Southland builders brace for Supreme Court ruling: case involves construction-related emotional distress.

The state Supreme Court, much to the delight of California's construction industry, has agreed to review a recent lower court decision that could mean huge financial losses for home builders.

Builders, lenders and the Building Industry Association of Southern California, a construction industry trade group, had filed legal briefs asking the Supreme Court to reverse a Sept. 20, 1993 decision by the California Court of Appeals that granted a $50,000 "emotional distress" award to a Los Angeles woman who sued a builder over construction defects in her home. Earlier this month, the Supreme Court agreed to review the lower court decision. The Supreme Court is expected to announce its ruling on the matter by mid-year, sources said.

Lawyers representing the building industry say that, if the award is allowed to stand, it will set a precedent that will open the floodgates for emotional distress claims by homeowners who allege construction defects in their homes. They say it will further increase the cost of builders' general liability insurance, which is already difficult to obtain and extremely expensive.

The case involves a home in Benedict Canyon that was built by Dean Homes of Beverly Hills Inc. and bought by Robert and Nancy Salka. The court awarded the Salkas $213,913 for construction defects, plus $50,000 to Mrs. Salka for emotional distress.

Attorney John Zemanek of Zemanek & Mills in West Los Angeles, who represented Dean Homes, said the builder didn't dispute that the home suffered from defective construction. But Zemanek said Dean Homes is appealing the case on the basis of the emotional distress award and certain other legal issues. He said the emotional distress award is the primary issue and the one that has the construction industry worried.

Dean Homes has since retained Ron Silverman of the Beverly Hills law firm of Weissmann, Wolff, Bergman, Coleman & Silverman to represent it in the Supreme Court case.

Meanwhile, Zemanek said he has been getting deluged with correspondence from builders concerned about the case and its possible ramifications. "I've had calls from all over the state, and I've received at least 20 friend-of-the-court briefs from builders and developers," he said. Among those who have submitted briefs are the Building Industry Association, Great Western Bank, The Presley Cos., Warmington Homes and many others in the industry. "If the court upholds this, any developer who has the intestinal fortitude to be in the home building business in California will have to be prepared to potentially pay emotional distress claims even in the absence of any physical injury suffered by the homeowner," Zemanek said.

He explained that courts in the past have sometimes granted additional awards to homeowners who had been physically injured as a result of construction defects. But in the Salka case, he said, no physical injury was claimed.

"That's what makes this case so different," he said. "How do you predict or control what damages may be awarded if the defendant doesn't have to prove any injury?"

According to attorney Jeffrey Masters, a litigation partner with the law firm of Cox, Castle & Nicholson, the case is "just one more symptom" of what many believe is an underlying problem: California's legal system is out of control when it comes to handling claims by homeowners.

"In the past several years, there have been a number of very large jury verdicts in favor of homeowners or homeowner associations," Masters said. "There are so many of these claims being litigated that a number of insurance companies are not writing any more (homeowner insurance) business in California." Masters said that since the Sept. 20 decision, a number of homeowners throughout the state have "tacked on" emotional distress claims to their construction defect lawsuits. He said that, if the Supreme Court lets the lower court ruling stand, it will add immeasurably to the woes of builders already suffering from a protracted recession, litigious homeowners and rising insurance rates. "We in the industry believe it is totally inappropriate for emotional distress damages to be available in a construction case," Masters

said.

Mike Szot, a vice president at the Johnson & Higgins insurance brokerage in Century City, said rates have been rising for several years on the general liability insurance policies sought by most builders. Szot said the rates are climbing as a direct result of the large number of claims in Southern California for land subsidence, construction defects and shoddy workmanship.

Only the builders with the best track records can get insurance at reasonable rates, Szot said. Those who have been in business for only a short time or have had a high incidence of claims either can't qualify for insurance or have to pay extremely high rates. Rates vary widely, based on the number of homes a builder constructs and a host of other factors. But Szot said premiums can range from thousands of dollars per year for smaller builders to hundreds of thousands of dollars for the largest builders.

According to Masters, construction defect claims are rising for several reasons. First, there are legitimate claims for construction defects, and these often occur about five to seven years after a home is built. "Because so many homes were built in the mid to late 1980s, those projects are now getting to the point in their life cycle where these claims are going to be occurring," Masters explained.

Second, homeowners and homeowner associations are feeling economic pressures. "They purchased their homes when the market was hot; they've now seen some dramatic decrease in their (homes') values; they're feeling a little desperate and, when a lawyer approaches them and says, 'I can get you back a substantial portion of the cost of your home, and maybe some punitive damages,' it can be pretty appealing," Masters said. "Some lawyers are out there actively marketing these claims."

Masters said insurance costs are also rising because homeowners often insist on jury trials, which are the most expensive way to settle a legal dispute. Lawyers for homeowners usually ask for jury trials because they think juries will be more sympathetic to individual homeowners than to construction companies, Masters said. "This can lead to some unpredictable and, frankly, wrong results sometimes -- where damages are awarded far in excess of what the real problems are," he said. "The other result is that the jury trial adds tremendously to the cost for both sides. It's a very expensive way to resolve a dispute." Masters said the building industry "is working very hard" to try to streamline the settlement of claims and reduce the cost of resolving disputes.

One hope for builders is that the state Legislature would pass a law requiring homeowners to first use some sort of mediation or alternative means of resolving disputes before filing a construction defect lawsuit. A number of such bills were introduced last year, but none was passed, Masters said, so the industry will try again this year. He said many in the construction industry are also calling for builders to tighten quality-control programs to minimize construction defects.

Masters added that the increase in construction defect lawsuits has led to an increase in disputes between builders and their insurance companies regarding which insurance policies cover a construction defect.

Some court decisions in California have ruled that the defect is covered by the policy that is in effect when the damage is first discovered by the homeowner. But other courts have ruled that more than one policy may apply.

"If you have pipes corroding over a period of several years, for example, there is damage occurring in each of those years," Masters said, so some courts have ruled that the defect would be covered by each of the policies in effect from the time the defect is believed to have occurred. This is an extremely important question because builders often change policies or insurance companies from year to year, he said.

"This issue of when a policy is triggered gets extremely complicated because there is so much contradictory law out there," Masters said. He said the California Supreme Court is currently reviewing the issue and "is going to tell us, hopefully within the next six months, what the answer is."