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Construction-defect suits haunt home builders

In the late 1990’s and early 2000’s, California, like many other states, enacted a number of laws intended to provide homeowners with the legal right to recover damages for construction defects in new houses. One of the unanticipated consequences of the new law is its effect on home builders after the collapse of the housing market in 2008. Construction defect litigation is now haunting some home builders with the prospect of bankruptcy.

The law sets a number of specific standards for new construction. The builder’s failure to satisfy one or more of the standards allows the homeowner to recover damages.

Builders are struggling with the question of whether to repair the alleged defects or battle the homeowner in court. A related question is how much construction defect insurance is necessary to protect the firm against such claims. One firm in Clovis recently filed for dissolution under Chapter 7 of the federal bankruptcy law, and the builder’s struggles appear to typify the experiences of other builders.

The firm built about 900 homes in the San Joaquin Valley between 1996 and 2008. Its troubles began with a 240-home subdivision in Reedley. The firm’s president admitted that the number of homes in the development “had some issues.”

He estimates that the company spent “close to half a million dollars” trying to repair defects or settle claims in court. These expenditures, in combination with a large deductible insurance policy (which the firm was forced to cover from its own funds), drove the firm into bankruptcy.

The president blamed predatory purchasers and their attorneys. But, he admitted that the company’s insurance policy had too high of a deductible, and the problem was largely “an insurance issue.”

A residential home builder who is facing a number of construction defect complaints may wish to consult an attorney who specializes in construction law before the claims become lawsuits. A knowledgeable lawyer can provide guidance on a builder’s exposure to such claims, the amount of insurance to purchase, the size of the deductible amount and many related issues.

Source: Ca.gov, “§§896-897,” accessed on April 11, 2016