Ruling by Court Unlikely to Spur Condo Construction

California builders--who have long blamed negligence lawsuits for choking off condominium construction--hailed a court ruling this week that will limit such litigation.

But don’t expect condos to come back any time soon, despite their popularity among buyers anxious to get a foothold in an increasingly tight housing market.

The cost of insurance to protect builders from the threat of construction defect lawsuits is expected to remain prohibitively high. And construction defect lawyers say their clients can still sue using other legal options not affected by the California Supreme Court ruling. Instead of suing for negligence, homeowners could claim fraud, for example.

“I think that overall it’s business as usual,” said Newport Beach construction defect attorney Thomas E. Miller.

Trial attorneys and home builders have been poring over the state Supreme Court’s 5-2 decision that prevents homeowners from suing builders for negligence unless construction defects have caused an injury or economic loss.

Previously, a buyer of a new home or condo could sue the builder for negligence any time within 10 years of purchase if a defect was found. Now, such a negligence suit can be filed only if the defect already has caused damage. If no damage has been caused, homeowners can recover only the cost of repairing the defect during the warranty period.

The ruling, which was based on a lawsuit brought by home and condominium owners against Newport Beach-based William Lyon Co., applies to single-family homes and attached dwellings or condominiums. But it has a far bigger impact on condominium projects, where established owner associations have made it far easier to create class-action lawsuits against builders.

As a result of litigation, condo builders have seen liability insurance premiums on such projects soar, making it economically unfeasible to build all but the most expensive condos. The annual rate of condo construction has plunged from about 25,000 units in the mid-1990s to about 2,400 in the most recent years, according to estimates by the California Building Industry Assn.

The suit is expected to have little or no impact on apartment construction, according to industry observers. The laws are more protective of homeowners than they are of commercial apartment owners, who are expected to have the sophistication to inspect property and protect their interests during construction, according to legal analysts.

Although the building industry group hailed the state’s court decision as “a clear victory for affordable housing in California,” industry observers said additional steps must be taken before the cost of insurance falls and builders feel comfortable enough to return to the condo market.

“This court decision by itself doesn’t do anything to resolve the fundamental problem in California that has grown out of this litigation,” said Tim Coyle, senior vice president for the state builders’ group. “The best way to bring insurance coverage into the marketplace is to establish a fair, balanced and cost-effective means to resolving construction disputes.”

Builders have supported legislation that would essentially give new-home buyers a 10-year guarantee backed by insurance on the structural and operational performance of a new house or condo. Disputes would be settled through arbitration. But homeowners would be prevented from suing the builder over construction defects.

Last year, Assembly Bill 2112, which includes many of the protections sought by home builders, remained in committee and was never put to a vote.

Trial attorneys said such legislation would leave homeowners at the mercy of builders and insurance companies.

“It [would be] a disaster,” said Miller, the attorney. “It eliminates the homeowner’s right to seek redress in the court entirely.”

But the building industry claims that such legislation--which is modeled on laws in New Jersey and other states--would substantially reduce the risk of litigation and jump-start new condo construction.

Home builder Mick Pattinson, president of Carlsbad-based Barratt American Inc., said his company doesn’t have any immediate plan to reverse its decision of three years ago to stop building condos. Pattinson said he wants to see how receptive the state Legislature will be to builders’ proposal for additional protections against construction defect lawsuits. He also needs to be assured lawmakers, perhaps under pressure from trial attorneys, will not undermine the court’s decision with new legislation.

“The building industry is cautiously optimistic,” said Pattinson. “If this is upheld, builders will build [condos] again.”