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Home Buyer Waivers of Tort Liability:

In my column for today's Rocky Mountain News, I critique a newspaper article which reported on the continuing controversy in Colorado over homeowner waiver of tort liability regarding the purchase of newly-constructed homes. Colorado buyers can still sue to enforce the home builder's warranty.

How about some comments from readers with expertise in real estate or torts? What do you think of tort liability caps for home-buyer lawsuits? (Colorado has them.) Should the legislature, or the courts, prohibit the enforcement of tort liability waivers in home sale contracts? (That's the current proposal in the Colorado legislature.) Do you have evidence for or against the home builder lobby's claim that tort liability is driving up home prices? Have you, or your clients, or someone you know, ever succeeded or attempted in striking language from standard-form real estate contracts? (I've done so on mortgage contracts, although that's not exactly the same.)

In your comments, please try to avoid simply making theoretical statements, such as "no government should interfere with any freely-negotiated contract." It's not that these theoretical statements are necessarily wrong, but I don't think they will advance the real-estate-specific discussion.

John (mail):
I'm surprised these waivers haven't been voided already as contracts of adhesion. Could the Colorado lawyers commenting on David's other points address this too? Thanks.
2.24.2007 4:22pm
Byomtov (mail):
Do you have evidence for or against the home builder lobby's claim that tort liability is driving up home prices?

What would such evidence look like? Suppose you could show that stated purchase prices were lower when liability was waived. That still wouldn't prove it, since a buyer who waives tort liability is not getting the same product as one who doesn't.
2.24.2007 4:30pm
Jake (Guest):
The column is a response to this piece, right? I don't understand what tort claims are generally being waived.

Could somebody familiar with Colorado law outline what potential tort recovery Mr. Fonseca could have, assuming no waiver? Just going by the sort of generic common law I learned in law school, it doesn't look like he has anything waiveable.

Mr. Fonseca's house that is suffering damage to itself only as a result of shoddy construction. Setting aside fraud (which, IIRC, you can't waive anywhere), it looks like the claim would be some sort of products liability theory. But since no one has been injured but the product itself, the claim fails since you can't recover for pure economic loss (per East River and, more on point, Casa Clara). Does Colorado not recognize the economic loss rule?

It looks to me like Mr. Fonseca is in trouble because he signed on to a contract providing him with fewer contract rights than he thought, not because he waived any fruitful tort claims. Am I missing something here?
2.24.2007 4:48pm
CEB:
No government should interfere with any freely-negotiated contract. And John Lott's methodology is flawed.

Sorry, couldn't resist.
2.24.2007 5:52pm
Bored Lawyer:
When I was first practicing one of the partners had an extensive admiralty practice, and would regularly defend boat manufacturers from similar claims. IIRC, the federal courts held as a matter of admiralty law that injury of the product to itself did not sound in the tort of products liability but rather was one of warranty to be negotiated between the purchaser and seller. The NJ Supreme Court came to a similar result in cases involving recreational vehicles.

This is very different from a defect in the product injuring a person. If part of the construction was defective and thereby injured a person, that would be a tort claim. (And might even be made by a stranger to the contract, e.g. a passerby.)

The real question, therefore, is (1) what sort of warranty is implied by a contractor selling a newly constructed home and (2) if there is a claim that this has been waived, what proof does the contractor have to show that the waiver was knowing (and not merely a hidden clause among the mass of papers a home purchaser signs at closing).
2.24.2007 9:04pm
wooga:
Jake,
I don't know Colorado law, but in California, the economic loss rule would - for the guy in your cited article - not have much effect. Under California's Aas case(and more specifically Jimenez case), the economic loss rule prohibits recovery under negligence or strict liability theories except where the damage is to something "other than the product itself." Your state must interpret that phrase very differently than California.

The Jimenez example: The manufacturer TM Cobb's windows might leak, but the economic loss rule only blocks strict liability claims against the manufacturer for replacement and repair of "the window itself." However, TM Cobb is still exposed for strict liability claims regarding the resultant damage to other products (most commonly, drywall damage cause by the window leaks). With a 10 year statute in California, especially with its lenient joint and several liability principles, this royally screws subcontractors like the soils guys, framers, and all building envelope subs, because they have most of their claims outside of Aas and Jimenez). Of course, subs like HVAC and electrical are usually 90-100% protected by the economic loss rule (unless the house catches fire). However, the CA legislature made sure to screw over those HVAC and electrical guys on all new construction, thanks to SB 800.

In your cited article, this guy has ground swells causing cracking of foundation, and bowed framing. The grading subs would be liable under strict liability for the 'resultant damage' to foundation and framing. That's a whole lot of money the carriers for the soils subs will have to cover.

Practically speaking, SoCal has a big problem with residential construction insurance costs. However, I blame this on the insurance companies themselves, because the adjuster system rewards settlement over defense attorney fees. Adjusters are selling out their insureds to save their own jobs. This ends up hurting the carriers in the long run, but no adjuster is going to sacrifice his own job on the off chance he might be able to slow down the CD plaintiffs' bar.
2.24.2007 9:15pm
wooga:
In short, most of my work is in construction defect litigation (primarily defense as general counsel, with some private plaintiff work). I strongly favor some sort of tort liability cap, or alternatively (and preferably from a home owner's point of view) a major overhaul of permissible indemnity provisions in construction contracts. Right now, the big developer's can screw up a home, and the subcontractors have to foot the bill.
2.24.2007 9:21pm
Michelle Dulak Thomson (mail):
Possibly I'm missing something, but I have the same problem Kopel did with the example in the Denver Post piece:

It's hard to understand why anyone would expect the homebuilder's warranty to cover subsequent work that was performed by someone else.

The homebuilder contends that the work that failed wasn't theirs, but someone else's, subsequent to the completion of the house. If that's true, I can't see how the original builder is implicated at all. OTOH, if it isn't true, or if the subsequent "improvements" have nothing conceivable to do with the upheaval in the basement, then it's pretty obvious that the original builders screwed this guy. The difficulty is that the article doesn't give the reader enough information to know which version is correct, only a picture of a guy with a messed-up house and someone refusing to fix it.
2.24.2007 9:26pm
Jake (Guest):
Wooga,

Casa Clara basically is Fonseca's situation (subcontractor supplied defective concrete that caused the house to fall apart). The court there (in FL) held that the concrete became incorporated into the product itself. Under that logic, the foundation is part of the house, so swelling there only harms the product itself. It sounds like there are some competing doctrines of what the "product itself" includes. I'm curious to know what the rule is in Colorado.
2.24.2007 10:36pm
Lev:

The difficulty is that the article doesn't give the reader enough information to know which version is correct, only a picture of a guy with a messed-up house and someone refusing to fix it.


Exactly


In Fonseca's case, Engle Homes Colorado, which built his house, denied responsibility because of homeowner improvements. "We know that the Fonsecas have made changes in their house since they purchased it," said regional manager Don Merrell. "Since it was not performed by Engle, the work ... would not be covered by the 10-year warranty."


That covers a lot of territory, from putting shades on a window, to changing the drainage around the house, to adding a second story.
2.24.2007 11:45pm
Michelle Dulak Thomson (mail):
Lev,

That covers a lot of territory, from putting shades on a window, to changing the drainage around the house, to adding a second story.

It sure does. Also, I can't be the only person who read

"Since it was not performed by Engle, the work ... would not be covered by the 10-year warranty"

and wondered what exactly was in that ellipsis.
2.25.2007 12:36am
fishbane (mail):
It is an interesting question - should warranties be mandated, and if so, "how much"?

Raising the cost of constructing homes is obviously not a good thing. Legally mandating a certain baseline (and the devil, of course, is in the details) things might be a social cost that "we" want. I assume Colorado doesn't "want" (I hate to imply motive to large bodies of random people) tent cities, and so might place a baseline for new housing having, say, basic sanitation that works with whatever poop removal system is in place. Now, you can raise the cost of moving in however you'd like via private contract, but it becomes a policy issue: do you want to become Miami?
2.25.2007 9:44am
Guest12345:
It is an interesting question - should warranties be mandated, and if so, "how much"?


<sarcasm>Certainly not. Instead we should require the houses be exactly to the specifications of the design and completely within regulations. As such any failures should result in a full refund of the purchase price plus moving expenses, plus appreciation. Maybe not.</sarcasm>

Any builder who claims a warranty would increase costs apparently knows that they are cutting corners on workmanship, materials, or design. Otherwise a warranty is zero expense item. If their business model can't stand up to delivering the product the are claiming to sell (ie. a house that isn't made of paper-mache) then they don't deserve to be in business and no amount of libtertarian-style, zero regulation, salesmanship should be allowed.
2.25.2007 1:28pm
Bruce Hayden (mail) (www):
I had a lot of the same reactions that David had when I first read the Post article last Sunday. While it had some good points, it was the usual Denver Post liberal chest banging that has, IMHO, so discredited the paper from the time I delivered it as a youth. The problem, as with many Post articles, is that it only looks at problems from the lens of the aggrieved consumer, etc., and not from the point of view of economics or reality. Sure, the builders may be overreaching. Not surprising. But if they are able to get passed (as is likely now with a Democratic legislature and governor) tort limits, how about all those potential buyers who won't be able to buy now? Or if they can, can't buy quite as big or nice a house? Not surprisingly, the Post, as is usually the case, is silent.
2.25.2007 1:49pm
Bruce Hayden (mail) (www):
I actually found David's comments about Amdt. 41 more interesting. For those of you not here in CO, the voters recently enacted an amendment to our constitution that was aimed at cleaning up government by prohibiting government officials and employees from most situations where they received money, etc. outside their salaries. Unfortunately, it was much too broad as drafted and enacted, apparently affecting all government employees, and might even prevent researchers from receiving Nobel prizes or the kids of employees from receiving some scholorships (though apparently the Boettcher scholorship is ok, since it has the added requirement that the recipients stay in state). And it specifically doesn't allow the legislature to narrow it.

Well, now the initiators of the amdt. want it to be reinterpreted to not apply to these situations, which would be to narrow its plain language. And the leader of one house of the Colorado legislature is amenable to this (the other isn't).

Not surprisingly, the Denver Post jumps in with both feet, trying to rebut letters to its editors. But in both cases, the paper was incorrect. Will there be a retraction? Of course not - that is why David works for the other major daily in town.
2.25.2007 1:58pm
Bart (mail):
I am a lawyer and my Colorado practice includes construction defect defense. I would be glad to take a stab at your questions:

What do you think of tort liability caps for home-buyer lawsuits? (Colorado has them.)

In fact, there are no caps on damages for the actual cost of rebuilding and, under some circumstances, the plaintiff can seek triple damages under the Colorado Consumer Protection Act if they can prove the builder / owner engaged in a dishonest trade practice. This is quite a hammer for plaintiffs in suits against well advertised multi unit developments.

Should the legislature, or the courts, prohibit the enforcement of tort liability waivers in home sale contracts? (That's the current proposal in the Colorado legislature.)

I oppose the proposed bill. However, I think that the home seller should have to list in bolded and capitalized letters what exactly the buyer is waiving. Indeed, I would be surprised if one of these waivers actually survived in court if it was not clear and plain.

Do you have evidence for or against the home builder lobby's claim that tort liability is driving up home prices?

Construction liability insurance rates have gone through the roof in Colorado in order to pay off these multi million dollar settlements under our very liberal construction defect statutes. Colorado is one of the most favorable legal environments for construction defect suits in the nation. There was a statutory reform enacted a couple years back, but the insurance rates have not fallen and are passed to the consumers.

Have you, or your clients, or someone you know, ever succeeded or attempted in striking language from standard-form real estate contracts?

I have had a great deal of difficulty enforcing waivers in court for my clients when they simply waive rights without replacing them. Colorado courts generally favor the plaintiff and very rarely recognize a complete waiver of rights. I have been more successful when the builder / owner is providing a comprehensive warranty which clearly states that it is replacing the implied warranties of habitability and workmanship under law.
2.25.2007 2:05pm
wooga:
It sounds like there are some competing doctrines of what the "product itself" includes. I'm curious to know what the rule is in Colorado.

Jake, that was exactly the issue raised in Jimenez, where CA rejected the "product = house" theory. There has even been a recent push towards taking "component to component" damage outside of the econ. loss rule, even within the same product. Here's a summary of the case setting the current boundary in CA. (Can you tell I've been waiting a long time for this site to give me an excuse to talk about Construction Defect law?)
2.25.2007 2:07pm
Grumpy Old Man (mail) (www):
I've done construction defect work in California for about 15 years (plaintiff side).

This problem really began in the '70s when the construction industry drove the unions out of residential tract construction. They now typically use the cheapest subcontractors, who hire illegal immigrant labor, and supervise only to expedite production (because renting money is costly). Shoddy construction is the norm, even in the $800K tract house.

Insurance, which builders require the subs to obtain, naming them as additional named insureds, is a cost of doing business. Developers often create a separate LLC for each tract and by the time the leaks and cracks appear, the LLC is without assets. Hence the importance of tort theories. Also, under CA warranty law, the implied warranty does not extend to subsequent purchasers, even though their existence is entirely foreseeable, indeed likely.

Although I think planning and zoning controls and demand due to population growth and low interest rates contribute much more to housing costs here than do construction defect lawsuits, I don't know of studies on the point.

Some builders have experimented with "wraparound" insurance policies covering all subs on a job, but it hasn't caught on, even though litigation costs may be higher in many cases than the actual settlement amounts, due to the number of parties. I've seen electrical subs (usually minor players) have as many as four separate law firms, because the successive carriers don't trust one another. The associates sleep through the depositions (or read the sports pages), then wake up and ask "Have you ever heard of my client? Do you have any complaints about their work?" and then go back to the NFL or dreamland. Not bad for ~$100 per hour.

The politics of this are that the building industry and the plaintiff's bar competed to win over legislators (guess how?) and in the end compromised on a bill (AB800) which is pretty much of a camel, but won't stop the lawsuits.

The lawsuits are moving inland because the coastal areas are pretty much build up. No end in sight.
2.25.2007 7:10pm
Ken Arromdee:
Any builder who claims a warranty would increase costs apparently knows that they are cutting corners on workmanship, materials, or design. Otherwise a warranty is zero expense item.

This assumes that the cost of defending oneself against an invalid warranty claim is zero. That isn't true.
2.25.2007 7:38pm
fishbane (mail):
Any builder who claims a warranty would increase costs apparently knows that they are cutting corners on workmanship, materials, or design.

Well, no. I'm probably the liberal in the house, and I'll say that if you build stuff often enough, once in a while something is going to go wrong, even if you try hard. That doesn't mean there shouldn't be a remedy, but 'holding harmless' would make sense.

But, look at the base claim, that the cost of building something is increased by whatever. Do you accept someone who will apparently do crappy work, apparenty because of regulation?
2.25.2007 10:08pm
Jim Copland (www):
David,

The lack of due diligence from The Post report runs even deeper, along the lines you suggest. "Colorado Home Alliance" ("CHA") appears to be nothing more than an "Astroturf" (faux-grass roots) organization for two prominent Colorado construction defects firms, McKenzie Rhody &Hearn in Denver and Vanatta, Sullan, Sandgrund, Sullan &Smith in the capital's southern suburb of Greenwood Village -- also the home of lobbyist Clay Vigoda, the registered lobbyist for the CHA according to the Colorado Secretary of State's office. As of February 2, 2007, the CHA's listed office, 5618 S. Geneva St. in Greenwood Village, and its phone number, 303-320-8352, are the same as Vigoda's address and number. Vigoda's other listed employers with the Secretary of State's office are the law firms listed above. As reported by the Post in July 2004, these same two construction defects firms worked to get the ultimately unsuccessful Amendment 34 on the ballot and as of that date had given at least $117,500 to the effort. As reported in the Colorado Springs Business Journal in September 2004:

The passage of Colorado House Bill 1161 mandated that homebuilders be allowed an opportunity to rectify construction defects before a homeowner or commercial property owner could file a lawsuit. Proponents of the bill said state legislators initiated HB 1161 because of rapidly rising liability insurance costs and increasing construction lawsuits.

Gov. Bill Owens signed HB 1161 on April 25, 2003, and two days later Denver lawyers Scott Sullen and Cass McKenzie filed an initiative that counteracts the legislation. Amendment 34, which is slated for the November ballot, prohibits restrictions on any property owner's right to file a lawsuit for the recovery of damages.


As for the merits, I haven't studied the Colorado scene extensively, but my experience following other states such as California would suggest that the home builders are right here, not the Astroturf lobbyist for the plaintiffs' firms. A spokesman for the builders stated in the same 2004 Colorado Springs Business Journal article that "average multi-family attached housing per-unit liability insurance cost is $10,000" in Colorado, with rates some 7 to 8 percent higher in Denver. Obviously, such costs are relevant to lower income first-home purchasers.

The experience in California, prior to its adoption of a "right to repair" law similar to Colorado's 2003 HB 1161, is instructive. As we described in the Manhattan Institute's 2005 Trial Lawyers, Inc.: California report:

[T]he construction of new condos—-the home of choice for asset-strapped first-time homeowners—-plummeted from 18,691 units in 1994 to 2,945 in 1999. In the mid-1990s, 30 percent of new houses in California were condos; by 2000, only 2 percent were condos. Areas of the state that were job engines in the 1990s, such as Silicon Valley, have started to lose population in part because of the lack of affordable housing. In 2002, California was building one new house for every 3.5 new jobs, barely half of what economists say is required to support growth.

The problem harkens back to the early 1980s, when new favorable tax treatment spurred condo construction in California and other parts of the Sunbelt. Inevitably, a percentage of these new homes were shoddily built, and owners sued the contractors, often with some justification. Trial Lawyers, Inc. quickly determined that the market was lucrative, since hundreds of litigants could be brought into a single suit through their condo associations, vastly increasing the size of potential judgments—and of their lawyers' fees, which are based on a percentage of the verdicts. Aggressive lawyers started blanketing condo communities with flyers listing a litany of potential defects, from leaky windows to loose carpet corners. Firms specializing in construction-defects litigation surfaced, such as the Miller Law Firm of Orange County, whose website www.constructiondefects.com touts its success in "recovering" over $400 million for construction-defects claims.

The result has been a food of litigation in California courts, aided by the state's ten-year statute of limitations on structural defects, one of the longest in the nation, and its plaintiff-friendly strict liability laws. Under a strict liability doctrine, homeowners do not have to prove that a builder was negligent—only that he built a structurally defective home. Thus, if a window leaks, the contractor is liable even if he installed the window properly and met industry standards.

To dig into as many deep pockets as possible, lawyers typically name as defendants as many as 60 subcontractors on a project— and all their insurers—including some who had nothing to do with that portion of the construction where defects are being alleged. As a result, portable-toilet vendors are being dragged into lawsuits over construction flaws, and roofers are being named in litigation over tennis-court defects, inflating costs and causing cases to drag on for years. Insurers understandably prefer to settle these nuisance suits in order to cut their ever-increasing litigation tab.


Colorado's experience seems to have been similar to California's. The "right to repair" issue in HB 1161 is of course not conceptually identical to the ability to opt-out of tort, of course. But as I see it, forbidding home buyers to contract away non-warranty tort rights does nothing more than increase the costs of home building for all. There's nothing to prevent a prospective home buyer to insist on a tort remedy in his insurance contract, for a (likely sizable) premium. Many would of course pass on the additional remedy -- much to the dismay of the McKenzie Rhody's and Vanatta, Sullan's of the world.
2.26.2007 12:41pm
PDXLawyer (mail):
In response to the call for evidence, I *do* have some evidence on tort liability costs. I have represented a number of small business people in Oregon, including some builders and other quasi-builders (for example, people who buy and renovate houses, where the renovation is mostly landscaping and decorating not demanding any technical skill, or free-lance carpenters). All of these people need a state license, and one of the conditions of getting a state license is getting liability insurance. I'm told that the *minimum* premium for this insurance is in the range of $15,000 per year. If you are in a market where the average price of a house is $200,000, and you are a small operator, doing one house a year, that represents a very substantial expense. One result is that some entrepeneurs choose to go without insurance, which also means going without a license. So, yes, insurance costs are a problem and one result is to drive more small operators into the gray market.

Are insurance costs driven by tort, rather than contract, liability? I'm not so sure. If you do much with insurance you pretty quickly realize that pricing on liability insurance is a very inexact science. For one thing, the "float" on liability insurance can be pretty long, especially when one considers discovery exceptions to statutes of limitation, etc., so that in addition to risk pooling, insurance is also a loan from the insureds as a group to the insurer. Even if an insurer can accurately guess what the eventual payout is going to be, they also have to assign a discount (interest) rate to calculate the minimum premium they ought to accept. Thus, insurance premiums tend to rise during periods when long-term interest rates are low.

Also, because risks vary so much across industries, and localities, loss data is proprietary, and the cost of establishing a sales force, and an adjustor force is non-trivial, this really isn't that easy a market to break into. The result is that in a *lot* of fields, there are only a few companies underwriting many liability risks, so there are a lot of effective oligopolies and the pricing can deviate quite a bit from a purely competitive price.

Related to all this, insurance companies, like banks, are subject to solvency regulations, and have to maintain a net worth which is only small fraction of their total liabilities (including loss reserves). In other words they are invariably highly leveraged. If they have a bad year, their reserves get dangerously low and they have to either get more capital or recover by increasing their profit margin (the difference between their premium, less sales costs, and the estimated final liability). That is, raise premiums, at least in the short run.

In response to Grumpy Old Man, the dynamics he's talking about seem to relate mostly to commercial construction. I myself don't share his enthusiasm for unions, but whatever their merits, they have never been a major force in single family home construction which has, until very recently, been dominated by very small, non-union firms.
2.26.2007 1:49pm