Building defects spoil homeowners' dreams

Sunday, June 19, 2005
The Oregonian
By Jeff Manning

From Portland to Seattle to Vancouver, B.C., homes and condominiums are falling victim to a commonplace enemy long thought to be vanquished -- the humble raindrop.

Over the past decade, the combined effects of new building techniques, trouble-prone materials and shoddy construction have made modern homes vulnerable to moisture damage. Simply put, rot and mold are eating away at the structural components inside a small but growing number of today's homes and condos.

The result is an ugly -- and costly -- affront to the American Dream.

In Portland's West Hills, million-dollar units at Vista House Condominiums sit shrouded in tarps for more than a year while residents settle for $5.5 million in repairs. In Lake Oswego, a couple sues for $898,000 to fix a leaky roof, walls and windows of their $1.8 million dream house. In Depoe Bay, owners of a TrendWest time share demand $12 million for damages so extensive their lawyer says the complex needs to be rebuilt.

The problem is most evident in the Pacific Northwest and British Columbia, one of the rainiest corners of North America. But experts say that almost every region with humidity and precipitation has been affected, including the Rockies, Southeast and Midwest.

Already, thousands of homeowners nationwide have sued or turned to builders and insurers for repair costs, a daunting process that takes a financial and emotional toll.

"For the last year and a half, when I wake up and it's raining, I don't go back to sleep," said Brian Leitgeb, whose $600,000 Forest Heights home suffered extensive moisture damage. "I literally think about my house rotting every time that happens.

"My doctor says I must have some sort of sleeping disorder. No -- I just have a crappy house."

Leitgeb was one of the lucky ones. After nine months of negotiation, his builder's insurance company covered the $100,000 repair bill. Many homeowners, even those who have launched expensive legal fights, get reimbursed for only 50 percent to 70 percent of their repair costs. The rest comes out of pocket.

Mold and trouble-prone building products have been on the building industry's radar episodically since the early 1990s. But an investigation by The Oregonian, based on extensive interviews with contractors, homeowners and engineers and drawing from confidential legal settlements, found that damage claims are exploding in step with the housing boom. The underlying causes are hotly disputed and little understood by homeowners.

Builders and engineers say the surge can be traced to good intentions. Building codes adopted in the 1970s and strengthened through the '80s and early '90s, required greater energy efficiency. Paradoxically, the demise of the drafty house had an unintended consequence: When moisture penetrates today's walls, they tend to stay wet.

"We used to build buildings like those great boxers from the 1950s who could really take a punch," said engineer Joe Lstiburek, a nationally known expert on construction problems. "Now we're building buildings with glass jaws."

Some dispute that argument. The National Association of Home Builders says money-hungry lawyers are primarily to blame for rising litigation over construction defects. But the theory that design, materials and construction practices all contribute to the problem increasingly is embraced by housing professionals as well as grass-roots builders, some of whom are adopting new preventive techniques.

The fortunes of many are at stake. During the past decade, more than 16 million new homes or condos have been built in the United States, including 2 million last year. Home building is one of the nation's biggest industries, generating about 14 percent of the nation's gross national product, according to the NAHB. And today, buyers are paying more money than ever for what, in most cases, will be their single largest investment.

A fierce battle is shaping up over who will pay for the damage.

In Oregon, Washington, California, Nevada, Colorado and Illinois, courthouses are crammed with lawsuits against builders, a trend that has staggered the construction industry while adding thousands of dollars to home prices as insurers increase rates for builder liability policies, or refuse to cover some types of damage.

At least five insurance companies have pulled out of the contractor liability business in Oregon, saying defects and big payouts make it too risky. The builders, for their part, are pressing legislatures here and in other states for laws restricting the right of homeowners to sue for repairs.

Though difficult to quantify, the extent of the damage is clearly enormous, according to more than 100 interviews with homeowners, contractors, developers, engineers, lawyers and industry experts.

One measure of the financial impact comes from insurance companies, which told Oregon regulators in a survey that they could pay out more than $125 million for construction defects on liability policies in place during 2001-03 alone. Regulators said insurers portrayed the figure as a dramatic increase from prior years.

Drawing on dozens of lawsuits and sealed settlements, The Oregonian confirmed that three Portland law firms alone have helped homeowners in Oregon and Southwest Washington win $70 million since 2001.

Nationally, construction defect losses run into the billions. Ron Kozlowski, a principal in the consulting and actuarial firm Towers Perrin in San Francisco, said the construction defect losses and loss reserves from 20 insurance companies he has studied stands at about $10 billion since 1995.

That is just a sliver of the entire industry. "The actual total is way beyond that," Kozlowski said.

Repair costs for moisture-related defects in British Columbia, where the housing boom preceded Oregon's, have exceeded $1 billion, according to the province's Homeowner Protection Office.

Hidden defects

To homeowners, one of the most frustrating aspects of dealing with construction defects is the lack of regulatory protection.

State building code officials and city and county inspectors interviewed knew little about the scale of the problems. The Oregon Construction Contractors Board, which licenses the state's more than 40,000 contractors and whose mission is to stand up for consumers, has spent months trying to alleviate the insurance gap facing contractors. But it has not focused on the construction failures that are driving big claims settlements.

Craig Smith, administrator of the contractors board, said it's unclear who's at fault. "Is it really defective product?" he asked. "Or is it really the current state of affairs in the tort area of law?"

Bob Walsh, one of Portland's most respected builders, no longer needs any convincing.

Stadium Station, an apartment project Walsh's namesake construction firm completed in 2000, showed him that something is going profoundly wrong with newly constructed buildings.

Other than a few cracks in its stucco siding, the building, adjacent to PGE Park in Portland, seemed to go up without a hitch.

Barely two years later, an inspector troubled by the cracks suggested the company take a closer look. As crews dug into the building's south wall, they found rot and mold extending 24 inches into the interior floors. "You could put your foot through the flooring," Walsh said. "We were worried about a collapse."

The repairs took eight months and cost $3 million, half the building's original cost. Walsh's company paid $2 million of the repair costs out of pocket.

Stadium Station's problems are typical of the kind of moisture-related defects that increasingly are turning up in condominiums and detached single-family homes around the region.

The typical Northwest residence of prior decades was relatively insensitive to water intrusion. Water inevitably found its way into wall cavities of these homes, perhaps through a crack in the siding or a leaky or poorly installed window.

But there was generally sufficient space within the wall for the water to drain and enough airflow through the wall to dry it out.

Tighter residential energy standards, which increased a number of times between 1973 and 1993, changed things. To meet them, contractors stuffed wall cavities with more insulation.

"Those drafty old walls from the 1940s and '50s were wonderful in keeping moisture problems to a minimum," said Paul Lukes, a Seattle building consultant. "New walls don't leak more. Many of them leak much less. But these new walls don't have the ability to dissipate the water."

The so-called "heat drive" through the wall cavity that helped dry out older homes has been eroded by insulation and other barriers, said David Ricketts of RDH Building Engineering in Vancouver, B.C., where the problem has been extensively studied.

The potential for trouble increased during the 1990s with the emergence of new building materials.

Many builders shifted from plywood to a cheaper alternative called oriented strand board, or OSB.

OSB sheathing, made of wood chips compressed and glued together into a panel, is a cousin to the mushroom-sprouting Inner-Seal siding from Louisiana-Pacific that cost homeowners millions of dollars in the mid-1990s. Some major builders now refuse to use OSB, considering it less resistant than plywood to moisture problems such as swelling and mold.

In the same decade, Northwest builders in considerable numbers began siding homes with a synthetic stucco generically known as Exterior Insulation and Finish Systems, or EIFS. The EIFS siding comes with its own polystyrene backing that insulates a house much as a foam cup keeps coffee hot. But the insulation also tended to trap any water that seeped behind it, causing decay within the wall cavity.

Oregon's protracted building boom adds still another ingredient to the recipe.

The state's red-hot housing market has strained contractors' ability to adequately supervise jobs. It also depleted the pool of qualified labor, leading to inevitable lapses in quality. The same thing happened in British Columbia, where a government inquiry determined shoddy work was as much to blame as new materials.

The quality problems are national. In a survey of U.S. home inspectors in 2003, Criterium Engineering, a Portland, Maine, engineering and inspection firm, found that 15 percent of new homes contain at least two significant construction defects. The survey blamed a lack of skilled labor as well as new materials.

Walsh, one of the state's most prominent builders, said it's pointless and counterproductive for his industry to deny that buildings are suffering problems or to blame those problems on homeowners or their attorneys. With the help of Ricketts' engineering firm, Walsh's company is adopting new practices to avoid future moisture problems.

"Stadium Station is the poster child for these issues," Walsh said. "There were no angry homeowners or attorneys here. The building just failed. . . . We have an industry crisis."

Synthetic stucco

There are angry homeowners elsewhere, however, and many have attorneys.

Betsy Lee sits in the sunny dining room of her handsome Mediterranean-style home in Gresham. In the distance, Mount St. Helens pokes through the clouds.

In contrast to the bucolic setting, Lee is tearful and desperate. She is facing $100,000 to $200,000 in repair costs for the home she bought in 2001 for $429,000. Recently divorced, she can't afford the repairs and can't sell the house because of its problems.

Lee hired a lawyer to explore a possible case against her builder.

"To me, it's a crime," she said. "I feel like I've been raped. I'm financially being drained of everything I have to fight this."

Among Lee's largest and most expensive problems: Her EIFS siding has failed and needs replacing.

EIFS figures in a significant number of the defect lawsuits in the Portland area. Michael Scott, a Tigard lawyer who worked as an independent mediator in about 300 cases, said EIFS was a factor in about two-thirds of them.

The condos at Prescott House in Northwest Portland have an EIFS problem; owners have sued for $1.7 million in repairs. Residents of the Vista House condo project in Portland's West Hills endured more than a year under tarps and scaffolding while repair crews removed the failed EIFS siding, part of a repair job that cost at least $5.5 million.

Then there is Sam Allen, president of the Monarch Hotel in Clackamas. He is a two-time EIFS loser.

The Monarch's EIFS siding first failed in 1994, requiring a $1 million repair. Allen made the ill-fated decision to replace it with more EIFS. The second layer failed in 2003, forcing a $3.1 million repair and redesign that disrupted operations and took a significant toll on business until work was finally completed late last year.

"Here you've got a product where it has to be installed absolutely perfectly or it will fail," Allen said of EIFS. "For them to keep selling a product that has that devastating an impact on people was wrong. It is wrong."

Portland lawyer Greg Byrne is also a veteran of home-siding failures. In 1997, he and a neighbor in a Northwest Portland duplex replaced their failed Louisiana-Pacific Inner-Seal siding with EIFS.

Five years later, in June 2002, inspectors reported widespread water intrusion, rot and structural damage behind the siding. Byrne and his neighbor paid more than $110,000 to replace the EIFS with cedar siding. They sued Dryvit Systems Inc., the Rhode Island company that is the largest supplier of EIFS, in January 2004.

"It's not just that you have to replace the siding," said Byrne, whose lawsuit is pending. "You have to replace the building under the siding. And you can't and don't know it until it is too late."

Byrne is among more than 3,000 property owners across the country who have sued Dryvit or have joined a national class-action case pending against the company in Tennessee.

Byrne opted out of the class action for a number of reasons, including that the proposed settlement calls for victims to have their damaged homes refitted with Dryvit EIFS.

By most accounts, EIFS first hit the Portland market in the early 1990s. It offered the handsome look of stucco, installed faster and allowed architects to design touches such as arches, capstones and cornices. But builders and subcontractors who used it have been caught in the EIFS crossfire.

Blazer Homes of Tigard has built 20 high-end homes sided with EIFS over the years. The company has been sued 19 times by angry homeowners, mostly because of EIFS.

"I think the product is inherently flawed," said Blazer President Ray Derby. "It does not work well with wood-frame construction. If water gets behind it, there are going to be problems. It's hard to build a house that is Thermos-bottle tight."

Mike Busher has lost count of the lawsuits against his now-bankrupt company, Exterior Specialty Systems of Clackamas, an EIFS installer that put the synthetic stucco on about 3,000 area homes.

How many of those houses will go bad?

"All of them," Busher predicted. "I don't see how they can't fail. It's inherent. At some point, either through water intrusion or condensation or both, water's going to get in. It's just a matter of time."

Dryvit spokesman Doug Mault said Busher's claims are ridiculous. EIFS is not to blame for all the problems, he said. The fault lies with builders, who are doing sloppy work. "This is an extraordinarily forgiving system," Mault said of EIFS. "If a building isn't constructed correctly, it doesn't matter what's on the outside."

Mault said there about 350,000 buildings around the country clad with Dryvit EIFS. Estimates of the number of Portland-area EIFS homes range from 3,000 to 10,000.

New-home nightmare

Michael and Darcy Moore left Chicago for Oregon in 2000 convinced that it was the right move for their young children. Before they left, a builder friend who had heard of their plans for a new house offered advice:

Don't side the house with EIFS.

So when the Moores, both successful investment industry executives, had their $1.3 million house built on a $500,000 lot in Lake Oswego, they had it sided with conventional stucco, cedar and stone.

The Moores moved into the 6,500-square-foot house in July 2001. Like many high-end homes built in the area in recent years, it is high on a ridge. View homes fetch high price tags for the builder. But they are also exposed to fierce winds and rain that homes in lower elevations never see.

With the first significant October rains, the Moores' nightmare began.

The leaks started in the kitchen. Soon, water drizzled down the chimney, leaving ashy blotches on carpets and furniture. Stains ringed the wallboard, and drips ultimately fell from the ceiling of their master bedroom.

For months, the Moores tried to get their builder, Jon Mathis Custom Homes, to fix the leaks as well as many other smaller details they say were never completed. Mathis, a 30-year veteran of the industry, made several visits, often with subcontractors who had worked on the house.

The Moores filed a claim with the Construction Contractors Board, which typically deals with smaller claims. But as that process dragged on with no resolution, the scope of the damage widened. Eventually the couple lost all trust in Mathis and didn't want him touching their house.

They sued in June 2003 asking for $898,000 in damages, which included repair costs, attorney fees and $104,000 for "loss of use."

Mathis denied any responsibility and filed complaints against his eight subcontractors and materials suppliers.

An inspector hired by the Moores told them the construction shortcomings were so varied and vast that they would need to remove all the siding as well as several windows and doors. The couple took out two loans from KeyBank to pay for the work.

Soon the Moores' home had turned into a noisy, dirty construction site. Workers were generally at the site slamming hammers and revving power tools by 7:30 a.m. To protect the interior, the repair contractor wrapped the house in a cocoon of scaffolding and plastic in February 2003. The Moores constantly worried that their three adventurous children would climb the scaffolding and hurt themselves.

"I remember laying in bed thinking, it just couldn't get worse," Michael Moore said. "And then the wind would pick up and the tarps would start flapping. I turned to Darcy, 'It just got worse.' "

Darcy Moore, a relatively cool-headed veteran of the venture capital industry, said she was driven to the edge by the lack of privacy. "I had to go to my sister's house to cry," she said.

After months of legal maneuvering, Clackamas County Circuit Court Judge Robert Herndon successfully mediated a settlement offer of $700,000. That was considerably less than the Moores' initial demand and $26,000 less than their total repair and litigation costs. But the Moores agreed anyway.

"It's like a big game," Darcy Moore said. "Who will blink first?"

"We blinked," her husband interjected.

Mathis doesn't dispute that the Moores' house leaked. But he also views himself as a casualty of a legal process that he claims is out of control.

Like many builders, Mathis argues that a handful of attorneys and their network of home inspectors and repair contractors are making relatively minor problems into big paydays -- for themselves.

He said he could have fixed the Moores' home for one-fifth of the price charged by their repair contractor. He was in the process of doing so when the Moores' attitude toward him was poisoned by their lawyer, he said.

"The only winners are the attorneys and the guy who is doing the work," Mathis said. "They work together as a team, and they go from one house to another."

Today, the Moores' home wears a new siding of cedar and stone, and it just weathered its second winter with no leaks. The couple wonder at the lack of public recognition of these construction failures and the resulting financial hardship for home buyers.

"Why is this happening?" Darcy Moore asked. "Why don't more people know about it? Where are the regulators? People who are buying or building their houses need to beware."

Damage beyond walls

On March 7, a Clackamas County jury rocked the local building industry when it awarded $498,418 to Paul and Renee Haynes.

The Haynes had claimed their new, 1,950-square-foot house in rural Clackamas County near Sandy was rife with construction errors that led to moisture problems. But the heart of their lawsuit, the part that inspires indignation and a good bit of fear among builders, was the claim that their new house had poisoned them.

The Hayneses asserted that mold inside the wall cavity of their home caused possibly permanent neurological damage in their children as well as assorted health problems in Renee Haynes.

The notion that a moisture-damaged home could ruin your health as well as your finances is as frightening to builders as it is to homeowners.

To some builders and their allies, mold claims represent the epitome of a legal system gone haywire -- attorneys wielding junk science and preying on builders with bogus claims. They fear cases such as the Hayneses' could inspire many more such claims, which unlike garden-variety lawsuits over construction defects allow for potentially hefty personal injury awards.

In its defense, Adair Homes, the Beaverton company that finished the Hayneses' house in 2002, called to the stand a toxicologist, an industrial hygienist and Dr. Emil Bardana, an allergist from Oregon Health & Science University.

"The scientific evidence in the journals has been totally inadequate to establish a causal relationship between the mold found in homes and the adverse effects that are being alleged today," Bardana said after the trial.

The Hayneses rebutted Adair's experts with their own, who convinced the jury there was a connection between mold and the family's health problems. Yet their jubilation at the hard-fought victory has been tempered by the possibility that they may never see the $500,000.

The reason? Adair Homes' liability insurance didn't cover mold claims.

Now, nearly all construction lawsuits settle before trial with a chunk of cash provided by the builder's liability insurance companies. But the insurers, fed up with bankrolling these settlements, are pulling out of the contractor liability market or are increasing rates to barely affordable levels.

Carriers are also further reducing their exposure by limiting the kinds of claims they'll pay. During the past four years, some have excluded EIFS claims, multifamily claims and those involving any residential building.

They have also added mold to the growing list of problems that are excluded from coverage.

"The end game here is that you're going to have a bunch of uninsured contractors," said Mike Farnell, a Portland lawyer specializing in insurance issues. "The homeowners and plaintiffs' bar are going to find that the resources needed to fund these lawsuits goes away."

The Hayneses have moved back into their former house, which sits on the same lot as the new one. They've gone deeply in debt to pay the $150,000 in legal fees, not to mention the $65,000 they paid for their new house, a reduced price because the Hayneses did site preparation and cleanup themselves.

The family's legal fees will only increase. Adair filed notice June 1 that it intends to appeal the verdict. The company declined repeated interview requests.

The Hayneses' new home now sits unused with all their furniture, clothing and other belongings inside. They've enrolled their two sons in special education class

es. Both suffer from "sensory integration syndrome" caused by mold exposure, Renee Haynes said, making it difficult for them to deal with too much stimuli.

Like many other homeowners, Renee Haynes feels bitter and betrayed.

"We were failed by the builder," she said. "We were failed by the county inspector. We tried repeatedly to get the state regulators to respond. We went to the attorney general's office.

"I'd like to know who is supposed to protect me."