Builders seek shelter from flurry of lawsuits

Oregon contractors faced with increased litigation seek relief at the Capitol, where homeowners lack comparable political clout

Monday, June 20, 2005
The Oregonian
By Jeff Manning

Oregon builders are asking the Legislature to protect them from a force they say is crippling their business: customers who sue.

The cost of insurance required of all contractors has skyrocketed in recent years as hundreds of homeowners turned to courts demanding costly repairs for water damage. Some won or settled for hundreds of thousands of dollars. Insurers have paid out at least $35 million for repairs at new condominiums in Oregon.

Experienced builders acknowledge that modern homes are more vulnerable to moisture because of troublesome materials, shoddy construction and designs that trap water. But they say the system favors homeowners and the trial lawyers who bring their cases.

The builders want to shorten the time period in which home buyers can sue for construction defects and force homeowners into a state-run dispute process. They already have scored one win: a bill signed into law this month that could hold subsequent buyers of homes to terms of a builder's warranty with the original buyer.

Lawyers argue that any curb on the right of homeowners to sue or recover damages is anti-consumer.

Builders have one of the most powerful and deep-pocketed political lobbies in the state, but they are squaring off against an equally well-heeled opponent in the trial lawyers. Between them, the two groups have showered more than $1.2 million on legislative campaigns in the past four elections.

"We desperately need some help here," Jon Chandler, the lobbyist for the Oregon Home Builders Association, told a Senate committee this spring. "The impact of this crisis on our industry has been dire. This is not only an important part of Oregon's economy, it is an important part of Oregon communities."

The builders' effort is part of a national push to pass "right to repair" laws giving them more control over resolving construction defect claims. Variations have already passed in Oregon and 25 other states, but builders in the state say they want to put some teeth into a law that hasn't slowed the cascade of litigation.

After passing the Republican-led House, two of the industry bills are stuck in the Senate, where Democrats - the recipient of more than 80 percent of the trial lawyers' donations - have a majority. They have a powerful advocate in Senate Majority Leader Kate Brown, D-Portland, who opposes shortening the time frame for suits.

"Why would we pass a bill that puts homeowners at risk?" Brown asked. "The bill says after a certain period of time, the contractor is not going to be held responsible. I think that leaves the homeowners holding the bag."

There is no advocacy group representing homeowners at the Capitol, a fact that shaped the debate during committee hearings this spring. While contractor hard-luck stories were common, questions about building longevity, construction quality and factors that might be contributing to defective homes got little attention.

As the debate in Oregon plays out, Washington Gov. Christine Gregoire last month signed compromise legislation that applies only to multifamily housing. Under the new law, owners who reject an arbitrated settlement in favor of a lawsuit are liable for a builder's legal fees should they win a lesser damage award in court.

Insurance crisis

The insurance woes making the industry so nervous are national in scope.

Zurich North America, one of the largest insurance companies in the nation, stunned the construction industry in June 2002 when it pulled the plug on its liability coverage for smaller residential contractors. Zurich walked away from 25,000 contractor customers nationwide because the financial risk had grown too great.

"The ways homes are being constructed and the materials that are being used gave rise to more incidences of construction defects," said Zurich spokesman Keith Owens. "Plus, we live in a very litigious society."

Other insurers have followed Zurich's lead.

Mutual of Enumclaw left the construction liability business entirely, abandoning 8,000 customers in Oregon, Washington and Idaho. Three other carriers - Maryland Casualty, Northern Insurance Co. of New York and the Assurance Co. of America - insured 1,500 fewer Oregon contractors this year compared with 2004, state Insurance Division officials said.

The Oregon Construction Contractors Board, which requires proof of liability insurance to get a license, declared an emergency in May 2004, stating that the insurance crisis had reached an acute stage.

Construction liability rates had jumped an average 165 percent in the prior 12 months, the board reported. But the rate increases haven't made a dent in the number of licensed contractors, which has held at about 40,000.

As with any insurance, claims experience drives the rates. When a builder is sued by a dissatisfied customer, the liability insurance carrier typically shoulders both the settlement and defense costs.

Dean Aldrich, a Portland lawyer whose firm has handled more than 250 homeowner complaints against builders, testified this spring that his clients have collected $39 million in settlement money since 1998. Of that, 99.6 percent was provided by insurance companies, he said.

Quantifying the industry's total payouts is difficult, in part because insurance companies carefully guard the information. But even in Oregon's relatively tiny market the numbers are large.

In a 2004 survey by the Oregon Insurance Division, the state's major carriers estimated they would pay out between $81 million and $191 million for construction defects on policies in place from 2001 to 2003.

That is a dramatic spike from historic levels, officials said, but it is impossible to obtain more precise numbers because builders, and therefore insurers, remain liable for 10 years after a project's completion under Oregon law.

The number would have been considerably higher had state regulators surveyed all insurance companies doing business in Oregon. "Surplus" carriers, which cover many of the higher-risk builders, were not polled.

Multitiered lawsuits

The rate increases are driven in part by the inefficient nature of litigation.

Builders who are sued for construction defects also typically file third-party complaints against all or most of the subcontractors who worked on the building, getting more lawyers involved. The builders' and subcontractors' liability insurance carriers then take charge, bringing in their own phalanx of attorneys.

In California, lawyer fees and other legal costs have surpassed settlement costs by a 4-to-1 ratio, said Mike Strich, risk management and insurance director for the California Building Industry Association.

Local developers say they are getting socked.

Prominent Portland developer John Carroll fondly recalls paying $40,000 to insure his Chown Pella condos in the Pearl District eight years ago. The combined liability and workers' compensation insurance bill for his current, and considerably larger, project - the Eliot Tower at Southwest 10th Avenue and Jefferson Street in downtown Portland - exceeded $1.8 million.

Mike Purcell, head of Gray Purcell, a Tigard contractor, said the firm's liability insurance jumped 60 percent in price during the past two years for significantly less coverage. The annual deductible increased from $5,000 to $100,000. Also, during the last four years, Gray Purcell's insurer has "excluded" from coverage any claims that involve mold or synthetic stucco. More recently, they excluded any residential project - period.

That means Gray Purcell is locked out of the residential construction business unless it buys expensive project-specific insurance. For a $2.5 million mixed-use office-residential project the firm is contemplating, the insurance could cost as much as $330,000, Purcell said.

Gray Purcell and Carroll have undertaken ambitious training and quality-assurance programs to avoid future problems. But it's hard not to become discouraged, Purcell said.

"Why would anyone want to be a contractor?" he asked. "One claim can put you out of business."

Push for changes

Feeling under siege, builders in Oregon and across the nation are turning to state legislatures.

Among the more than 10 bills lawmakers introduced in Salem was Senate Bill 514, which is intended to end the liability insurance shortage by simply rescinding the 1971 law requiring contractors be insured.

With insurers narrowing their coverage, liability policies no longer afford the consumer protection that was the impetus behind the insurance requirement, said Sen. Jason Atkinson, R-Jacksonville, the bill's sponsor.

Atkinson's insurance bill appears to be bound for oblivion, largely out of fears that it would make a bad situation worse for homeowners. But his rhetoric typifies the industry's posture in Salem.

"Businesses are being lost, small towns are being damaged," Atkinson told a Senate panel while testifying on behalf of this bill. "We're wiping out a whole section of our economy."

The Home Builders Association had better luck with Senate Bill 574, signed into law by Gov. Ted Kulongoski on June 7. The law says builders may record an original sales warranty with the county when a house is sold. If so, the original warranty "benefit(s) and burden(s) subsequent owners of the structure," the law says.

Builders play down the impact, saying the law simply allows subsequent owners to learn the identity of the builder. The new owners then would be more likely to contact the builder rather than a lawyer if construction defects surface, said Scott Barrie, lobbyist for the Home Builders.

Aldrich and other lawyers said, however, that the new law could hinder the rights of subsequent owners to sue depending on the wording of the original warranty. "The bill reads innocuous enough," Aldrich said. "But it could kill a claim by a subsequent owner."

Builders have also pinned their hopes on two other bills that passed the House in May.

House Bill 3158 would shorten the time in which homeowners can file a claim to six years after a home's completion. House Bill 2525 would require that homeowners alleging construction problems go through a mediated claims process at the Oregon Construction Contractors Board before they could sue.

Another measure, Senate Bill 1070, would create a Construction Contractor Risk Management Council charged with making sure contractors have coverage. Contractors would provide the cash, making payments into a new liability fund and home warranty fund. Claims filed against builders would be exempt from public disclosure.

Consumers now can ask the contractors' board to investigate construction defects, but they must file within one year of purchase or substantial completion of a home.

Builders say the 10-year window for liability lawsuits poses an undue financial burden for them.

"I do believe that people should be held accountable," Steve Malaney, president of P&C Construction of Gresham, told a House committee in April. "But after six years, it really becomes a maintenance issue."

Opponents of the bill say that's not always the case.

Northwest Portland resident Marty Cronin didn't learn until nine years after he bought his 6,000-square-foot home that it was suffering extensive dry rot behind the stucco siding. He sued his builder and settled for most of the $500,000 repair bill, he said. But Cronin figures he's still out more than $100,000 in various expenses.

If the liability window were six years instead of 10, Cronin would have been unable to sue. He predicts that other homeowners will find themselves in that position if HB 3158 becomes law. "I think they could be leaving a lot of people exposed who don't know they have a problem," Cronin said.

Thirty-one states and the District of Columbia give homeowners 10 years or longer to sue. Of the remaining 19 states, half a dozen have a six-year limit.

The Oregon Trial Lawyers Association is fighting both House bills. In May, Kristen Leonard, the group's lobbyist, arranged for Sean Ghores, a Portland repair contractor and Lee Street, a Portland attorney who represents homeowners, to meet with several key legislators. Ghores, whose firm has repaired nearly 500 moisture-damaged homes since 1998, came equipped with photos of houses riddled with rot and mold.

Associated General Contractors, another potent lobbying group representing larger commercial builders, badly wants the six-year limit on lawsuits. Trying to win over the trial lawyers, AGC offered to exempt single-family homes. But the Home Builders Association, most of whose members build single-family homes, balked.

Power struggle

Political prestige is at stake in the fight as well.

The home builders' political action committee has given more than $559,000 to legislative candidates and leadership committees since 1997, with 87 cents of each dollar going to Republicans. The trial lawyers' committee contributed $684,000 during the same period, with 84 percent going to Democrats.

Neither of the bills that passed the Republican-controlled House in May has had a hearing in the Democratic Senate. Barrie, the Home Builders' lobbyist, said the bills would squeeze out "frivolous" lawsuits.

Contractors "are an emerging target in Oregon," Barrie said, and lawyers are cashing in. "We wouldn't be fighting this if it was simply a matter of repairing a problem. We've got attorneys putting on symposia called 'mold is gold.' This is how attorneys make money off this situation."

Lawyers counter that the industry is simply trying to shift the spotlight away from its poor performance record. Jim McDermott is a Portland attorney who has helped secure more than $20 million dollars in settlements for condo owners since 2001.

Said McDermott: "This is an unjustified attempt to ratchet down recoveries for homeowners who have done nothing wrong."