Pretreat Industry Threat

Like a ghoul rising from the grave, construction defect lawsuits are haunting companies that have in the past done termite pretreats on attached housing projects. Attorneys have discovered a new gold mine and pest control companies are paying the price years after putting projects to rest. The new gold mine is representing homeowner associations, primarily in attached housing communities, in construction defect lawsuits against builders.

Homeowner associations, under the expert guidance of law firms specializing in this area of the law, sue the original builder of an attached housing project, often resulting in settlements reaching into the millions of dollars. The problem is particularly acute in California where plaintiffs have up to 10 years after the completion of the project to file suit. This compares with a two-year statute of limitations in other states.

WHAT IT MEANS TO YOU. How does this affect pest control companies when the allegations involve malfunctioning downspouts, leaky roofs, decks not properly sloped and noisy plumbing? The standard response to these lawsuits has become the almost automatic filing of a cross complaint by the builder against every subcontractor that did work on the project. The stated reason is that the ultimate liability for the defects, if any, is unknown at the outset. So, the prudent response is to drag everyone into the lawsuit until the facts sort themselves out which can be costly. You end up charging the $1,000 deductible — or whatever your liability insurance might charge — against your current earnings for the cost of getting yourself extricated from the mire of a complex and tedious lawsuit. If you can do this, consider yourself lucky for having adequate insurance coverage! Typically these cases take three to four years to resolve, with more than 90% of them settling without a trial. It could take as long as a year and a half to get out of one of these cases — if your attorney can convince everyone it’s not in their best interests to pursue you. The attorney costs for your defense could amount to $20,000 and even involve a "nuisance" payment. The dollar amount doesn’t reflect the indirect costs of distractions management and staff incur processing the claim.

RECORD-KEEPING QUESTIONS. In regard to the 10-year statute of limitations in California, my question is this: who keeps service records for 10 years? The essential information that needs to be saved is your history of insurance carriers so you can identify who provided coverage at the time of application. Then, hope you had occurrence rather than claims-made coverage!

The need for this insurance history also calls attention to what business records you need to carry away from an asset sale of your company. Remember, your company’s buyer is acquiring your assets, not your liabilities. You will still need to defend yourself, or your corporation, if a summons is served on you for work you did. You may need to know who your insurance carrier was 5, 7 or even 10 years ago. Even though many asset sale agreements address the retention and availability of records for some length of time (often for five years), don’t count on it. Your service records and files may not hold much priority for a branch manager years down the road who may be struggling to make the numbers rather than safeguarding your records.

This construction defect legal feeding frenzy is being supported certainly in part by genuine concerns with construction practices. But there is also a certain attractiveness of deep pocket builders and their lenders and a myriad of subcontractors with a multitude of insurance companies protecting them. The issues are complicated in California by the antiquated legal forums available to resolve these disputes, including the definition of a defect, the damage arising out of it and the punitive charges resulting from these lawsuits. Builders in California currently are liable for charges far beyond the real cost consequence of a construction defect. Legislation is now being proposed to force plaintiffs to show a real value consequence of a defect, which now is not the case.

OUTCOMES OF THE LITIGATION. One of the outcomes of this surge in construction defect litigation is that it has become almost impossible for builders to build the most affordable and land-efficient type of new homes: condominiums and attached townhouses. The threat of an almost certain lawsuit has created an aversion to building this type of home. In fact, in a California Building Industry Association (CBIA) survey, 68% of the builders surveyed no longer build townhouses and 86% no longer build stacked condominiums units. This withdrawal from building lower cost, affordable housing is contributing to the gap in the affordability and availability of housing in California. According to CBIA, the median price of a new home in California is $208,500. The estimated qualifying income needed to purchase this median-priced home is $68,605. The problem is that the actual median income of a family in California is $40,000, an afford-ability gap of $28,605.

In regard to availability, the economic resurgence in California is creating a demand for housing outstripping the ability of the market to provide such housing. For example, the economy in Orange County (in Southern California) is growing fast enough to support 20,000 new housing units a year. In 1998, permits for only 10,000 units — only half of what was needed — were issued. You can imagine what this shortage is doing to the demand and prices of existing homes. The pattern is being repeated throughout the state.

In the Silicon Valley in Northern California, Sun Microsystems announced they would stop expanding in the Bay Area due to the inadequate supply of housing. Our industry suffers an added negative impact from this disparity in affordable housing since this is where our staff would otherwise live in order to be close to their workplace.

CONCLUSION. What will be the outcome of this new threat to this market niche in our industry? At the very least it raises the need to build an added cost into quoting these types of jobs to compensate for the new risks inherent in doing this work. The risk is there: a recent sampling of condominium projects revealed 81% of them had been the subject of litigation. We do know the issue has only just begun to blossom in the past couple of years and will probably get worse before it gets better. And incurring the costs of these lawsuits will no doubt fall disproportionately on the shoulders of firms who have done many of these projects in the past.

In closing, keep in mind that your attorney, your insurance broker and your carrier are your partners. Rely on them for advice in making well-informed decisions.

Saunders can be reached at 949/376-5788.