Insights: Construction defects reforms cost lawyers, but they might not save much for home buyers

construction defects(Jay Pickthorn/The Argus Leader via the Associated Press)

After years of Colorado legislative fights over how to save time and money on litigation, two significant but insufficient things happened over the last three weeks that help nail down the issue of construction defects.

If changing the rules of the courts to address defendants’ liability sounds like the bygone battles of tort reform, then you’re onto something. Tort reform is a ghost of Mississippi.

A lucrative practice of law is suing developers and builders over poor work. Another one is defending builders and developers who get sued. A homeowners association board of as few as three people, a majority of two, can file suit and court ain’t cheap.

This issue cuts much deeper than the owners and builders, however. Lawsuits and insurance premiums are said to be one of big reasons condos and town homes have slipped to just 3 percent of the market in metro Denver. That matters because they’re cheaper than houses, so they’re an important landing spot for low-wage earners and young people buying their first home.

Coalitions, some financed by plaintiffs lawyers who prosper off lawsuits, see the curbs as back-door tort reform. Priced-out homeowners are the straw men every tort reform has to have.

The macroeconomic argument is that if builders and developers have to pay more for insurance, they’ll build apartments instead of condos. That way they don’t have to mess with litigious HOAs, and they can pocket the equity. Builders as a group also could continue to concentrate on higher-priced residences with more comfortable profit margins.

Let’s be logical. At the rate they’ve been throwing up housing developments in metro Denver the last 20 years, they weren’t building Sistine Chapels. Plywood, nail gun and go is more like it. Caulk is the great equalizer.

For four years legislators have tried and failed to limit lawsuits and reduce builders’ premiums to coax them back into building lower-priced condos and town homes.

That’s what they hope, but that’s all they can do.

“We can’t wave a wand and see the market recover overnight,” said Rep. Cole Wist, a Republican from Centennial, who’s made a good living defending corporate interests. Wist co-sponsored break-through legislation with Rep. Alec Garnett, a Democrat from Denver.

Three weeks ago the governor signed into law House Bill 1279.

The new law says each owner in a condo or town home association gets to vote on whether to sue. Before that, they must meet with the builder to see if there’s a remedy. Residents also would consider the cost of the litigation and the impact it could have on selling or refinancing their home.

Last week, the Colorado Supreme Court issued a long-legged ruling on arbitration, a finer point lawyers call “consent to amend,” which really just means if you change a construction defects contract between a builder and residents after the fact, both sides have to agree.

That simple argument has been in court racking up billable hours for since 2013, when Vallagio at Inverness Residential Condo Association in Arapahoe County voted to sue their builder, Metro Homes, after HOA members voted to erase the arbitration clause from their contract. Vallagio is hardly affordable housing, I should note.

The Colorado Supreme Court voted 5-2 that you can’t do that.

I had a chat with the winning attorneys, Mary Ritchie and Diane Palumbo of Palumbo Lawyers, about what the ruling means in the construction defects universe.

“I think this has tremendous precedents for developers, builders, homeowners and carriers across the country,” said Palumbo, who practices in six states from California to New Jersey. “If this decision had gone the other way then every homeowners association could have come in after the fact and amended their (covenants, conditions and restrictions) to avoid arbitration.”

She said arbitration gets a bad rap, but it’s a way to get a court decision without spending court-sized money on each side of a dispute. That’s money builders and homeowners could put to better use.

“Arbitration is something that’s been put out there as bad, when it’s really something very good,” said Ritchie, who argued the case.

That’s the part that bugs Wist, the time and the money.

“If people are building bad products, they need to be held accountable for that,” Wist said. “But if a business is really trying to resolve their deficient product, I think they deserve a process that is swift and is the least expensive alternative we can find.”

Wist and I discovered something in common. We’re both battered veterans of the tort reform battles of South from way back. Wist defended the Ford Motor Co. in the Bronco II rollover class action lawsuit in Greene County, Ala., in the mid-1990s. The SUV maker ultimately paid $113 million to victims in rollover crashes.

The conservative Weekly Standard magazine said nice things about my, blush, even-handed coverage of “jackpot justice” lawsuits, hundreds of millions of dollars in awards coming out of class-action cases such as Wist’s in rural Southern counties. The liberal Jackson Free Press thought I did a pretty fair job, as well.

We were told by spin doctors then that the reason health care was so expensive and awful in Mississippi was because tlawsuits and high premiums were driving up costs and driving out good doctors. The real victims were the people who couldn’t get access to quality health care,  while out-of-state lawyers made off with millions in legal fees.

In 2002 and 2004, the Magnolia State’s legislature put caps on the amount of money sympathetic juries could award, even for victims horrifically injured in the most negligent ways. Former Republican National Committee chairman Haley Barbour of Yazoo City made the issue central to his run for governor in 2003.

At the 10-year anniversary of the law in 2014, Geoff Pender of the Jackson Clarion Ledger wrote that  medical lawsuits and medical malpractice premiums had fallen by about two-thirds since the state slashed the profit margin for trial lawyers.

Pender interviewed one of my old sources, David Baria, now the minority leader of the Mississippi House from my old neck of the woods on the Gulf Coast, who was then president of the state trial lawyers association. (Baria once chartered an airplane to fly around the state and do press conferences about a piece of investigative reporting I did on why doctors were really leaving the state.)

“Baria said it’s now more difficult to settle cases for legitimate claims because businesses are willing to gamble on going to trial because of caps, and that businesses now start negotiations at zero instead of reasonable amounts for obvious damages.” Pender wrote.

But for all the money that doctors and insurers saved, it didn’t do much for those Mississippians who were supposed to get better care in the bargain.

Mississippi still ranks near the bottom nationally by almost every public health measure, including access to primary care physicians.

It must have been the fried chicken, cornbread and institutional poverty more than the lawsuits.

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