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Early Preparation of a Construction Defect Claim Can Produce Quicker Results

When confronted with construction defects at your home or in your association, the first questions that an owner will likely ask almost always relate to money. How much will it cost to pursue claims against the builder? Who will ultimately pay for the repairs? The answers to these questions depend, to a certain extent, on how well and how soon the owner or association is prepared to support their claims… but we will get to that in a minute.

In an effort to avoid construction defect litigation, the California State Senate proposed, and the Legislature passed, Senate Bill 800. With an effective date of January 1, 2003, this legislation (now codified as California Civil Code Section 895, et seq.,) imposes certain “Requirements for Actions for Construction Defects” within the State of California. Within the legal community these requirements are interchangeably referred to as the “SB800,” “Title 7,” or “pre-litigation" procedures and are now well known by construction defect attorneys.

The stated purpose for the SB800 pre-litigation procedures is certainly worthwhile: among other things, it seeks to reduce the number of construction defect lawsuits in California; it seeks to improve the standards and procedures for early disposition of construction defect cases; and it is intended to facilitate the ability of the builder to obtain liability insurance for the housing that is constructed. To accomplish this, the law prescribes certain steps that construction defect claimants must follow prior to filing suit.

One result of this legislation is that insurance companies are more willing to issue a liability policy to a general contractor for the construction of a major development because SB800 is in place to lessen the threat of a potential lawsuit (and thus lessen the exposure that the insurer faces). On the other hand, the same general liability policies typically state that coverage is provided only for sums that an insured “is legally obligated to pay as damages” - a phrase that insurers continually argue requires the filing of a lawsuit before any coverage obligations are triggered.

This raises two questions: will a builder be willing to fund the resolution of a substantial claim when it has paid premiums for an insurance policy that is supposed to cover those same claims? What does this mean for homeowners or associations hoping to resolve disputes through the required SB800 pre-litigation procedures?

In the end, it means that preparation is paramount.

While insurance companies will argue that they have no coverage obligations until a suit is filed, general liability policies also typically include language stating that the insurer “has the right, but not the duty” to fund any settlement prior to trigger of coverage. Thus, if it makes economic sense for the insurance company to settle the suit during the SB800 pre-litigation procedure phase (i.e., if the cost to ultimately defend its insured against a lawsuit is likely to outweigh the current cost to settle the claims), the insurer may do so even though it also argues that it has no current coverage obligations.

For this to be a possibility, however, the insurance company will likely require evidence that covered damages exist at the property. This is where homeowner and association preparation is of the utmost importance. Evidence is the key word when it comes to this preparation, and the more thoroughly it is compiled, the greater the likelihood for resolution during the SB800 pre-litigation phase. This preparation should include all evidence of damages (property or otherwise), repairs, owner complaints, inspections, surveys, consultant analysis, and of any costs of repair performed. Anything - and everything - related to physical damage to the property due to faulty construction should be vetted and assembled at the very earliest opportunity. Early preparation of the facts of a claim will facilitate an insurance company's acknowledgement of its coverage obligations.

Of course even with the most well-prepared owners or associations, insurance companies may still refuse to participate in the SB800 pre-litigation procedures. While unfortunate, it is not necessarily fatal to an early resolution of the claim. The SB800 pre-litigation procedures will still be followed, and the builder will still have an opportunity to settle the claim absent litigation. Ensuring that the best evidence is gathered and presented during this process can only aid the likelihood of early resolution, particularly when, as we routinely recommend, a mediation occurs during this period.

Should litigation ultimately become necessary because neither the insurer nor the builder is willing to fund necessary repairs, the advance preparation that was done will nonetheless be vital to the litigation. Because the evidence relating to damages has been gathered, a major early hurdle will have been cleared and resolution of that litigation can be achieved just as soon as the defense is ready to discuss it.

Thus, when a property owner is considering the cost of pursuing a construction defect claim, and the time necessary to do that, remember that gathering as much evidence as possible, as soon as possible, may significantly reduce both. Your attorney can recommend appropriate experts who are skilled at analyzing construction problems and obtaining the evidence necessary to pursue a claim. An early investment in such an expert and the guidance of legal counsel may be a property owner's best protection against construction problems.

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