Berkeley, Calif. -- A report released October 17, 2002 by the California Policy Research Center examines the impacts of construction-defect litigation -- including its effect on condominium development and affordable housing in the state. The two principal authors, from UC Berkeley, say that aspects of California's legal environment may have facilitated more defect litigation than has occurred in other states.

The report indicates that litigation -- and resulting problems of insuring residential construction when construction carriers leave the California market -- is one of several different factors contributing toward the decline of new multifamily construction in the late 1980s through much of the 1990s. "California was hit hard by both the legal climate and economic conditions during this period,� said coauthor Cynthia Kroll, regional economist at Berkeley's Fisher Center for Real Estate and Urban Economics. "As the economy improved builders found ways to address some of the problems brought on by litigation, and they began building condominiums again.�

The study's authors challenge some of the myths of the litigation debate in California. "Many builders will tell you that a key problem in California is that state law permits litigation on construction defects to occur for up to 10 years after the completion of a project,� said coauthor Larry Rosenthal, executive director of the Berkeley Program on Housing and Urban Policy. "Yet we found that many other states allow such suits as long or longer after construction but have not had similar levels of litigation and insurance problems.�

Instead, the authors argue, it may in part be the application of "strict liability� to the construction industry that has left California builders and their insurers susceptible to costly lawsuits. California is one of only five places out of 21 studied which apply this homeowner-friendly doctrine, and one of only two such states lacking factors mitigating its effects. Compounding this problem is the heavy presence of legal firms specializing in construction-defect litigation in California, a higher concentration of such law-firm activity than would be expected from the state's size or level of construction.

These conditions have been changing, however, even as the study approached completion. A decision by the California Supreme Court in late 2000 restricted the range of damages available to homeowners in such lawsuits. In addition, many builders, insurers, policymakers and others, concerned that construction-defect litigation slowed California's construction of multifamily housing and condominiums during the 1990s because of skyrocketing construction-insurance costs, pushed for legislation "to move more and more construction-defect disputes out of the courtroom to the bargaining table,� Rosenthal said.

The study's authors believe that Senate Bill 800, signed into law last month by Governor Davis, represents a genuine attempt by the state legislature to level the playing field in construction-defect lawsuits. "Lawmakers apparently sensed that the cost of defending defect claims had grown exorbitant and that many of the state's largest construction insurers had fled the market as a result,� Rosenthal said.

Kroll and Rosenthal state that legislative reform and recent court decisions may dampen litigation activity, at the same time that builders and insurers are finding new ways to improve building quality and maintenance, which will reduce legal expenses in the long run.

"Many of the changes that have come about in the building process make good sense,� Kroll said. "More attention is paid to the quality of construction and to maintenance after the product is completed. Insurers and builders have worked together to package products that provide coverage on a project-by-project basis and for subcontractors as well as the lead developer.�

However, these changes may come at a price. Many of the state's new condominium projects are in the luxury rather than the affordable range.

Last month, when Governor Davis signed a series of bills designed to produce more low- and moderately priced housing, he said Californians should have a "decent roof over their heads.� SB 800 streamlines pretrial procedures and encourages quick resolution of defect claims by promoting prompt repairs rather than attenuated, costly litigation.

Rosenthal said, "Only time will tell whether SB 800 succeeds in luring construction-risk insurers back to California in a way that reduces building cost and makes new attached units and condominiums more affordable.�

According to Rosenthal and Kroll, resolution of the affordable-housing problem in California will require more than reforms just in the area of construction-defect litigation. From a public policy standpoint, they believe, such reforms must be part of a broader strategy that enhances subsidies, loosens overly restrictive land controls, and overcomes unreasonable community opposition to new low- and moderate-income housing stock.

The report is based on a research study conducted by a team affiliated with the Fisher Center for Real Estate and Urban Economics at UC Berkeley's Haas School of Business, and the Goldman School of Public Policy.

Note: The research study, "The Impact of Construction-Defect Litigation on Condominium Development,� was funded by The California Policy Research Center, the Fisher Center for Real Estate and Urban Economics, and the Berkeley Program on Housing and Urban Policy.

Both a 4-page summary and the complete report can be found online at CPRC's Web site.

Media Contact:

Russell Hoyle

California Policy Research Center

(510) 642-7798

russell.hoyle@ucop.edu