S.B. 241, 72d Sess. (Nev. 2003) (Commerce & Labor); 2003 Nev. Stat I. Introduction

Transcription

1 SENATE BILL 241: REINING IN NEVADA S CONSTRUCTION DEFECTS LITIGATION FIXING HOMES WITHOUT LAWSUITS 1 Statutes Amended: NEV. REV. STAT , , , , , , , , , , , , , , , Statutes Repealed: NEV. REV. STAT , , , Statutes of Nevada: S.B. 241, 72d Sess. (Nev. 2003) (Commerce & Labor); 2003 Nev. Stat. 362 I. Introduction Dramatic increases in insurance costs present a serious danger to Nevada s residential construction industry, and in turn, the state s economy. The number of builders constructing ten or more homes in southern Nevada decreased from 157 to 110 between 1996 and This 30 percent decline occurred when Nevada experienced more home sales than any other period in its history. 2 Insurance costs per home reportedly increased by 500 percent between 1999 and 2003, pushing a number of builders, contractors, and subcontractors out of the market and consequently, putting an upward pressure on home prices. 3 One Nevada roofing contractor reported paying premiums of $64,000 for $2 million of coverage in In 2002, premiums soared to $578,000 for $1 million in coverage, with a $75,000 self-insured retention requirement. 4 These extraordinary increases in insurance costs appear to be correlated with the rising number of construction defect claims. In fact, some news articles have labeled the 1 By Craig Carlston 2 Minutes of Assemb. Comm. on Judiciary for May 8, 2003: Hearing on S. B. 241 Before the Assemb. Comm. on Judiciary, 2003 Leg., 72d Sess. Ex. E, Construction Defect Litigation and the Residential Housing Market (citing Homebuilders Research, Inc., March 2003) (Nev 2003) (included with statement of Steve Hill, President for Coalition for Fairness in Construction) [hereinafter Minutes of Assemb. Comm. on Judiciary for May 8, 2003]. 3 Id. 4 Id. 1

2 Las Vegas area as a pot of gold at the end of the California rainbow, as it provides a fertile market for construction defect attorneys that have been displaced by California s adoption of the economic loss doctrine. 5 the Las Vegas area began in mid The steep rise in construction defect litigation in At that time, the vast majority of builders had insurance coverage that protected them from some portion of litigation costs. However, due to the increase in construction defect lawsuits, self-insurance rates, premiums, and deductibles increased drastically, forcing contractors to cope with higher insurance costs and less coverage. 7 One developer, expressing his alarm over the mass litigation, stated: little did we dream that litigation would run rampant through Nevada and have such a devastating impact on our homeowners and our residential building industry. Nor could we have anticipated that this litigation nightmare would be unleashed under the guise of consumer protection. 8 Steve Hill, chairman of the Coalition for Fairness in Construction, stated: this bill is exceptionally important for Nevada homeowners and the construction industry. People on both sides of the bill have a common goal: to get their homes fixed without lawsuits. 9 Homebuyers, particularly those in need of affordable housing, are also feeling the sting caused by the increase in construction defect litigation and subsequent rise in construction costs. Corrie Craig 10 testified that median sales prices for 5 Id. (quoting A. Swanson, Las Vegas: Boomtown for Construction Defect Litigation, NEVADA LAWYER (Dec. 1997)). 6 Id. at 1. 7 Id. 8 Minutes of Assemb. Comm. on Judiciary for May 8, 2003, supra note 2 at Ex. F at 3 (statement submitted by Richard Plaster, Owner of Plaster Development Company). 9 Minutes of S. Comm. on Commerce & Labor for Mar. 19, 2003: Hearing on S.B. 241 Before S. Comm. on Commerce & Labor, 2003 Leg., 72d. Sess. (Nev. 2003) (statement of Steve Hill, Chairman of the Coalition for Fairness in Construction) [hereinafter Minutes of S. Comm. on Commerce & Labor for Mar. 19, 2003]. 10 Corrie Craig is the Senior Deputy Director, Nevada Partnership Office, Federal National Mortgage Associations (Fannie Mae). 2

3 condominiums/townhomes (traditionally affordable for first time homebuyers) have increased 23 percent in southern Nevada and over 66 percent in northern Nevada. In contrast, the market for these homes has increased only 5.6 percent in southern Nevada and 8 percent in northern Nevada. 11 Craig concluded that we are losing the affordable end of the market and first time buyers are being shut out. 12 Senate Bill 241 attempts to address the issues raised by the dramatic increase in construction defect litigation by establishing a procedure whereby aggrieved homeowners, in cooperation with contractors, may resolve construction defects discovered in their homes prior to filing suit. The primary objective of this bill is to facilitate speedy resolution of construction defects, ensure contractor solvency, and lower the cost of construction by arresting skyrocketing insurance rates. Senator Hardy stated: it is a very important and difficult issue, and there is a need to be careful about putting obstacles in the way of homeowners. By the same token, the issue of conscientious good contractors not able to access insurance must be addressed with the related causes. 13 II. Legal Background A. Unintended Results of Chapter 40 Prior to the enactment of Senate Bill 241, many deemed Chapter 40 of NEVADA REVISED STATUTES as an inadequate mechanism whereby Nevada s construction defect issues were to be addressed. Chapter 40 was said to produce many unintended results, such as delaying or denying repair, declining property values, and sharp increases in 11 Minutes of Assemb. Comm. on Judiciary for May 8, 2003, supra note 2 at Ex. H (testimony of Corrie Craig). 12 Id. 13 Minutes of S. Comm. on Commerce & Labor for Mar. 21, 2003: Hearing on S.B. 241 Before the S. Comm. on Commerce & Labor, 2003 Leg., 72d. Sess. (Nev. 2003) [hereinafter Minutes of S. Comm. on Commerce & Labor for Mar. 21, 2003]. 3

4 construction costs, injuring homeowners and contractors across the state. 14 For example, Ellen Rosenbaum, president of Benchmark Properties, relayed that one of Benchmark s properties, a community of sixty-seven condos, sued for construction defects in the condos with claims totaling $6.5 million. The suit eventually settled for $1 million and the association received $550,000, which was not enough to make the required repairs. At the time suit was filed there were no rental units in the community. However, at its conclusion, 56 percent of the units were rentals, causing condo prices to drop from $119,000 to $93,000. Because Chapter 40 was viewed as an instrument that instigated lawsuits instead of repairs, the Legislature felt compelled to amend the statute. Senate Bill 241 made substantial changes to Chapter 40. The primary thrust of the bill is aimed at curbing unnecessary litigation by giving contractors the opportunity to repair construction defects according to a prescribed timeline, prior to an aggrieved homeowner filing suit. Senate Bill 241 was not passed without controversy or debate. The majority of contractors, builders and developers lobbied for the bill s passage, seeing it as much needed relief to rising insurance premiums and construction costs. Many homeowners associations viewed the bill as an attempt by the construction industry to end construction defect suits and leave homeowners associations without a plausible course for repair of constructional defect repairs. Homeowners feared that their construction defect complaints would be ignored or inadequately addressed. 14 Minutes of Assemb. Comm. on Judiciary for May 8, 2003, supra note 2 at Ex. G, The Truth about S.B. 241: Fact versus Fiction (included with statement of Steve Hill). 4

5 B. Amended Definition of Constructional Defect Numerous amendments were made to definitions that comprised Chapter 40. The most significant and controversial of such modifications was that made to the definition of constructional defect. NEVADA REVISED STATUTE defined constructional defect as: a defect in the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance. The term includes physical damage to the residence, an appurtenance or the real property to which the residence or appurtenance is affixed that is proximately caused by a constructional defect. Senate Bill 241 modified this definition to read: Constructional defect means a defect in the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance and includes, without limitation, the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance: (1) Which is done in violation of law, including, without limitation, in violation of local codes or ordinances; (2) Which proximately causes physical damage to the residence, an appurtenance or the real property to which the residence or appurtenance is affixed; (3) Which is not completed in a good and workmanlike manner in accordance with the generally accepted standard of care in the industry for that type of design, construction, manufacture, repair or landscaping; or (4) Which presents an unreasonable risk of injury to a person or property. 15 Opponents to Senate Bill 241 expressed concern that the amended definition of constructional defect grants builders immunity from liability until a tragedy arising from the existing defect occurs. 16 Additionally, opponents argued, the definition prevents Nev. Stat Minutes of Assemb. Comm. on Judiciary for May 8, 200, supra note 2 at Ex. F (statement submitted by Ross Lageunesse, President Green Valley Ranch Community Association). 5

6 a homeowner or association from pursuing the developer responsible for the defects at the time when it would be more economical to repair such defects and at a time prior to any serious injury or damage to persons or property. 17 Bill proponents claim the previous definition was woefully inadequate and the revised definition provides a tough, but clear definition of proper construction. 18 Furthermore, proponents reason that the amended definition clarifies that all projects must be built to code, and that any damage or loss in a home s value due to defects is the responsibility of the contractor. 19 C. Attorneys Fees Pursuant the Senate Bill 241, a contractor may elect not to repair alleged defects in a home. 20 Opponents contend that even though a homeowner retains the right to sue the contractor, Senate Bill 241 bars relief for those persons and entities, such as homeowners associations, who could not afford to pay an attorney s hourly rates. 21 However, Senate Bill 241 does not modify the damages that a claimant can seek for constructional defects nor eliminate contingency fees. Pursuant to section 22 of the bill, a claimant may recover any reasonable attorney s fees and the amount of any attorney s fees awarded pursuant to this section must be approved by the court. 22 Thus, this bill requires judges to analyze the fees that are charged and determine what is reasonable before awarding such fees. D. Contractors Board Decisions 17 Id. 18 Minutes of S. Comm. on Commerce & Labor for Mar. 21, 2003, supra note 13 (statement of Steve Hill). 19 Minutes of Assemb. Comm. on Judiciary for May 8, 2003, supra note 2 at Ex. G, The Truth about S.B. 241: Fact versus Fiction (included with statement of Steve Hill.) Nev. Stat Minutes of Assemb. Comm. on Judiciary for May 8, 2003, supra note 2 at Ex. F (statement of Ross Lageunesse) Nev. Stat (2). 6

7 Senate Bill 241 provides that a claimant or contractor may submit a question or dispute to the State Contractors Board concerning any matter which may relate to a constructional defect. 23 Such questions or disputes are to be investigated by the Board, which will then render a decision concerning the matter. 24 Opponents of the bill have two major contentions: first, the Board s decisions may tend to favor the construction industry; and second, the Board specifically stated that it did not have the ability or the funding to oversee such disputes. 25 Opponents view such bias and lack of funding as a serious obstacle to fair relief to homeowners for constructional defects. Senator Shaffer expressed like concern of the proposed revision of chapter 40: Section 31 puts a lot of responsibility on the State Contractors Board to make decisions they may not be trained to make. They are not certified building or plumbing inspectors. 26 Jim Wadhams, lobbyist for Southern Nevada Home Builders Association, responded to Senator Shaffer s concern by stating: we are not trying to bring in the State Contractors Board to adjudicate cases. We think it may be helpful to have the advice of a board with the current statutory responsibility to see that contractors are performing their services in a competent manner. They have enough construction expertise to evaluate the qualities of the licensee s work. Their role will be to give advice to either the licensee or the homeowner on the quality of repairs. We think the expertise is there or can be developed. 27 Additionally, the contractors board holds the license of every contractor in the state and has the authority to revoke the licenses of bad contractors. Proponents of the Nev. Stat Id. 25 Minutes of Assemb. Comm. on Judiciary for May 8, 2003, supra note 2 at Ex. F (statement submitted by Marie Traub, President of Grand Legacy Community Association). 26 Minutes of S. Comm. on Commerce & Labor for Mar. 19, 2003, supra note Id. 7

8 bill argued that contractor fees will provide the necessary funds to provide any additional personnel that the Board would need to hire to resolve constructional defect disputes. 28 Additionally, Board decisions are not binding, nor are they subject to judicial review. 29 Furthermore, such decisions are not admissible in any judicial or administrative proceeding. 30 Therefore, if aggrieved homeowners feel that the Board unjustly resolved the dispute, they may pursue a judicial resolution of the dispute. III. Senate Bill 241 A. Overview Senate Bill 241 purports to establish a remedial process whereby aggrieved homeowners, in conjunction with contractors, may resolve construction defects discovered in their homes prior to filing suit. Among other amendments to Chapter 40, the bill requires the homeowner to give notice of the defect to the contractor, subcontractor, supplier, or design professional. 31 The bill provides the contractor, subcontractor, supplier, or design professional with a right to inspect and cure the defects if they so choose. 32 If the contractor elects to repair the defect, he must be given a reasonable opportunity by the homeowner to do so, and must make repairs in accordance with generally accepted standards of care in the industry. 33 Following inspection, the contractor may elect to repair the defect. 34 The homeowner retains the right to sue after 28 Id Nev. Stat (1). 30 Id. 31 See id. 7(1). 32 See id. 8(1). 33 See id Id. 8

9 the procedure is followed. 35 A court must dismiss a construction defect action if the claimant fails to comply with the requirements outlined in this bill prior to filing suit. 36 The bill also allows disputes concerning matters affecting or relating to a construction defect to be submitted to the State Contractors Board. 37 Decisions by the board are not binding and are not admissible in any judicial or administrative proceeding. 38 Additionally, the bill authorizes a judge presiding over a claim for a construction defect to order a representative of a party s insurer to attend a settlement conference. The court may sanction an insurer who fails to attend, who attends but is substantially unprepared to participate, or who fails to participate in good faith. 39 B. Construction Defect Repair Process This bill establishes a timeline whereby notice, inspection, and repair are governed. First, homeowners or homeowners associations 40 are required to send notice of the construction defect to the contractors of which they are aware. 41 The homeowner must allow the contractor access to inspect the home within sixty days of the notice. 42 Contractors must then, within thirty days, notify relevant subcontractors, suppliers, and design professionals of the alleged defects. 43 If a contractor fails to send the requisite notice, he cannot commence an action against a subcontractor unless he can demonstrate 35 See id Id. 37 See id Id. 39 See id See id. 27 (pursuant to section 27, homeowners associations must have a majority vote to put the association at risk). 41 Id. 42 See id See id. 7. 9

10 that, after making a good faith effort, he was unable to identify the subcontractor. 44 Once the subcontractor receives notice, he then has thirty days to inspect the alleged defect. Within ninety days of the notice from the homeowner, contractors must indicate in writing whether they are going to repair the defects. 45 If the contractor fails to respond to the notice, the homeowner may immediately proceed with filing a lawsuit. If the contractor chooses to correct the defects, the repairs must be completed within 150 days of the homeowner s notice. 46 If it is not possible for the repairs to be completed within the stated timeframe, the contractor and homeowner may agree to a reasonable time for the repairs to be made. 47 Repairs must be performed on reasonable dates and at reasonable times to which the homeowner agrees in advance. 48 Repairs must also be in compliance with any applicable building code and in a good and workmanlike manner in accordance with the generally accepted standard of care in the industry for that type of repair. 49 If the homeowner feels that the repairs were not properly made, the homeowner may immediately file suit. IV. Conclusion In light of the increasing construction costs due to rising insurance rates, and given that Nevada was becoming a haven for construction defect litigation, the legislature deemed it necessary to pass legislation designed to curb the negative effects of a sue now, repair later mindset. Contractors viewed the reform of Chapter 40 as absolutely 44 Id. 45 See id See id Id. 48 Id. 49 Id. 10

11 essential to the survival of their businesses, as well as a tool for homeowners to address construction defects without resorting to lawsuits. 11