June 18, 2014

If Defects Aren’t Addressed, Owners Absorb Losses Alone


Any building owner should dread the prospect of discovering construction defects. Faced with uncertain financial impacts, even loss of the property, stricken owners must press the limits of the law to find the resources they need to save themselves from disaster. Due to the environment in which these claims are resolved, unwary owners may find themselves doubly damaged by their own actions.

In the Pacific Northwest, construction defect claims are all about water. They do not necessarily involve incompetent workers or designers, or unscrupulous builders cutting corners to save money. Most often, building defect claims arise out of small mistakes in construction or in maintenance that, repeated, can lead to large repercussions. These mistakes allow water to enter and accumulate, hidden within structures. The degradation caused by undiscovered rot, fungus, and mold can destroy a property and endanger the health of its occupants. Fear of it can damage the property's value.

Owners of buildings damaged by construction defects face fearsome losses. They cannot let the problem persist, but the cost and effort to repair overwhelm them. Property insurance often excludes such damages from coverage. With the value of the property sharply diminishing, lenders are reluctant to increase financing to fund the necessary corrective work. Commercial properties may become unprofitable. Owners may find themselves prepared to take desperate action to find relief.

Claimants pressed to find solvent defendants may cast a wide net in the hopes of capturing the attention — and insurance coverage — of as many professionals, contractors, and subcontractors as may have some degree of responsibility for the defects. Each defendant faces some risk that it will pay some part of the claimant's damages and the certainty that it will incur substantial investigative and defense costs if the matter is not settled out of court. It is the perceived value of avoiding these risks that motivates the various parties to contribute to a settlement fund.

In the effort to maximize the perception of risk, and thus the willingness to participate in settlement, owners may be inclined or encouraged to state their cases in the extreme. Associations authorized to make claims on behalf of individual unit owners may decry the condition of all units, when only some have problems. Attorneys, within the bounds of ethical practice, may plead the worst conditions leading to the most dire damages, anticipating the defense will argue for moderation or avoidance of the claim. These tactics, which may be effective to raise the stakes in a dispute, can also pose a substantial hidden risk to those who employ them.

Every allegation of defect and damage to property reduces the value of the property. Few buyers or lenders are interested in property they believe may be deteriorated or dangerous. Such allegations can interfere with marketability and create a stigma that persists long after the dispute has been resolved. To the extent the allegations cannot be substantiated, the claimant is unlikely to recover damages (after paying consulting and attorney fees) sufficient to do the work that could mitigate the stigma. The owner is then left to explain to potential purchasers and lenders that the property is now in good condition, even though nothing has been done in response to the earlier defect claims.

The owner simply absorbs the self-inflicted loss alone. In extreme cases, he or she may look to the association management, the defect consultants, or even to the attorney to recover stigma damages flowing from their negligence — a claim that should be covered, if it can be substantiated, by liability insurance.

Building construction defect claims still plague the construction industry. The best way to avoid such claims is to build defect-free buildings. Developers and builders have already become more involved in the monitoring and maintenance of their completed projects. Even more is gained as they create the mechanisms that will show owners and building operators how to get the most out of their building investments and how to avoid damaging them. Finally, in collaboration with owners, take positive steps outlined in warranty and maintenance manuals to identify defects early and to correct them quickly — before anyone needs to claim their building is deteriorated or dangerous.

For more information on this topic, please contact marketing@jordanramis.com or call (888) 598-7070.


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