Kenneth S. Kasdan is a plaintiffs’ attorney with Kasdan Simonds Weber & Vaughn in Irvine, Calif., a firm specializing in construction defect litigation. He was a co-chair at the Construction Litigation Leaders’ Forum, produced by HB Litigation Conferences, on March 3-4, 2011, in Marina Del Rey, Calif.

New construction defect litigation is increasing, as is the pressure on insurance carriers and developers. We are also seeing greater complexity in the litigation due to the number of foreclosures, an influx of cases involving half-empty high rises, and more commercial and municipal claims.

The number of homeowners is substantially increasing in each case. Before the real estate crash, homeowners didn’t care if they purchased a house with leaky windows and roofs because, regardless of the condition, they believed that house’s value would double in a few years and someone would be there to purchase it.

But in today’s market, these homeowners who purchased houses with problems are watching their home’s value diminish and suddenly feel the need to get involved in litigation. Number one, they’re stuck with a house they can’t sell and number two, they’re stuck living in a house with problems.

Case Mix

We’re seeing a change in the types of cases in Construction Defects litigation. We’re not just seeing cases involving single-family homes and condos anymore. A number of firms are taking on a tremendous amount of litigation involving high-rise projects, many of which are half empty because of the recession. There’s quite bit of this type of litigation occurring, particularly around the major cities in California and Nevada.

We’re seeing an increase in condominium conversion cases. The condo conversion cases offer a panoply of legal claims. These don’t just involve a construction defect claim. They also involve breach of fiduciary duty claims — which may be covered under an entirely different type of policy — and fraud claims, which may not be covered at all.

There’s also been a significant increase in commercial and municipal litigation. Many cases are now centered around Owner Controlled Insurance Programs (OCIP), which are also known as “wraps.” These used to be applied in the realm of large commercial projects only, but have made their way into residential projects. Under them, the developers, general contractors and subcontractors are named insureds under a single policy for a single project. As a result, the days of chasing 80 percent of the money for the subcontractors and various subcontractor counsel are on the decline.

Outside the Wrap

But what is a creative plaintiff’s lawyer doing in light of these factors? A lot of firms now are chasing all the subcontractors outside the wrap policy. Developers’ counsel are also chasing subcontractors outside the wrap.

Also, product manufacturer and product supplier claims for various forms of defective product in various buildings are being included in the construction defects cases. Often times those claims even survive long after the resolution of the underlying construction defect case.

Design professionals are coming into the cases more often. Issues of conflict with the developers’ counsel are arising if he or she is under the wrap policy. Insurance carriers are also asserting reservations of rights in these cases, which raises even more issues.

Wrap policies raise a multitude of questions, such as, if there are uncovered claims, who will represent the subcontractors? Who will represent the developer for those uncovered claims?

This goes back to the manuscripting of the policies. Many of these policies either haven’t been manuscripted or were manuscripted by in-house counsel or developers who didn’t understand the legal risks of the policy down the road.

These concepts outline the direction construction defect litigation is moving, and very quickly.

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