California Expands on Scope of Coverage for Soft Cost Claims
February 14, 2023 —
Caitlin N. Rabiyan - Saxe Doernberger & Vita, P.C.The California federal district court case of KB Home v. Illinois Union Insurance Co., No. 8:20-cv-00278-JLS-JDE, (C.D. Cal. August 23, 2022), provides much needed guidance for cases involving builder's risk insurance claims for soft cost coverage.
The case stems from damage to several of KB Home’s residential building sites caused by a severe rainstorm in January 2017. Each home site was a smaller part of a large housing development project. The damage caused significant delay in the completion of some individual home sites, although there was limited evidence of delay to the overall housing development project.
As a result, KB Home sought coverage under a builder’s risk policy purchased from Illinois Union for both hard costs and soft costs. “Hard costs” are the costs directly associated with repairing property damage to the sites. Conversely, “soft costs” are indirect expenses associated with project delays caused by such property damage and repair efforts. For example, hard costs would include labor and materials, whereas the soft costs claimed by KB Home included additional real estate taxes, construction loan interest, and advertising and promotional expenses incurred because of the delays. Illinois Union paid the claim for the hard costs, but denied the soft costs claim. KB Home filed suit and Illinois Union eventually filed a motion for summary judgment.
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Caitlin N. Rabiyan, Saxe Doernberger & Vita, P.C.Ms. Rabiyan may be contacted at
CRabiyan@sdvlaw.com
Additional Insured Not Entitled to Coverage for Named Insured's Defective Work
September 02, 2024 —
Tred R. Eyerly - Insurance Law HawaiiThe Court of Appeals for the Seventh Circuit determined there was no duty to defend or to indemnify the additional insured for the named insured's defective work. St. Paul Guardian Ins. Co., et al. v. Walsh Construction Co., 99 F. 4th 1035 (7th Cir. 2024).
The City of Chicago contracted with Walsh Construction Company to manage the construction of a canopy and curtain wall system at O'Hare International Airport. Walsh entered into a contract with Carlo Steel Corporation, which in turn subcontracted with LB Steel, LLC to fabricate and install steel columns to support the wall and canopy. LB Steel listed Walsh as an additional insured in its commercial general liability policies. LB Steel's insurers were St. Paul, Travelers, and Charter Oak Fire Insurance Company.
Several years into the project, the City discovered cracks in the welds of the steel columns and sued Walsh. Walsh, in turn, sued LB Steel under its subcontract. Walsh also asked LB Steel's insurers to defend it in the City's lawsuit, but they refused to do so. Walsh eventually secured a judgment against LB Steel, but LB Steel declared bankruptcy. Walsh then sued LB Steel's insurers to recover the costs of defending against the City's lawsuit and indemnification for any resulting losses.
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Tred R. Eyerly, Damon Key Leong Kupchak HastertMr. Eyerly may be contacted at
te@hawaiilawyer.com
Recent Developments in Legislative Efforts To Combat Climate Change
October 30, 2023 —
Dominick Weinkam & Robert B. Cimmino - ConsensusDocsGovernments across the United States have been increasingly integrating climate considerations into legislation affecting various sectors of the economy. The construction industry is no exception. Recent legislative developments at various levels of government are reshaping construction practices to mitigate the industries’ greenhouse gas emissions and vulnerability to climate-related risks. These developments include incentivizing eco-friendly construction projects, mandating stricter regulations to reduce carbon emissions, and enhancing building resilience to more severe weather events. Contractors must stay abreast of these developments to ensure compliance with new substantive and administrative requirements to remain competitive in a changing environment.
Funding Greener Construction Projects: The Inflation Reduction Act
The federal Inflation Reduction Act (IRA) enacted in August 2022 marked a significant milestone in the pursuit of greener construction. The IRA is widely considered to be the single largest investment into climate change in history, with potential ripple effects throughout the construction industry. The IRA allocates substantial funds for projects utilizing “low-carbon” materials, with an explicit focus on climate-conscious construction. This initiative aligns with the broader goal of curbing emissions from sectors like steel, concrete, and glass, which have been major contributors to the nation’s carbon footprint.
Reprinted courtesy of
Dominick Weinkam, Watt Tieder and
Robert B. Cimmino, Watt Tieder
Mr. Weinkam may be contacted at dweinkam@watttieder.com
Mr. Cimmino may be contacted at rcimmino@watttieder.com
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Colorado Mayors Should Not Sacrifice Homeowners to Lure Condo Developers
September 17, 2014 —
Jesse Howard Witt - The Witt Law FirmFor the past two years, Colorado’s Metro Mayors Caucus has been aggressively lobbying the state legislature to strip away consumer protections in construction defect disputes, in the hope that more lax construction standards may attract condominium developers to their cities. Although the General Assembly voted down their proposals in the 2013 and 2014 sessions, Denver Mayor Michael Hancock raised the issue again during his recent State of the City address, and it is likely that proponents will sponsor another bill during the upcoming 2015 session.
The mayors would do better to protect their constituents’ rights and work to correct the underlying problems that have hampered condominium construction in recent years. Eliminating consumer protections is not the right way to help their communities grow.
Should developers build apartments to rent or condominiums to sell?
At the core of this debate is the recent trend favoring apartments over condominiums. According to an October 2013 report from the Denver Region Council of Governments (DRCOG), the construction of new condominiums around Denver has not rebounded from the Great Recession as quickly as the construction of apartments or single-family homes. Many of the new attached-housing projects currently in development are expected to be offered as apartments for rent rather than condominiums for sale. This concerns some mayors, who feel that apartments promote a more transient population, with fewer permanent ties to the their communities. To encourage developers to build condominiums instead of apartments, the mayors have argued that Colorado should repeal or limit laws that currently protect condominium owners from shoddy workmanship and construction defects.
In April 2013, DRCOG had urged the Colorado General Assembly to pass Senate Bill 13-52, which would have given immunity for environmental hazards to builders of multi-family communities located near bus stops or light rail stations. The bill would also have given these builders an unfettered right to choose what repairs were appropriate if any homeowners complained of other defects, and it would have prohibited homeowners from seeking relief in court for unsatisfactory repairs; if builders did not offer reasonable repairs, homeowners’ only option would have been to pursue costly private arbitration. During judiciary committee hearings, a number of mayors and homebuilders testified in favor of the bill, and expressed a belief that it was virtually impossible to build a condominium project without being sued over defective work, and that this was the reason why apartrments had become more popular. There were few data to support their anecdotes, however, and the DRCOG report had not yet been published. As a result, the committee rejected the bill.
Just what the “Doctor” ordered.
Several months later, DRCOG made its report available. Not surprisingly, portions of this document supported the type of legislation that DRCOG had promoted earlier in the year. The report’s authors acknowledged, in fact, that the subjective sections of their report were limited to the opinions of the development industry, and “should be recognized as one side of the discussion.” The authors also conceded that they had relied primarily on interviews with homebuilders, contractors, and defense lawyers in preparing their findings; they had spoken to “very few” plaintiff attorneys, and it does not appear that they spoke to any homeowner association representatives.
Nevertheless, local politicians immediately seized on the report as evidence that laws should be changed. “God bless DRCOG,” joked one member of the Denver Metro Chamber of Commerce in an interview with Westword. “I think it’s devastating,” Lakewood Mayor Bob Murphy said in a separate interview with the Denver Business Journal. “I see this as a verification of what I’ve been talking about… I’m not aware of a single member of the 41-member Metro Mayors Caucus who is opposed to some kind of reform.”
At the January 2014 meeting of the Metro Mayors Caucus, Mayors Murphy and Hancock cited the report when arguing for changes in the law. Other mayors echoed their concerns and voted to support legislation that would take away homeowners’ access to the courts, limit the power of homeowner associations to advocate for their members, and impose difficult administrative barriers to taking legal action against developers.
Senate Bill 220
The mayors eventually found a receptive ear in Commerce City Senator Jessie Ulibarri. In the final days of the 2014 session, Ulibarri broke ranks with fellow Democrats and introduced Senate Bill 14-220.
Ullibarri’s bill would have addressed the mayors’ concerns by making it illegal for homeowner association boards to speak with attorneys, consult experts, or request that builders repair construction defects, unless the board first obtained the votes of at least half of the community. The bill would have required that the board obtain votes from a majority of the entire membership—not just those who appeared at a meeting or participated in the election—and forbid the use of proxies to meet this total. In practice, this would have made it effectively impossible for large communities to hold a builder accountable for negligent construction, code violations, or breaches of warranty. In addition, even for communities that would be able to overcome these voting hurdles, the bill would force many disputes into binding arbitration with whatever service the builder had selected to resolve disputes. In theory, these changes would have made it so difficult for communities to enforce their legal rights that developers would have enjoyed de facto immunity from claims for defective work. Senator Ulibarri and the mayors hoped that giving this immunity to developers would spur them to build more inexpensive condominiums, without fear of liability for ignoring the building code or delivering low quality work.
Ultimately, the late introduction of SB 220 proved fatal. Democratic leadership expressed frustratation that Ullibarri had put forth the bill without allowing sufficient time to discuss potential amendments to preserve consumer rights, and the 2014 session ended before the bill could pass through committee hearings. The mayors, however, seem intent on introducing similar legislation in 2015, repeating the mantra that it is impossible for developers to build quality condominiums at a reasonable price. Mayor Murphy, in particular, has been vociferous in his support for laws curtailing homeowner rights: He recently proposed a local ordinance that would deny Lakewood residents the consumer protections available to other Colorado homeowners in construction disputes.
Litigation is not the only factor favoring rentals.
This approach is fundamentally misguided. Although many apartment builders have cited the fear of litigation as a factor affecting their decision to avoid the condomium and townhome market, there is little in the DRCOG report, or elsewhere, to support the theory that eliminating consumer protections will cause these developers to start erecting condominiums.
In reality, the DRCOG report itself (which was recently taken off the DRCOG’s website without explanation), identified multiple factors that have slowed condominium construction, not just the perceived legal risks of litigation over defective work. These factors included more stringent lending requirements from banks, surplus inventory from foreclosures, homebuyers’ inability to afford down payments, and overall economic and market conditions that have recently favored apartments. Giving builders immunity for defective work will not change any of these economic circumstances.
In addition, the DRCOG report noted that some Millennials may simply prefer to rent rather than buy; it acknowledged the existence of a vigorous ongoing debate in academic circles over whether the “Gen-Y” and “Millennial” populations have the same desire to own property as their parents in the “Boomer” generation, though the report’s authors ultimately concluded that generational preferences have only had a minor effect on condominium construction. The report further noted that demand for condominiums may increase on its own over time, as older Boomers seek to downsize and move to smaller houses. These issues are also independent of any concern over construction defects.
Moreover, one should not overlook a factor that received little attention from the DRCOG report: Colorado’s strong rental market. Recent reports show that rents are at all-time highs across the state, and many individuals are willing to pay a premium for desirable rental property in this tight market. It should therefore come as little surprise that homebuilders have started constructing more apartments to meet this demand.
Mayors should concentrate on why apartments cost less to build.
On the subject of construction and construction defects, the DRCOG report did identify three reasons why it may be less expensive to build apartments than condominiums in today’s market.
One was quality control. For condominium projects, prudent developers often choose to retain a third-party inspector to visit the site and verify that subcontractors are performing their work correctly. This is a wise step to ensure that any defects are identified promptly and corrected on the spot; making such repairs during construction, while the responsible subcontractors are still on site, and before other trades have covered up their work, is typically far less expensive than taking a house apart and fixing mistakes years later. On an apartment project, however, a developer may choose to omit this step and wait to see if renters complain about defects or demand repairs. By eliminating this quality control expense, the DRCOG report found that a developer could save an estimated $1,800 per unit during construction.
A second reason was the use of less-expensive subcontractors. The report found that general contractors who build condominium projects may demand a “premium” of between four and six percent of overall job costs to pay for subcontractors who have the necessary credentials and insurance to do the most challenging phases of the work. This is deemed crucial for condominium projects, because the eventual homeowners may seek redress in court if their homes contain construction defects. By contrast, those who lease apartments are thought less likely to insist on quality workmanship, and builders may therefore be able to get by with a cheaper workforce when constructing rental properties. The report found that using less-qualified subcontractors could save developers an estimated $9,300 per unit.
The third reason was lower insurance costs. The report assumed that condominium communities would not have the same level of on-site maintenance as apartment complexes, and that condominium owner associations would “introduce an element of risk for litigation that apartment properties do not have.” As such, developers of apartment projects often pay between $3,674 and $3,952 less per unit for liability insurance than developers of condominium projects.
Adding these three figures produces a total savings of $14,774 to $15,052 per unit for apartments. Developers interviewed for the DRCOG report stated that the only way they could make sufficient profits on “entry-priced” condominiums (those with a sales price under $450,000) was to use the cheaper construction methods associated with apartments. These developers were reluctant to cut such corners on condominiums, however, because of the fear that buyers might sue for the cost of repairing defects and code violations.
Lowering quality standards will not help the industry.
Although the DRCOG report helped explain why the perceived fear of litigation may have made some developers hesitant to build condominiums, this perception does not justify laws that would strip away consumer protections or lower quality standards in the industry.
Overall, the DRCOG report described a market saturated with poorly-built condominiums, many of which have been the subject of multi-million dollar construction defect lawsuits and foreclosures in recent years. Although several national builders have now pulled out of the Colorado attached-housing market, the report noted that a lingering oversupply of condominiums has held sales prices down. The report stated that this oversupply would likely diminish within a few years, but it may take time before the market fully normalizes and returns to the point where local, honest contractors can compete with those who have been peddling cheap, substandard products. The last thing that Colorado lawmakers should do now is encourage more low-quality workmanship by limiting homeowner rights.
Likewise, while high insurance rates remain a valid concern, the DRCOG report suggested that this increase is actually the result of 2010 legislation that the homebuilders themselves sponsored. Senate Bill 10-1394, now codified at Colo. Rev. Stat. § 13 20-808, protects builders from unfavorable policy interpretations by creating a rebuttable presumption of insurance coverage for property damage from construction defects. This is good for developers, but has made some insurance carriers nervous. According to the DRCOG report, roughly a dozen carriers have left the state in recent years, and insurance brokers “attribute their departure to the passage of the 2010 legislation.” The report also noted that new insurance providers have since entered the market, but these carriers tend to specialize in the “high cost/high risk” arena, and charge premiums that are twenty-five to forty-five percent higher. Developers likely did not intend this result when they sought insurance reform in 2010, but that does not mean that homeowners should be penalized in 2015.
In sum, these data do not support curtailing consumer rights. If Senator Ulibarri and the mayors truly want condominium construction to become more economical for developers, they should direct their attention to the real issue: How did it become impossible for quality builders to earn a profit on condominiums? The DRCOG report suggests that construction defects are part of the problem, but politicians should be thinking about ways to prevent the defects, not penalize the consumers who end up stuck living in defective houses. If poor workmanship and code violations have become so commonplace that a developer can only make money by eliminating quality control and hiring unqualified workers, then steps should be taken to stamp out negligence and level the playing field for quality builders. Politicians should not create even more incentives for builders to cut corners.
Moreoever, one should note that Colorado, unlike many states, does not license its general contractors at the state level; some cities require contractors to pass a local examination, but a statewide licensure program could help weed out builders with a history of defective work.
Temporarily providing grants to offset quality control and insurance costs could also help condominium developers stay competitive until the economic conditions improve. In fact, Senator Ullibarri proposed a separate bill in 2014, SB 216, that would have done just that, but Republicans killed the measure shortly before SB 220 was heard in committee.
Arbitration and HOA restrictions are not the answer.
Unfortunately, however, many of Colorado’s mayors and legislators insist that eliminating consumer protections is the only way to create an incentive for builders to construct more condominiums. Thus, their ideas have largely ignored the underlying problems of cheap, substandard work; they have instead focused on concepts such as requiring private arbitration of disputes and limiting the power of homeowner associations to represent their members in lawsuits. Although these concepts may seem neutral at first glance, they could actually tilt the balance heavily in favor of the homebuilding industry.
With regard to arbitration, one should recognize that the process is unlike mediation or other forms of alternative dispute resolution, in which the parties meet and try to reach a mutually acceptable compromise. Arbitration is more akin to a private lawsuit, wherein the parties give up their right to an impartial jury and, instead, pay a panel of lawyers or retired judges to hear their evidence and award monetary damages. This tends to make arbitration much more expensive, and to create a financial incentive for arbitrators to favor the large companies that are likely to give them future business, not the occasional consumer who is unlikely to need a professional dispute resolution service again.
With regard to homeowner associations, individual homeowners often lack the resources to litigate claims against well-funded developers and insurance companies, and the only way they can protect their property values is to join together in an association with their neighbors. A united association of homeowners can often persuade a builder to make reasonable repairs; a divided group of individuals can rarely achieve such a result. Limiting this right of association would merely encourage developers to build more substandard units.
Likewise, while homeowner voting requirements may seem innocuous, they often penalize communities with large numbers of military, absentee, or out-of-town owners, all of whom may be difficult to reach in the event that the community needs a quick vote on legal action. If nothing else, the hypocrisy of these arguments should anger the mayors’ constituents. Homeowner associations and cities both rely on the same model of representative government. But when a municipality hires a contractor to build a new city hall or erect a new bus stop, it does not let the contractor unilaterally dictate the terms of dispute resolution, nor does it promise to abandon all legal rights unless a majority of its entire population votes to act. Imagine if Mayor Hancock had to obtain affirmative votes from half of Denver’s 483,000 registered voters before he could ask the City Attorney to enforce a construction contract; DIA would be a defect-riddled nightmare for taxpayers.
Despite such facts, however, many of the mayors at the January 2014 meeting seemed confused or naïve about what really happens when a homeowner gives up his or her legal rights. Some, for instance, did not seem to understand the different forms of alternative dispute resolution available, or to appreciate the difference between voluntary mediation (in which both sides meet and agree on appropriate repairs or solutions) and binding arbitration (in which the builder selects a private service to decide if the homeowners are entitled to money damages). Cherry Hills Village Mayor, Doug Tisdale, meanwhile, encouraged the other mayors to use talking points, such as arbitration being “faster, cheaper, more effective, and more efficient” than proceeding in court, precisely because neither side can appeal if the arbitrator misinterprets the law. He failed to offer any real facts or statistics to support this opinion, however, or to explain why homeowners should feel good about forfeiting their right to appeal an erroneous decision.
Mayor Tisdale went on to suggest that mayors tell their constituents that homeowners of limited means could always find an attorney willing to represent them individually on a contingent fee, even if legislators took away the ability of homeowner associations to advocate on behalf of their members. No such statement should ever be part of a mayor’s talking points; anyone who actually practices in this field knows that construction attorneys will rarely agree to represent a single condominium owner on a contingent fee basis, because of both the high investigation costs and the reality that the owners’ association almost always has exclusive responsibility for maintaining and repairing the community’s structures and other common elements.
An honest debate
This is not to say that the homebuilders’ concerns about the increased costs of condominium construction are entirely without merit.
The DRCOG report suggested that the prevalence of cheap, low quality work across Colorado forced many developers to cut back on quality control and hire inexperienced subcontractors in order to remain competitive and earn a profit in recent years. The resulting poor workmanship led to construction defects and litigation, and the insurance carriers responded by raising rates on builders across the board. The passage of SB 10-1394 appears to have exacerbated the problem and pushed insurance rates even higher. The combination of low sales prices and high insurance rates, coupled with a dip in demand for owner-occupied attached housing, has made it very difficult for local developers to make money on condominiums.
As the DRCOG report confirmed, a key underlying cause of this problem has been defective work. Stripping away consumer protections will not encourage condominium developers to invest in more quality control or premium subcontractors, however; stripping away consumer protections will merely encourage more of the same mistakes that contributed to the condominium shortage in the first place. If the mayors truly want to address the lack of new condominiums, they should look at why substandard construction has become acceptable and ways to improve code compliance and overall quality. Mayors are in a unique position to direct their cities’ building departments, and they should take advantage; instead of lobbying for weakened consumer protections, mayors should invest their tax dollars in hiring and training more building inspectors, and they should establish a clear policy prohibiting approval of substandard construction. Once communities stop tolerating shoddy workmanship, good developers will again be able to build quality condominiums without fear of incompetent competitors undercutting their prices.
Legislators may also want to revisit the option of providing temporary tax credits or other financial assistance to developers who hire their own quality control inspectors and take other steps to avoid building homes with construction defects. The DRCOG report concluded that the developers could shave about $15,000 off the construction cost of an entry-level condominium unit by eliminating quality control, using less-qualified subcontractors, and saving on insurance premiums, and the government could act to eliminate this incentive. Licensing contractors at the state level could help in the long term, but politicians may also wish to consider supporting tax credits or other incentives of up to $15,000 per unit to developers who agree to build quality condominiums instead of cheap apartments. This would allow the developers to offset the higher costs of building for-sale properties, avoid litigation over substandard work, maintain adequate insurance, and still earn an attractive profit.
Obviously, some taxpayer advocates might object to the subsidization of real estate developers’ profit margins in this manner. Others might conclude that encouraging owner-occupied housing is a worthwhile investment of a community’s tax revenue. Regardless, this would at least be an honest debate about the real question: Who should bear the cost of building condominiums without defects? The mayors’ current plan to make homeowners pay for repairing a builder’s poor workmanship is the wrong answer.
Jesse Howard Witt is an attorney with The Witt Law Firm in Denver. He focuses on construction law and represents homeowners, associations, developers, and contractors. He welcomes comments at www.wittlawfirm.net.
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Super Lawyers Selects Haight’s Melvin Marcia for Its 2023 Northern California Rising Stars List
July 16, 2023 —
Melvin F. Marcia - Haight Brown & Bonesteel LLPCongratulations to Melvin Marcia who was selected to the 2023 Northern California Rising Stars list. Each year, no more than 2.5 percent of the lawyers in the state are selected by the research team at Super Lawyers to receive this honor. Super Lawyers, part of Thomson Reuters, is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are made using a patented multiphase process that includes a statewide survey of lawyers, an independent research evaluation of candidates and peer reviews by practice area. The result is a credible, comprehensive and diverse listing of exceptional attorneys. The Super Lawyers lists are published nationwide in Super Lawyers magazines and in leading city and regional magazines and newspapers across the country. Super Lawyers magazines also feature editorial profiles of attorneys who embody excellence in the practice of law.
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Melvin F. Marcia, Haight Brown & Bonesteel LLPMr. Marcia may be contacted at
mmarcia@hbblaw.com
2017 California Construction Law Update
December 15, 2016 —
Garret Murai – California Construction Law BlogTo say it’s been an exciting year in politics would be an understatement.
While most of the nation’s attention was focused on the presidential election, state legislatures, including California’s, were busy at work. The California State Legislature introduced 3099 bills during the second session of the 2015-2016 session of which 808 bills were signed into law. 2016 saw the enactment of several bills of interest to the construction industry including bills related to alternative project delivery methods, prevailing wages, and licensing. Each of the bills discussed below takes effect on January 1, 2017.
Project Delivery
AB 2126 – Amends Public Contract Code section 6701 to increase the number of projects the Department of Transportation may use the construction manager/general contractor method of project delivery from no more than 6 projects, to 12 projects, of which 8 of the 12 projects would be required to use Department employees or consultants under contract with the Department to perform all project design and engineering services.
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Garret Murai, Wendel Rosen Black & Dean LLPMr. Murai may be contacted at
gmurai@wendel.com
CSLB Reminds California Public Works Contractors to Renew Their Public Works Registration
October 02, 2015 —
Garret Murai – California Construction Law BlogA friendly reminder from the Contractors State License Board . . .
CSLB Urges Public Works Contractors to Renew Dept. of Industrial Relations Registration before October 1 to Avoid Hefty Penalty
SACRAMENTO — A mandatory renewal deadline is approaching for licensees who work on public works projects. Contractors whose registration with the California Department of Industrial Relations (DIR) expired June 30, 2015, and have ongoing public works projects or plan to bid on new ones, must pay the $300 renewal fee
before October 1, 2015, or face an additional $2,000 late penalty after that date.
As a result of
Senate Bill (SB) 854, all contractors have been required since April 1, 2015, to register with DIR to be awarded a public works contract, even if the project did not go out to bid.
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Garret Murai, Wendel Rosen Black & Dean LLPMr. Murai may be contacted at
gmurai@wendel.com
Bill to Include Coverage for Faulty Workmanship Introduced in New Jersey
December 04, 2013 —
CDJ STAFFOn November 25, Gary S. Schaer, a Democrat from Bergen and Passic, introduced a bill into the New Jersey legislature that would require insurers to cover faulty workmanship. The bill would require commercial liability insurance policies to cover “property damage or bodily injury resulting from faulty workmanship.” Policies that do not provide this coverage could not be offered in the state of New Jersey should the measure pass and be enacted into law.
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