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Nevada Construction Defect Law Litigation Primer

Posted by: on Thu, Aug 16, 2012

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Over the past several years, the proliferation of construction defect litigation has created an increasingly growing problem which appears to some to be burgeoning out of control. A phenomenon that was once unique to California has now spread to other rapidly growing residential areas in Arizona, Nevada and other states. Because many of our clients are being exposed to Construction Defect (“CD”) cases for the first time, we thought it prudent to briefly outline some of the issues these cases raise. The number of such cases is exploding in Southern Nevada, and more contractors are being exposed to new issues which are typically not manifested in “normal” civil litigation.

Nevada Construction Defect Lawyers

1. What is a “Defect?”

Chapter 40 of the Nevada Revised Statutes governs actions resulting from constructional defects. According to NRS Chapter 40, Section 40.615, a defect may be as little as anything not done pursuant to a local code, ordinance, or standard of care. While the statute includes language regarding the “physical damage” or “unreasonable risk of injury to person or property,” the use of the word “or” following subsection 3, below, does not require it. Thus a “defect” may be determined without respect to resultant damage or actual/potential harm caused thereby. In this regard, while the statute does not use this language, it is essentially a negligence per se standard.

NRS 40.615 defines “Constructional defect” as follows:

“Constructional defect” means a defect in the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance and includes, without limitation, the design, construction, manufacture, repair or landscaping of a new residence, of an alteration of or addition to an existing residence, or of an appurtenance:

1. Which is done in violation of law, including, without limitation, in violation of local codes or ordinances;

2. Which proximately causes physical damage to the residence, an appurtenance or the real property to which the residence or appurtenance is affixed;

3. Which is not completed in a good and workmanlike manner in accordance with the generally accepted standard of care in the industry for that type of design, construction, manufacture, repair or landscaping; or

4. Which presents an unreasonable risk of injury to a person or property.

Even a minor infraction can automatically equate to “damages” (see below), which includes fees and costs. Thus, the statute is written in language that is clearly pro-plaintiff.

2. Statutorily Mandated Opportunity to Repair Defects

Under Chapter 40, NRS 40.646, before a contractor commences an action for a constructional defect against a subcontractor, the contractor must follow specific procedures. First, within thirty days of receipt of such notice, the contractor must provide written notice to the subcontractor of the specific construction defects alleged. Upon receipt of such notice, the subcontractor has an opportunity to inspect the alleged construction defects. Finally the subcontractor must be afforded an opportunity to repair the alleged construction defects. Only after this process is completed may a complaint be filed. This provides an opportunity for the entity who performed the work to fix its own mistakes.

In certain circumstances (i.e., where the defect allegations are minor or repairable at a minimal expense), a subcontractor should give strong consideration to effectuating repairs of the defects alleged, even over and above its own mistakes. The subcontractor is encouraged to view this decision strictly as a business decision, as a measure of minimizing the cost of defending against construction defect allegations. The decision to repair minor defects, such as a small area of cracked asphalt, may be the best financial decision, even if valid defenses exist. Such repairs may deter the filing of a lawsuit against you after the Chapter 40 process is complete.

While there is a statutory right of repair for subcontractors, there is no corresponding right to a release from the CD allegations following the performance of the repairs. This means that even if the subcontractor has valid defenses against performance of the repairs and decides to perform the repairs as a business decision to reduce costs, there is no guarantee that the subcontractor will not later be sued for the same issues.

When crafting the recent amendments to Chapter 40 of the NRS, the Legislature took care to protect the homeowner against subcontractors who would potentially employ a defective repair method that left the homeowner in the same or worse situation than before filing the original complaint. Once again, Nevada law sides strongly with the protection of the homeowner.

Despite the potential that repair work may not equate to a release of the defect allegations against a subcontractor, the repair cost of a minor issue may be as little as $1,000.00. Considering the high cost of defending a CD claim, performance of such repairs is often the best business decision from a financial standpoint. Showing of a willingness to repair is also strong evidence to present to a jury of a subcontractor’s efforts toward successfully resolving a problem without resorting to litigation.

3. Complex Nature of Construction Defect Matters

A typical CD matter is complex in nature, and is generally governed by the Nevada Rules of Civil Procedure for complex litigation (NRCP 16.1(f)) for being a “potentially difficult or protracted action that may involve complex issues, multiple parties, difficult legal questions, or unusual proof problems.” CD matters are more complex than any other type of civil litigation, excepting class action matters. Due to the inherent complexity, CD matters require specially-trained judges and mediators, and expert witnesses who have an acute understanding of the process. Such complexity naturally drives up the cost of CD litigation.

There are many parties involved in CD cases, including the Claimants, Developer(s), General Contractor(s), and numerous Subcontractors, each with their own attorneys and experts. These matters require extensive discovery, mediation conferences, Case Management Order requirements, Special Master Hearings, and Court proceedings. Each of these events often requires substantial preparation and the attendance of all parties, including attorneys and experts.

The unusual proof problems inherent in a construction defect matter generally require visual inspections and destructive testing of the subject property. The results of such inspections and testing are open to the analysis and interpretation of experts, and rarely will all experts agree as to causation. The Claimants’ experts will generally have at least one expert opinion, as will the developers’ experts and the subcontractors’ experts. In general, each of the various experts is highly qualified to render opinions, so these issues are matters open for compromise during settlement negotiations or for a finder of fact to determine in a trial.

Even if a defendant were to proceed through trial, it is highly unlikely that a jury would not find liability of even 1%, because the issues are so intertwined and complicated.

While not explicitly stated in the statute, it is generally understood that damages are incurred on a joint and several basis. This means that if liability is found in whole or in part for a constructional defect, (even 1% liability) then each party may be responsible jointly or severally (i.e., individually) for a percentage of the damages that may equal 100%, particularly if one subcontractor, for example, is the last one left in the case. Thus, even if a party “wins” by only being allocated 1% of the damages, that party may still be liable for 100% of the damages, which includes costs and attorneys fees of the owner and developer.

Additionally, even if a party gains a 100% win and is found to be without liability for the construction defects alleged, that party may still be liable for defense fees and costs pursuant to a written contract (see the discussion of Indemnity below). Studies have found that typically the defense costs and fees far exceed the actual cost of repair. Some surveys suggest that the average fees and costs exceed repair costs by five times.

PART 2 OF 3 — POSTED AUGUST 13, 2012

4. Recovery of “damages”

Due to the complexity of construction defect matters, there are numerous components to a calculation of damages. Pursuant to NRS 40.655, once a “constructional defect” is found, the claimants may recover the following “damages:”

a) Attorneys’ fees and costs;

b) Cost of repairs already made, including the cost of temporary housing;

c) Reduction in market value;

d) Loss of use of any part of the “residence” (which is defined to include driveways and etc. that are not part of the actual dwelling unit.)

e) Reasonable value of any other property damaged by the “defect”

f) Expert fees and costs, including the cost of visual inspections, report preparation, destructive testing, evaluation of loss, and etc.; and

g) Interest

5. The Indemnification Factor

Additionally, a party may be liable pursuant to a written contract (subcontractor indemnity clause), even absent a finding of liability for the defect alleged. Following is a fairly typical indemnification provision, with emphasis added:

To the fullest extent permitted by law, Subcontractor shall indemnify, defend (at Subcontractor’s sole cost and expense and with legal counsel approved by Contractor, which approval shall not be unreasonably withheld), protect and hold harmless Contractor, all subsidiaries, divisions and affiliated companies of Contractor, and all of such parties’ representatives, partners, designees, officers, directors, shareholders, employees, consultants, agents, successors and assigns, and any lender of contractor with an interest in the Project (collectively, the “Indemnified Parties”), from and against any and all claims (including, without limitation, claims for bodily injury, death or damage to property), demands, obligations, damages, actions causes of actions, suits, losses, judgments, fines, penalties, liabilities, costs and expenses (including, without limitation, attorneys’ fees, disbursements and court costs and all other professional, expert or consultants’ fees and costs) of every kind and nature whatsoever (individually, a “Claim”, collectively “Claims”), which may arise from or in any manner relate (directly or indirectly) to any work performed or services provided under the Contract…. The duty of defense hereunder is wholly independent of and separate from the duty to indemnify and such duty to defend exists regardless of any ultimate liability of subcontractor. Such defense obligation shall arise immediately upon presentation of a Claim by any 3 person or entity party and written notice of such Claim being provided to Subcontractor. Payment to Subcontractor by any Indemnified Party shall not be a condition precedent to enforcing such Indemnified Party’s rights to indemnification hereunder. Subcontractor’s indemnification obligation hereunder shall survive the expiration or earlier termination of the Contract and shall be enforceable by Contractor until such time as an action against the Indemnified Parties for such matter indemnified hereunder is fully and finally barred by the applicable statute of limitations or repose. Subcontractor’s liability for indemnification hereunder is in addition to any liability Subcontractor may have to Contractor for a breach by Subcontractor of any of the provisions of this contract….

These typical indemnity clauses, such as the one above, which require the subcontractor to pay the fees and costs of the developer, are in addition to the Chapter 40 repair damages. Thus, a subcontractor’s exposure includes not only the cost to repair defects, but also the plaintiff’s fees and costs, the developer/general contractor’s fees and costs, prejudgment interest on the cost of repair, and prejudgment interest on the plaintiff’s and general’s fees and costs. Hence, if the client’s expert determines that the cost of repair for a certain defect is $20,000, the client needs to understand that if the case goes to trial and the jury agrees that repairs are needed, the final judgment could be more than $300,000 when the plaintiff’s and developer’s expert fees and costs are added to that cost of repair. This is why it is so dangerous for a contractor to claim that a particular job was 95% or 99% successful, and refuse to offer to repair or otherwise settle during mediation.

In at least two cases in Nevada that have gone to trial, the jury not only awarded more than the plaintiffs were asking for, the judgment more than doubled when fees and costs were included. For example, in the Albios v. Horizon case, the jury awarded $95,000 for defects, but when Chapter 40 fees, costs, and interest were added, the judgment swelled to in excess of $355,000. Clearly most experts agree that Chapter 40 severely penalizes a subcontractor who goes to trial against homeowners. As such, it is typically in the contractor’s best interest to settle multi-party, multi-unit cases before going to trial.

6. Why Mediate?

First and foremost, to stem the flow of these cases from clogging the courts (over 500 such cases are estimated to be now pending in Las Vegas) the statute mandates mediation during the Chapter 40 process, as will the Case Management Order as the matter enters litigation. Gaining a strong understanding of the facts of each matter is fundamental to successful negotiations. Thus, a primary purpose of the initial mediation conferences during the Chapter 40 process is for the parties to meet and confer regarding scope of work and insurance issues. This process may take several conferences, especially in instances where a party’s job file cannot be located.

Once the respective parties’ scopes of work are determined, the next step is to correlate the party’s scope of work with the individual defect allegations which may be applicable. The developer’s counsel will allocate a percentage of each alleged defect to all subcontractors who may have liability for that particular issue, even if the issue is not clearly within the subcontractor’s scope of work or responsibility. For example, it is common to include so-called “defects” which are arguably design issues, under the theory that the subcontractor should have noticed that the work was not being done pursuant to local code, ordinance, or standard of care within the industry (refer back to the definition of a “defect” above.)

A mediation conference is an opportunity for a subcontractor to point out the flaws in the developer’s logic with regard to such allocations, and to raise applicable defenses, with the goal of reducing the overall demand to the subcontractor. Thorough preparation for mediation is essential in part to identify these flaws from the start. Once the developer’s counsel prepares formal demands and allocates defects to a particular subcontractor, it is very difficult to convince him to make changes later, as that would require providing another subcontractor with higher demand and allocation of defects, which were initially allocated to you. Such activity would raise questions of credibility to the developer. Thus, it is critical to disclaim liability for certain allocated defects at the initial mediation conferences. A well-prepared expert is essential to this process (see below).

Mediating to a successful negotiated settlement is also a means to avoiding the high cost and uncertain outcome of complex CD litigation.

Part 3 of 3 — Posted Thursday, August 16, 2012

7. Strategic Use of Experts

For homeowner claims of construction deficiencies, Chapter 40 requires the use of an expert in most CD matters. In order to lodge a successful defense against a claimant who has retained a team of CD experts requires that other parties also retain appropriate CD defense experts.

The use of defense experts falls into two categories within CD matters: (a) in-house expert-employees; and (b) experienced CD experts. Each category has its own unique role within the process.

In-house experts are critical for helping to determine matters, such as the scope of work performed by the party, and the cost to repair the defects as alleged. Their participation at mediation conferences is also helpful to bring appropriate defenses to the table. In-house experts are the best qualified to discuss issues such as the method of construction employed, quality control standards, and scope and timing of work performed.

Experienced CD experts are critical for their understanding of the CD process and their experience in laying the groundwork for successful mediations and into trial. CD experts are well-versed in the applicable construction laws, codes, ordinances, and standards of care within the industry. They know the type of claims that developers’ counsel will typically allege based upon a subcontractor’s particular scope of work in conjunction with the claimant’s allegations, and can inspect the site and review the client’s job file with an eye toward gathering appropriate defenses and information to reduce settlement costs.

Each party to a CD matter will retain at least one CD expert, and, depending on the issues involved, it is common for a party to retain three to six experts or more (e.g., civil, mechanical, structural, plumbing, electrical, cost-estimation, statistical). Each expert will be selected based upon the individual’s ability to best defend its client’s position; therefore, the experts’ opinions will, in most instances, be adverse to the other parties’ experts. There is room for interpretation within the statutes and codes, as well as with one’s opinion on the likely cause(s) of the allegedly defective conditions. It is thus important to retain an expert qualified to address these considerations. It is also imperative to retain a CD expert who routinely practices in this market, as that person is familiar and better qualified to defend against the rationale used by many of the local plaintiffs and developer experts.

CD experts also have experience with depositions and in preparing their clients for trial. They understand the best methods of collecting data and organizing their files, and they are familiar with the applicable laws of evidence.

CD experts, however, are very expensive, as their expertise is so specialized and unique to this area of the law. Oftentimes the cost of expert witnesses exceeds the cost of legal fees. Our law firm typically pays the expert witness directly, which is one reason why it is vital that our clients maintain a current balance with our firm.

8. Defenses and Considerations

There are numerous defenses available to a party, for example the issue of failure to properly maintain the construction by the homeowners or the HOA. Such defenses primarily relate to mitigation of damages or the concept of contributory negligence (which arguably may relate to the issue of severability of claims in the “joint and several liability” concept) and are in no way an absolute bar to liability. Our firm will vigorously use any and all defenses applicable to the situation. However, that these defenses will usually be most beneficial during settlement negotiations, as opposed to during trial, for the reasons outlined above.

There are also considerations such as the danger of establishing a precedent by regularly settling too soon, whereby the settling party gains a reputation for prematurely offering a monetary settlement in exchange for a release. Such a reputation could foster additional unwarranted claims in an attempt by the other party to increase overall contributions to the claimants’ damages.

Just as it is dangerous to settle too early, it is also dangerous to wait too long to settle. Costs and fees continue to mount as the case proceeds. As most of the parties reach settlement arrangements, the developer and general contractor claimants often begin to realize that they are potentially liable to the claimants for more than the value of the remaining third-party settlements. This may discourage acceptance of lower settlement offers, even ones that would have been accepted earlier on in the matter.

Finally, as discussed above, Nevada law is strongly in favor of the homeowner-claimants. A defending party may “win” as a prevailing party, yet still be liable for fees and costs far in excess of the actual “defect” cost. This results in perhaps winning the battle over the defect, but losing the war over fees and costs, which can far exceed actual damages.

9. Insurance Considerations and Attorneys’ Fees

Until such time that insurance coverage is determined and the appropriate tenders are accepted, the client will typically pay for its defense fees out of pocket. These fees are often later recouped from the date of tender, once the applicable deductibles or Self-Insured Retention amounts are reached.

Our firm is seeing an increasing number of instances where carriers delay coverage decisions for periods of six-to-twelve months. Unfortunately, Nevada law does not presently compel a carrier to immediately render a coverage decision. Nevertheless, we are being compelled to exert regular pressure on carriers to make a coverage decision. Often we have to threaten suit and in some cases actually file suit to determine if coverage exists.

Additionally, due to the increasing number of CD claims, carriers are becoming more creative with their exclusionary language. The policies are drafted with tighter language specifically written to help avoid claims. Hence, even if the party has a valid claim within the coverage period, the policy language may operate to exclude coverage.

10. Conclusion

The summary of construction defect litigation matters outlined above is only an overview of some of the main issues involved and is not meant to be exhaustive. The bottom line is that each matter must be analyzed individually with the goal of obtaining a total release from the claimants’ allegations at the least possible cost. This requires that a business decision be made based on a comprehensive analysis and understanding of the pertinent facts in each matter.

Mark Albright

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our law practice includes a strong emphasis on all areas of construction law.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.

Note: This article, and any other information you obtain at this website, is not offered as legal advice, nor should it be relied upon as such, nor is it a solicitation for legal services. Only a licensed attorney can advise you with respect to your specific legal needs. We welcome your contacting our firm to discuss such representation. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.