BY ROBERT P. MADER
Of CONTRACTOR’s staff
LAS VEGAS — Nevada builders and subcontractors are locked in a battle with trial lawyers over construction defects. Contractors, who say they no longer can buy liability insurance, plan to introduce legislation in the 2003 session of the Nevada legislature to try to reign in what they consider out-of-control litigation.
“We can’t get insurance,” said Sherry Hernandez, executive director of the Plumbing Mechanical Contractors of Nevada. “All of the insurers have bailed out of the state of Nevada because of construction defect lawsuits.”
Hernandez is partially correct. On July 2, Zurich American, the last insurance company in Nevada that was writing liability coverage, announced a moratorium and said it would only renew existing customers.
Contractors charge that lawyers persuade homeowners associations to file class-action lawsuits over construction defects, some of which are spurious, and sue everyone who has set foot on a project.
Contractors have responded by forming the Nevada Subcontractors Association as an umbrella group to try to change Nevada law.
The group was formed in 1999, said Executive Director Cindy Nevin. California lawyers “started moving into Nevada, went to the Nevada legislature and got them to change the laws to make it very easy to sue,” she said. Contractors — caught up in the midst of an enormous building boom — didn’t pay attention, she said.
The NSA has failed in two previous attempts to change the law, she said, because they were disorganized and overcome by the savvier lobbying of the trial lawyers. This time Nevin guaranteed that the law would be changed because the trial lawyers have antagonized everybody, including realtors, mortgage lenders and the National Association of Home Builders. The Associated General Contractors and Associated Builders and Contractors are lobbying with the subcontractors, Nevin said.
The contractors want two main changes to Nevada law:
1. They’re asking the legislature for a strict definition of a construction defect as anything that affects the habitability or structural integrity of a dwelling.
2. They want the right to inspect and repair any defect before a suit is filed.
A big problem with existing Nevada law, Nevin said, is that it allows the lawyers to recover all their expenses. Therefore, the lawyers can charge say 33% of an award for their contingency fee and perhaps another 33% for their expenses, leaving homeowners with little money to fix what may be legitimate construction defects.
Insurance costs have skyrocketed. Nevin knows of a roofer who bought a $1 million liability policy for a $1 million premium, “but at least she has her certificate so she can go on a job.”
Henry Sharp of Sharp Plumbing in Las Vegas, vice president and co-founder of NSA, said his insurance has doubled. He employs 145 people and pays $500,000 for insurance, with $250,000 of that for liability coverage.
In addition to the two main changes to Nevada law advocated by NSA, Sharp thinks the law should state that a homeowners association can sue only with the agreement of 51% of the homeowners, not 51% of the homeowners who showed up for the association meeting.
Insurance companies are fleeing the construction market, Nevin and Sharp said, because the class-action lawsuits hit anyone who had anything to do with a project. Nevin said she knows of a suit that named the company that cleaned up the site after construction was complete. Sharp said he knows of a suit that included the supplier of the portable toilets.
The idea, they said, is to drag in as many insurance companies as possible, which then “ransom” their way out of the suit.
Sharp said he’s worked on eight condominium or townhouse projects and been sued on seven of them. One suit alleged that a townhouse development was built without cleanouts. Sharp, his insurance company lawyer and their experts went through the project with the plaintiffs’ lawyers and experts while he pointed out and photographed every cleanout in the project. Even though Sharp hadn’t done anything wrong, his insurance company eventually offered the plaintiffs’ lawyers $65,000 to drop them from the case.
Such buyouts are common, Nevin said, as insurance companies for contractors who didn’t do anything wrong offer $5,000 or $10,000 to get dropped from the suit.
The contractors also want to educate homeowners on the enormous negative consequences of becoming involved in a construction defect class action. FHA and VA will not write mortgages for homes that may have defects. The property may be devalued. If they sell the property, they have to tell prospective buyers about the defects. A suit may take three years to settle, and then the homeowners may not get as much money as they expected after the lawyers deduct their fees and expenses.
“We will have to be proactive,” Nevin said. “Today we’re still in a reactive mode. We’ve got to educate legislators that this is not good for consumers or the economy, but today we’re just trying to save an industry.”