Construction defect lawsuits are typically initiated by a property owner, or entity assigned to act on behalf of a group of individual owners, such as a Home Owners’ Assocaition. These lawsuits have risen dramatically over recent years due to a littany of factors including, but not limited to, the following:
The proliferation of EIFS-related litigation which reached its apex upon the 1999 class action certification against certain synthetic stucco (EIFS) manufacturers in New Hanover County, NC (Ruff v. Parex, Sto Corp, WR Bonsal, Continental Stucco Products, Senergy, Inc., Thomas Waterproof Coatings Co., Dryvit Systems, Inc., United States Gypsum Co., and Shields Industries). The class action certification only applied to residential homeowners in North Carolina, as commercial structures were not included.
Because of its close proximity, the Wilmington class action bore a direct impact on South Carolina due to Wilmington’s proximity to Myrtle Beach, Litchfield, Pawleys, Island, and the entire Grand Strand. Some luxury neighborhoods conducted meetings and allowed attorneys within the confines of their Association meetings. The result of all the hype was an explosion of construction suits, the emergence of service industries that had never before thrived, as well as tremendous costs to builders as insurance premiums skyrocketed in order to keep pace with the projected losses that were in areas such as Georgetown, Hilton Head, Kiawah Island, news coverage, the proximity of , and other forms of publicity.
South Carolina, through both its courts and legislature, had historically been a favorable venue for the home buying consumer. See Terlinde v. J.F. Neely, Sr., 275 S.C. 395, 271 S.E.2d 768 (1980) (subsequent purchasers of home may sue builder in tort and contract), JKT Co. v. Hardwick, 274 S.C. 413, 265 S.E.2d. 510 (1980) (statutory implied warranty of merchantability extends to corporate plaintiff not in privity with defendant), Lane v. Trenholm Building Co., 267 S.C. 497, 504, 229 S.E.2d 728, 731 (1976) (“Our legislature continues to place South Carolina in the vanguard of consumer protection.”). Our court’s allowance of suits to be brought by homeowners lacking a direct, contractual relationship with the large, corporate manufacturers made these cases easier to file and, most importantly, profitable for the owners and attorneys.
The party appeared as if it would come to an end due to several factors including, but not limited to, the following: a) considerations by our legislature to ban the product entirely; b) exclusions within standard, broad form CGL policies procured by builders which contained the “EIFS” exclusion c) the stucco and exterior cladding insustry reacted with deliberate speed and introduced “drainable” or “traditional” stucco systems as an alternative and, finally, d) it didn’t appear that there were any EIFS structures that had not been litigated by 2005.
Analysts were wrong, however, as South Carolina courts, as well as our legislature (General Assembly) reacted to the blight of construction suits in ways which, inexplicably, served to disrupt and upset every each of the following parties: the consumer homebuying public; manufacturers and distributors of products integrated within the construction of both residential and commercial structures, contractors of all sizes and shapes, as well as insurance companies writing construction risk.
South Carolina has always drawn special attention and concern to insurance carriers and their insured contractors. Until 2005, the statute of repose was 13 years from substantial completion of a project. 13 years! Consider the following example involving a case that I litigated and settled in late 2004. The case involved a residential project that resembled a compound, or a group of buildings on a salt water creek in Beaufort County. A certificate of occupancy was issued in 1988, and suit was filed in 2001, allowing this case to be litigated in the nick of time. To put this in perspective, the Plaintiffs obtained a building permit during George Herbert Walker Bush only tenure as our president. These same Plaintiffs filed suit during his son’s first term of office, and settled the suit during the height of W’s campaign for a second term in office.
The statute of repose and its duration (13 years) was certainly a catalyst which allowed many EIFS suits to be actionable. In 2003, the legislature voted to reduce the statute of repose to eight years for all construction completed after 2005. Therefore, a construction project completed in 1991 could be litigated in 2004. The problems mounted for the defense as Plaintiffs appeared with little, if any records, other than a building permit (in your client’s name) and his certificate of insurance. If the contractor was still in business, risk transfer and indemnity was tough due to the general lack of records. Contractual indemnity provisions were unbelivably rare as, even if they existed, these documents were long gone.
So long as EIFS was on the Plaintiff’s house, however, the show went on, and lawyers and insurers working on behalf of a builder were forced to bring third-party warranty, negligence, equitable indemnity, and other claims on little more than memory. Because SC recognizes negligence as a complete bar to an equitable indemnity claim, the lack of documentation was always a real problem for contractors and carriers insuring them.
As for EIFS, there were means of identifying products (mesh color) and, when brought into a suit, the manufacturers were quick to roll on the applicator subcontractor, window installer, roofer, and anyone else that might have contributed to the alleged water intrusion.
EIFS litigation continues as of this writing, although cases have become sparse. For all practical purposes, houses built during the 13 year repose period have all been litigated. Some multi-family projects have been suspect to more than one suit, as actions are brought for deficient repair or replacement of EIFS with a comparable product such as drainable synthetic products, as well as traditional portland cement stucco applications.
Although the final pages have yet to be turned, the EIFS era is over for all intents and purposes. The EIFS saga hurt many builders, insurers, and consumers. Thankfully, insurance carriers indemnified contractors, manufacturers possessed enough money to pay most claims, and all parties to litigation, while bruised, were rarely broken.
The proliferation of EIFS litigation served to grow and create several industries. Forensic experts, attorneys, junk scientists, inspectors, and manufacturers of alternative siding products profited. As EIFS began to fade, construction defect cases did end. The industries that profited from EIFS litigation had to find another outlet, or target issue in order to survive.
Enter toxic mold, chinese drywall, engineered wood trusses, IAQ (HVAC), PVC, all things composite and not traditional. Lawyers, contractors, insurers, as well as court administrators learned very quickly that the end of EIFS did not mean the end of construction defect litigation.
Construction defect cases are not all created equally. Owners and their attorneys have learned that any instance of “defective” construction can lead to the retention of an expert witness who will identify problems. The extens or magnitude of these problems is rarely challenged, as defect cases rarely go to trial. As a lawyer rerpresenting contractors and, on occasion, owners, I have learned that most construction professionals do not leave projects knowing that problems exist. Most owners never take title to a property contemplating a suit. Somewhere after closing, and prior to suit being filed, there are factors which lead to these suits.
As attorneys defending contractors, we can’t control outside influences which lead to litigation. We can, however, act as advocates of the construction industry by impressing upon our clients the need to use strong contract language, additional insured clauses, and other means of risk transfer.
Construction defect litigation is not going away. I expect it to proliferate due to new building practices (green building, modular construction) which, combined with a poor economy, declining home values, and the inability of owners to refinance their homes or secure cash from home equity create a perfect storm.
In two or three years, I will be writing about a new construction defect theory which is likely unknown to us now. While there will never be a second waive of EIFS suits, the second, third, fourth, and future waives of construction defect litigation will bear the remnants of the EIFS age, and its creation of a profit center and industry that did not exist before.