(Written by Jack Milarch – NMHBA EVP/CEO – Originally published in the July 2007 Housing Journal)

How Big Is the Target You’re Wearing?

Construction Defect Liability Lawsuits Show Up in NM

For several years now our leadership has attended meetings where we’ve heard scary stories about massive construction defect litigation cases, particularly from California, Nevada, and Arizona. We hadn’t seen much of that in our state, however I was recently alerted to the existence of two such suits in New Mexico naming a high production builder, which prompted me to consider the topic of this column.

Why should our building contractors care about this? Several reasons come to mind.

General Liability insurers who cover construction contractors’ risk track construction defect litigation state by state and use this information to decide whether or not to cover contractors in that area and decide what to charge for that coverage. More litigation in New Mexico is bad news to our liability insurance carriers.

A large and highly profitable “industry” of attorneys and experts has arisen, particularly in the western U.S., that specializes in attacking and defending those who build and develop residential construction projects. These folks carefully track the occurrence and success of “C.D.” (as they refer to construction defect) litigation and like all other businesses they seek to expand their “markets”. Members of the “C.D.” litigation industry regularly attend their industry “trade shows” where they keep up with the latest on how the courts are ruling and any new techniques and law changes. Plaintiff representative members of this “C.D.” litigation industry are now active in New Mexico and are on the prowl for disgruntled home owners.

Defensive action alone for those contractors who find themselves embroiled in these C.D. cases can be extremely expensive and time-consuming. In reviewing one of the recent NM suits I counted 26 contractors and suppliers named as defendants, and each of them had to retain their own attorney. So far three contractors have been released by the court, and the remainder are still actively defending themselves.

So back to the main question: How big is the target you’re wearing? If you are a sub, a sub’s sub, or a supplier and you think “this doesn’t really apply to me”, think again. The latest trend in these cases in California and Nevada is that the general contractor’s legal team joins up with the home owners’ legal team and they jointly attack the subs and suppliers who worked on the homes or supplied products to the project. From an industry point of view that makes a very ugly situation.

Here are a series of questions you should ask yourself to assess your chances of being named in and, if so, surviving one of these lawsuits.

The first all-to-obvious question is “Are you building defects into the work you are doing?” I have heard several construction defect plaintiff attorneys gloating over how easy it is to attack and win against contractors and their insurers because they feel it’s very easy to find defects in typical home construction. In reading one of the New Mexico suits recently filed, a home was destructively tested, resulting in 28 separately listed defects inside, with another 12 defects in soil compaction and grading outside being the basis of the litigation.

Are you following manufacturer’s installation instructions for the components you are using? I have read several installation instructions recently which I felt were written more for defense of future suits rather than being actual installation guides. And I’ve heard contractors saying it would be very difficult to follow instructions to the letter with some particular component they are using. If you honestly feel that way I recommend you think twice about using such a product. Failure to follow manufacturer installation instructions is exactly the sort of thing that construction defect plaintiff attorneys look for. The experts they hire to “deconstruct” a defective home are very good at what they do and they will test and document any issues they can find, trying to prove these things contributed in some way to actual problems with the building. Water intrusion into walls issues and soil compaction related issues seem to be the targets of much of the testing in recent New Mexico suits. If it can be shown you didn’t follow manufacturer’s installation specifications, you’re leaving yourself wide open to both litigation and the possibility of a concurrent license revocation proceeding.

What documents are you signing? Carefully read any contacts or other agreements you are asked to sign, know what is in them, and keep a copy. Are you waiving any rights or pledging defense or indemnity to anyone? If so, talk to your attorney about possible ramifications.

What are the details of your general liability coverage? You should contact your insurance agent and go through your policy looking at details such as whether or not the cost of your defense is within your policy limits, how far your coverage will go on completed projects, what coverage you have for work done on your behalf by others, and similar high profile coverage issues that a competent contractor’s insurance agent should be aware of. If your coverage is deficient, look for better coverage.

What type of projects are you working on? There is no question that clusters of similarly built homes attract construction defect plaintiff attorneys. The more units you work on which are in close proximity to one another, which use the same subs and/or the same products, and are sold by the same builder, the bigger your target is. If you work on this type of housing, protect yourself accordingly.

Are you keeping good records? If you are attacked and expect your attorney to have a decent chance of defending you, you need good records. The pain and suffering felt by contractors and their insurers during the arduous “discovery” stages of these lawsuits can be horrendous. General contractors need records of which subs specifically worked on which buildings, who supplied materials, and exactly what components went into each building. Subs need accurate records in regard to exactly which building was worked on, when the work was done, and what products were installed into each particular building. Suppliers need accurate records of what, when, and where materials were delivered, and whether or not installation of any type was included. Contractors will get significant kudos from their defense attorney and insurer for having hard documentation of critical construction details. This may sound extreme to you but, in the more litigious western markets, builders routinely keep digital photos of every window and other flashing installation, and of other problem-prone construction areas, on every house they build. Many builders now retain third party inspectors to review, document, and catalogue these details.

Are you keeping copies of your own and other relevant insurance coverage documents? General contactors should always keep copies of the coverage from each sub and supplier who worked on every house and be sure their records can support an inquiry demanding copies of ALL policies of everyone who worked on house “X”.

I find it very unfortunate that we need to discuss these problems, but these are the issues of the day within our industry. NMHBA President Marc White has appointed a group of members who will follow the development of these construction defect litigation suits in our state and surrounding states, to inform our members and see if there is anything the association can do to help keep this trend from becoming the industry firestorm it has become in other western states. If you have information on this subject you wish to share, contact Melanie at NMHBA.