases is a failure of the building envelope," notes Paul Joelson, of Joelson Vail Associates, an architectural consulting firm in San Diego. "The resultant damage is often highly visible, and triggers the sympathy factor and the obligation of the insurance companies." Translation: Sympathetic jurors insist that homeowner insurance firms pay for what are seen as latent defects.
That obligation typically can be traced back to damage caused by moisture. Phil Andrews, a construction defect attorney with Kramon & Graham in Baltimore, says that once water has been detected in living areas, other complaints tend to snowball. "Our last couple of cases tended to have complaints about all aspects of the building, but especially exterior finishing and the improper installation of the board behind it. They're seeing stains inside. Everything has to do with water."
Andrews adds that the recent economic prosperity has encouraged lawsuits. "More building means more litigation," he says, "and there's much more access to and sharing of information out there."
In the past two years, for example, the mainstream media have gone after several big builders. Exposés on U.S. Home (The St. Petersburg Times), Pulte ("Dateline NBC"), and Toll Brothers (The Boston Globe) have made "shoddy construction" a widely recognized phrase. Search the Internet using it, and you'll find contact information for a half-dozen well-educated, sophisticated consumer advocates, including Nancy Seats, president of Homeowners Against Deficient Dwellings (HADD).
"The power of the local, state, and national builder associations is formidable," says Seats, "but thanks to the Internet, homeowners in the thousands are finding each other and forming coalitions to work together to force change."
In lockstep with homeowner sites on the Internet have come plaintiff attorneys, with their own marketing departments and savvy online presence. Sites such as hoalawyers.com, and constructiondefect .com offer a sympathetic ear to homeowners with a complaint.
"California has generally set the tone," notes Paul Joelson. "All the players seem to come from here."
Bottom feeders
Joelson, who wrote a thesis on defect litigation, notes that in most cases, defect litigation succeeds because each allegation contains at least some grain of truth. And builders get caught unprepared.
"A lot of the big developers in Vegas, for example, are out of Miami," he says. "They're taken completely by surprise by the legal environment. There are lions and tigers out here. These plaintiff law firms actually look for public records of notice of completion on a project. Then they go to the homeowners association for the new project and ask a bunch of questions: 'Have you had any problems? Does your ceiling leak?'"
Certain types of construction--notably condominiums and townhouses--tend to attract a larger portion of the negative flack. They're the engine that fuels other parts of the residential litigation business.
"Condos are an easy thing for builders to get into," Joelson says, "and they encourage a bottom-line attitude."
Andrews punctuates Joelson's comments about multifamily builders. He says that most of his residential cases have defended condo or townhouse builders who do 50 or more units annually.
"When people live together, if one neighbor notices a leak, she shares that information," Andrews notes. "More knowledge," he says, "combined with the sustained building boom, equals more litigation."
Defect lawsuits pay handsomely, says Joelson, but don't expect to find a lot of hard data on what you can expect to shell out--because so many cases settle out of court. "The attorneys are secretive," he says. "You can surmise from the judgements that are published that the payback is $20,000 to $30,000 per unit on a condo litigation. Thirty percent to 40 percent of that goes to the attorney. And that doesn't include the costs spent on the defense."
Labor pains
It's no secret that many builders have come to rely heavily on immigrant labor, primarily Hispanic workers. Without them, it's doubtful that many of the large builders could continue to pursue their endless growth imperatives.
But several of the experts we spoke with noted the contribution that language barriers have made to problems with construction quality. Builders, they suggest, simply don't have the bilingual supervision in place to ensure both quality construction and a safe working environment.
"When you have product failures, most of them are a result of the nature of the workforce and the supervisory capacity," notes Jim Bland, CEO of Hometest.com, an environmental training and consulting firm. "We've done a good job developing high-tech siding, sheathing, housewrap, but they have to be put together correctly. What we end up with is one crew doing sheathing, another does windows, a third does the flashing, but the crews are not coordinating their efforts. ?You may have three crews working on a jobsite, and none speak the same language."
Joelson asserts that building industry labor statistics reveal the roots of much litigation. "I ordered a report on labor from the NAHB," he says. "It went into the transient nature of the industry, the lack of loyalty in subs, very little ongoing training of workers. Many of our workers can't read blueprints or installation instructions. And they have absolutely no clue about code standards."
On the other hand, notes Andrews, dicey questions about the labor force rarely make a difference in the courtroom. By then, it's too late. "It's not a defense," he says. "It may be an excuse, but an excuse is not a defense."
No safety in numbers
As insurers are battered with more legal decisions, they have begun to adjust both the premiums builders pay and the amount of coverage they offer.
Certain types of defects--most notably "latent" defects--may get no coverage at all. Huge settlements in cases involving mold (see "Mold: A Creeping Threat?" sidebar), along with class action suits directed at exterior insulation and finish systems (EIFS) have made insurers extremely wary about any problem related to water. That nervousness could show up in your insurance policy's fine print.
"Deductibles are higher, and there's something called self-insured retention," says Joelson. "That means that you handle the first million dollars of costs in any lawsuit."
Bland adds that small builders and big builders face the same level of risk from litigation. Neither group is protected. "What you tend to see are economies of scale," he says. "The guy who's building three houses can easily go under. But the big builder typically has problems across the board in his product."
Back to the wall
Nobody has an easy fix for the mushrooming problem of litigious clients, but you can't miss the rising premiums on your insurance policies.
As a first step in protecting yourself, says DiCrescenzo, take a good, hard look at your current contracts.
"Those form contracts drawn by the AIA look nice and neat and pretty," says DiCrescenzo, "but they're made to protect the architect, not you. Spend the time to make up your own contracts--ones that apply to your company."
Andrews advises putting binding arbitration clauses into contracts with buyers-- but be prepared--home buyers often react with extreme hostility to such clauses. They see binding arbitration, which limits their legal options in the case of a complaint, as an attempt by the builder to dodge future responsibility for problems.
"Binding arbitration!" scoffs Seats. "I will rent an apartment before I will ever sign a contract that includes binding arbitration!"
"If they won't sign a binding clause, at least try to include some kind of non-binding mediation agreement in the contract," urges Andrews. "At least that way you can talk things over before you end up in court."
"Shea Homes has instituted a wraparound insurance policy," notes Joelson. "It covers all the subs, but the premium is deducted from the sub's contract. That's a singular defense that's been quite effective."
Other advice is stuff you've heard before: Improve communication; institute better quality control measures; train your subs. Same old advice but with a new urgency.
Or, if you like living dangerously, you might find some solace in what DiCrescenzo says: "To my mind, litigation comes in waves. It's cyclical. We happen to be at a high point in the cycle."
