Ruling Limits Lawsuits by Homeowners

In a ruling that is expected to reduce the amount of money that homeowners can collect for construction defects, a state appellate court has determined that builders can be sued for damages only if the home shows physical signs of decay.

Previously, homeowners have collected jury awards and settlements, sometimes for millions of dollars, after showing that their homes were not built according to plans, regardless of whether those changes resulted in defects.

“What the court is saying is that unless you have physical damage, we’re not going to pay for it,” said Thomas Miller, a Newport Beach lawyer who says he has recouped $225 million in construction defect awards from the region’s builders and has written a book on the subject. He predicts the decision by the 4th District Court of Appeals in San Diego will limit the amount homeowners will receive in settlements or jury awards.

“If you have faulty electrical wiring that violates the Uniform Building Code, but it hasn’t caused a fire, the courts won’t allow us to recover those damages until a fire happens,” he said.

Industry executives and others applauded the ruling. While acknowledging that it might limit the size of awards for construction defects, they also insisted that more changes are needed. Indeed, the Orange County chapter of the Building Industry Assn. has made reform of construction-defect laws this year’s top priority.

Critics say homeowner litigation, which generally involves condominium and townhome complexes, has changed Southern California’s housing landscape by driving up builders’ insurance costs and discouraging construction of these complexes.

A recent survey of builders showed a typical insurance policy to protect against future lawsuits cost $300,000 and carried a $600,000 deductible, meaning the firms absorbed $900,000 in costs before insurance coverage took effect, said Juan Acosta, a lobbyist for the California Builders Industry Assn.

The Construction Industry Research Board says the number of multifamily unit building permits in Los Angeles County has dropped from 39,297 to 3,636 in the last decade, while permits in Orange County have fallen from 15,330 to 4,032.

Industry lobbyist Acosta said he believes the ruling is significant because it “clarifies the liability builders and subcontracts have.”

Under current law, “there is no legal definition of construction defects,” Acosta said. It can range from chipped sinks and cracked floor tiles to water leakage and other structural damage that can result in personal injury. “It’s one big ball of twine,” he added.

The appellate decision grew out of a pair of San Diego homeowner suits against William Lyon Co., a Newport Beach developer.

In one suit, a group of 84 home buyers at Carmel Mountain Ranch, a subdivision of $300,000 homes, had sought $10 million in damages for a variety of alleged defects. Ironically, the homeowners settled part of their claims for $4 million and were awarded $3.25 million by a jury before the appellate ruling. Those awards will not be affected by the ruling, attorneys said.

The second case involved the Provencal Community Assn., owners of a 162-unit condominium built in the early 1990s. The case, in which the condo owners are seeking $7 million, is scheduled to be heard this summer.

The appellate court ruling jeopardizes several hundred thousand dollars in claims, according to the condo owners’ attorney, Duane Shinnick of the San Diego.

“It cuts off one remedy a homeowner has,” Shinnick said. “Now, there is less incentive for contractors to comply with building codes.”

Steven Strauss, an attorney for the Carmel Mountain Ranch group, said he plans to appeal to the state Supreme Court. He said he believes the ruling will eliminate up to 20% of the typical homeowner’s claim for construction defects.

Lyon Co. declined comment.

The appellate decision is not expected to trigger a spate of new multifamily developments, said Michael Carney, head of the Real Estate Research Council of Southern California.

“It seems to me this is a small aspect of the overall legal problems that developers face when building detached homes,” he said. “We live in a litigious society, and people can sue for many, many other types of perceived defects.”