Doctors aren’t the only professionals in Nevada taking down their shingles because of high insurance prices. In June of this year, 96 Systems President Leo Duram wrote to Nevada Insurance Commissioner Alice Molasky-Arman, “I have recently had to close my residential construction division . . . which accounted for 90 percent of all revenue.” Duram cited “astronomical” insurance costs, even though his firm had never been involved in construction-defect litigation, nor had it ever filed a claim against its insurance carrier. In shutting down 96 Systems’ residential division, Duram wrote he “had to deprive some 300 families of a wage base in Clark County.”
Horror stories like this one, including insurance premiums rocketing upward anywhere from 135 percent to 700 percent in one year, were brought before the state Insurance Commission on July 1 by the newly-formed Coalition for Fairness in Construction. The building blocks of the Coalition are the northern and southern chapters of the Associated Builders & Contractors and of the Associated General Contractors, plus the Southern Nevada Homebuilders Association, the Nevada Subcontractors Association and the Building Associations of Northern and Western Nevada. Beyond that, according to Coalition President Steven Hill, the membership extends to “Realtors, insurance agents, banking associations, lots of individual contractor and subcontractor organizations, title insurance companies and almost anybody affected by what happens in the construction industry,” right down to plumbers and other artisans.
Although insurance is the direct cause of their woes, Coalition members’ common enemies are construction-defect litigants and their attorneys. As of last April, up to 175 construction litigation cases were pending in Clark County. “The market is maybe 25 percent bigger than it was five years ago,” Hill said. “So, if five years ago we had six cases, then logic would dictate that we would have about eight now, not 175.” Del Webb Communities Vice President Paul Torblaa wrote to Molasky-Arman that, “The single greatest threat to our success as a company has been the magnitude of unreasonable and unfounded construction-defects litigation that we have been forced to defend.” Colleagues such as Perma-Bilt Homes Vice President Craig Hardy paint a picture of exponentially increasing litigation and insurance costs. In his letter to the Insurance Commission, Hardy said, “California construction-defect attorneys started coming here after having ravaged the California homebuilding industry.”
The rising tide of litigation comes at a time when the insurance industry is ill-equipped to respond. Its fixed assets are yielding less value due to declining interest rates, a struggling economy and a depressed stock market. “Back when the stock market was doing really well, pricing in the insurance industry got pretty cheap,” said Hill. Builders may now find only one or, at best, two companies willing to write policies, often with higher premiums and deductibles, and with more exclusions.
Hill compared the contractors’ dilemma with that faced by Nevada doctors, who recently pressured the governor into calling a special session of the Legislature to deal with their medical malpractice insurance rates. “I realize it’s not as sexy as not being able to have your baby because there’s not an ob/gyn available,” Hill conceded, “but an awful lot of people in this town are losing their jobs because of this, and the cost of housing has gone out of sight.”
Not everyone accepts Hill’s thesis. Attorney Francis Lynch, whose firm (Lynch, Hopper & Salzano) specializes in representing local homeowners, calls it “a stale argument. They brought that out in California years ago,” Lynch said. “Study after study has been done [showing] it’s not the insurance premiums that are raising the cost of these homes. It’s market forces. The cost of the insurance premium is the smallest cost a builder has to pass on to a homeowner.” Lynch insisted rising land costs are the most inflationary factor in home construction and that any appraiser will confirm this.
International Fire Resistant Systems CEO Jason Simontacchi blamed haste and opportunism, first in California and now in Nevada, for the predicament. “[Builders] want to get [houses] slapped up and sold as soon as possible because they’ve got a lot of debt on them,” he told the Las Vegas Review-Journal. “We’ll be happy to be sued if we won’t repair a legitimate problem,” retorted Jim Gair, owner of J.M. Gair & Associates, a townhome/condo developer. He said his main problem is Nevada Revised Statutes Chapter 40.600, which provides a grievance-and-remediation mechanism for victims of shoddy homebuilding. In distinguishing between “complex” (five plaintiffs or more) and “non-complex” cases, the statute enables the former to circumvent the lengthy redress-and-mediation procedures that single homeowners must pass through before taking a case to trial. “Well, the trial attorneys found a loophole and it is a nemesis right now to every residential builder,” Gair said. “It’s the worst thing we could ever have had done to us.”
Builders argue they are being hit without warning by multi-million-dollar homeowners’ association and class-action lawsuits, and are being deprived of a “right to repair” – a right they want written into NRS Chapter 40 when the Legislature reconvenes. They also want a more specific definition of construction defects than the law currently provides.
This is not the first time the Nevada building industry has petitioned Carson City for relief. But, during the last session, builders went before lawmakers with what Hill described as “15 different voices presenting 15 different plans. As a result, we didn’t get any legislation passed at all. We just failed.” Hence the formation of the Coalition and the new, united front seen last July at the insurance commission hearings.
Coalition members say they have no beef with the single homeowner and how such cases are currently litigated. “The law is working pretty well,” said Coalition counsel Jim Wadhams, “because the single homeowner in the stand-alone house says, ‘My problem is my windows are leaking and I want that fixed.’ When the [contractor] makes the offer to fix it, [the homeowner] generally drops the suit.” Wadhams blames plaintiffs’ attorneys instead: “I don’t think attorneys generally want repairs, because they want a percentage of a cash settlement. You can’t spend 40 percent of a new water heater, so they don’t want the new water heater – they want its cash equivalent.”
While Coalition members promise to leave single-homeowner protections intact if Chapter 40 is reopened, Lynch is not so sanguine. “Chapter 40 is probably the best construction-defect statute in the country,” he said, “crafted with the involvement of the construction industry. Ever since 1995 they’ve been trying to whittle away at different aspects of it. They would just as soon do away with all construction-defect litigation, I’m sure.”
Although the Coalition has yet to draft a specific proposal, Hill said there are “17 or 18 possible areas that we might address” within Chapter 40. As for codifying construction defects, Hill’s desire is to specify that “it has to be an actual damage, breach of contract [or] breach of warranty.”
Lynch, Hill and Gair all agree that greater involvement by – and greater funding from – the Nevada State Contractors Board would be helpful. Both Coalition members assert they and their colleagues would gladly pay a higher permit fee if it meant more vigorous policing of the industry. “I don¹t want to throw the Contractors Board under the bus, but they just don’t want to get involved in this at all,” Gair lamented. “I am passionate about this entire matter,” he concluded, “because my livelihood is threatened.”