Developers, trial lawyers face off over bill revising construction defect law changes made in 2015
Usually, an in-depth discussion on the characteristics of expansive clay soil wouldn’t draw much attention outside of an engineering classroom or a construction site.
But on Tuesday, dozens of lobbyists and representatives from two of the most powerful industries in the state crowded committee rooms in Carson City and Las Vegas to hear that presentation amid an emotional hearing on a long-running point of contention: construction defect lawsuits.
The actual subject of the hearing was AB421, a bill heard by the Assembly Judiciary Committee that would reverse many of the substantive changes Republican lawmakers made in 2015 on lawsuits related to construction defect claims, a move derided by Democrats but lauded by Republicans including Gov. Brian Sandoval and developers as necessary to stem the growing tide of alleged “frivolous” lawsuits on residential construction defects.
Since the 2015 law was passed, the number of construction defect lawsuits has dwindled significantly — declining by nearly 90 percent from the 2014 peak, according to a study by Applied Analysis, with only 20 defect lawsuits filed statewide last year.
But newly won Democratic control of the governor’s office and both legislative chambers has both sides geared up again for a fight over the section of state law allowing homeowners to sue builders and contractors for shoddy or dangerous residential construction practices.
The hearing also brought into stark relief the bitter conflict between two of the state’s most powerful industries: trial attorneys and developers/real estate companies. Both were top campaign contributors during the 2018 election cycle; real estate companies and developers contributed more than $997,000 to legislators, while law firms and individual lawyers contributed $630,000 to lawmakers during the election cycle. The issue has spilled out of the Legislature; the Builder’s Association has run ads opposing the bill on social media, and Republican Sen. Ira Hansen — the sponsor of the 2015 bill — has placed ads on Facebook opposing the bill.
The measure doesn’t entirely replace the 2015 law, but reverses many of its primary provisions.
Notably, it would extend from six to 10 years the period after home construction in which a construction defect lawsuit can be brought and indefinitely if the defect is caused by fraudulent or willful misconduct. Prior to 2015, Nevada had a “complex” system for bringing construction defect cases, typically between six to 10 years after the home was built depending on whether defects were patent or latent, known to the contractor or caused by willful misconduct, with time added on if the defects were discovered in the last possible year a claim could be brought.
But the 2015 bill instituted the universal six-year time period in which to bring construction defect claims once the home is “substantially” completed. Although most defect claims relate to more obvious issues with a home — wrongly fitted doors or windows, issues with lights or plumbing — Tom Marsh, a civil and geotechnical engineer, gave lawmakers several examples of how the clay soil composition on which most homes in the state are built spelled the possibility of major foundational issues with home construction that wouldn’t be apparent until eight to 10 years after the home was built.
“It really takes time for these things to manifest,” he said.
The bill also amends the definition of a construction defect beyond something that “presents an unreasonable risk of injury to a person or property” to include any defect done in violation of local law or ordinances. Attorney Ardea Canepa-Rotoli, a member of the Nevada Justice Association (the trial lawyers’ lobbying arm), told lawmakers that limitation meant a clearly dangerous defect or issue in a house would not be grounds for a civil construction defect lawsuit under the current law.
“Until or if that electrical code violation results in a fire, harming a person or property, it may not be considered to be a defect,” she said. “That’s just morally repugnant and just doesn't make sense."
The bill also removes certain pre-litigation requirements for homeowners, including a requirement that the homeowner be present when obtaining an expert opinion on the alleged defect, and a requirement for homeowners to first exhaust all warranties and limiting defect lawsuits to alleged defects denied by an insurer. It also removes prohibitions on homeowners associations to institute or to defend a defect lawsuit.
It also would remove limitations on recovery in lawsuits to only constructional defects proven by the claimant and allow for recovery of “reasonable” attorney’s fees. Canepa-Rotoli said many construction defect lawsuits were argued by attorneys working contingent fee contracts, as many homeowners cannot afford hourly rates for an attorney, so allowing recovery of those fees would allow more individuals to access the legal system.
Eva Segerblom, a trial attorney and member of the Nevada Justice Association, told lawmakers that the dwindling number of defect lawsuits was not because of higher construction standards but because the 2015 law made it nearly impossible to bring such a lawsuit.
“Unfortunately, this is not because all the homes in Nevada are being built without defects, but it is because the changes in the law have made it virtually impossible for homeowners to have a remedy,” she said. “The fact of the matter is that the current law puts all of the risk on the homeowner purchasing it.”
But a wide variety of lobbyists and representatives of the construction and real estate industry said that dwindling number was proof that pre-litigation dispute resolution processes were working, while helping keep down insurance and construction costs in a period of high demand for affordable housing.
Opponents pointed out that between 2000 and 2012, construction defect lawsuits in Nevada increased by more than 355 percent while home sales dropped by 86 percent, with a UNLV study finding homeowners in the state were 38 times more likely to be involved in such a lawsuit than the national average.
David Goldwater, a lobbyist for the homebuilding industry, said that the current construction defect system was set up to give homeowners as many opportunities as possible to quickly resolve issues with their home before going to court.
“I wish there was a bill you could vote for to force all builders to build the perfect house,” he told lawmakers. “I promise I’d work day and night to get that passed. The truth is, houses are not built perfectly, and when they are not, the home buyer needs fast and effective remedies. No one who buys a house wants a check from protracted litigation that lasts several years and drains them of time and resources.”
A study by Applied Analysis on behalf of the homebuilders found that the industry-wide cost to settle construction defect claims fell from an average of $32.1 million between 2010 and 2015 to just $3.8 million between 2016 and 2018. The study also estimated that costs fostered on all home sales as part of insurance and settlement costs related to construction defect lawsuits had fallen from an average of $5,000 to about $360, which advocates said allowed thousands of homeowners on the margins to access housing that they otherwise would be priced out of.
At the hearing, subcontractors, real estate agents and developers testified that approval of the bill would result in higher insurance rates and tougher barriers for housing development. Jesse Haw, a Reno-based contractor (and former state senator), told lawmakers that he and his brother’s company built their first residential subdivision in more than 14 years in 2016, which he credited to the 2015 changes in defect law. He warned that reversal of those changes would hurt smaller builders such as him the most.
“I’m here to tell you that private builders will be impacted the most,” Haw said. “My stock price doesn’t go down when I get sued; I simply go out of business.”
Updated at 9:50 a.m. to correct the name of the individual testifying on behalf of the bill.