When bad houses make good cases: a homebuilder's shoddy work can render a house uninhabitable. Litigation can help homeowners transform a money pit into home sweet home.

Construction-defect litigation has traditionally involved commercial buildings and multifamily condominiums, town homes, and apartment complexes. However, millions of new, single-family homes have been built over the past decade--tens of thousands of them with serious defects.

"Bad house" cases have typically been handled by small firms or sole practitioners as a sideline to their general practices. Until now, this has not merited a separate practice area. Although it is still a narrow field, handling construction-defect cases has become a viable enterprise.

The number of cases has surged in recent years because houses are being constructed at a furious pace and in record numbers. Many general contractors who have entered the field are entrepreneurs, not artisans or experts in the building trade. Others are national "production" or "mass" builders that build thousands of houses a year at record paces. These builders face fierce competition, often cut corners, and frequently employ unskilled or overworked subcontractors.

In addition, building components such as claddings and windows have become more complex, requiring greater attention in selection and installation. At a time when coordination of subcontrators' trades has become more critical, many general contractors have little experience, delegate much of the work, and provide little supervision. Also, government inspection departments have less funding but more work than ever before, meaning that they sometimes approve below-par construction. The combination of these factors is a potent recipe for substandard construction and the resulting rise in bad-house cases.

Construction defects cover a broad spectrum, from a laundry list of minor problems like popped nails and peeling paint to situations when a house must be bulldozed. Some cases involve leaky windows that have led to toxic-mold contamination. Others center on mere negligence that gives rise to compensatory damages. And still others involve fraud, entitling homeowners to punitive damages.

Deciding whether to accept a homeowner's construction-defect case can present a daunting array of legal, economic, technical, and practical considerations. Thoughtful analysis of these issues early in the litigation process will reveal whether legal action is both warranted and worth your and your potential client's time.

Legal considerations

Take steps early to determine the extent of the problem and the value of the case. This requires that you analyze a host of potential legal obstacles--including statutes of repose, statutes of limitation, the economic-loss doctrine, and warranties--that can destroy an otherwise attractive case. There may also be questions about insurance coverage.

Statutes of repose. Some states require that construction-defect claims for latent defects be brought within the life of the mortgage or the expected life of the home. In North Carolina, for example, suits must be initiated within six years after substantial completion--that is, the date the homeowner's certificate of occupancy was issued. (1) Meanwhile, South Carolina imposes a more liberal 13-year statute of repose. (2) Many statutes allow for an extension, depending on the parties' "last acts or omissions" or "willful or wanton conduct." (3)

In jurisdictions that enforce statutes of repose, identify the date of completion or the other applicable date on which the statute begins to run. Subsequent repairs by the defendant may lengthen the statutory period, while acts of willful or wanton conduct may render the statute inapplicable.

Statutes of limitation. Ask potential clients when they first noticed a problem with the home and what steps they took in response to those conditions. Frequently, a homeowner's awareness of a troublesome condition does not alert him or her to a specific defect. For example, a homeowner may notice an interior leak but not discover at that time that the leak is related to the home's synthetic stucco cladding.

Most jurisdictions have statutes of limitation that provide that a plaintiffs action "shall not accrue until the injury, loss, defect, or damages become apparent or reasonably should have become apparent to the claimant." (4) Defendants will use any example of a homeowner's noticing problems as the time that the statute began to run. However, several decisions clarify that homeowners are not expected to be construction experts and that the statute does not begin to run until the homeowner appreciates that the condition gives rise to a claim against a specific party. (5)

Economic-loss doctrine. Rulings on this issue are inconsistent and warrant continued attention. The economic-loss rule generally provides that potential property losses and consequential, non-personal-injury losses by contracting parties bar tort remedies. In a few jurisdictions, the economic-loss doctrine severely limits actions against manufacturers and subcontractors. Some courts have contorted that principle and ruled that homeowners cannot sue manufacturers of building components because the homeowners contracted with the builder for a finished product--a house.

A decision issued by the Florida Supreme Court, for example, held that since homeowners bought a finished product, not the individual components on their dwelling, damage caused by a component product is not compensable. (6)

The prevailing rule, however, is stated in a Fourth Circuit opinion, where the court held that the economic-loss rule does not bar recovery for homeowners with claims against manufacturers of components that cause damage to other parts of the house. (7)

Another potential issue is construction defects that are serious but have not yet caused property damage or personal injury. This was the case in Aas v. Superior Court of San Diego County, where the California Supreme Court held that the alleged defects constituted economic damages and were not compensable. (8)

Warranties. In most jurisdictions, implied warranties of habitability require that a home be "sufficiently free from major structural defects, and ... constructed in a workmanlike manner, so as to meet the standard of workmanlike quality then prevailing at the time and place of construction." (9) The implied warranty of habitability imposes strict liability on the warrantor.

Study the written warranty before filing suit. If it contains a disclaimer that purports to abrogate all potential causes of action other than the limited warranty, you must determine to what extent the law of the jurisdiction allows this language. Some states disallow such disclaimers entirely. (10) Others limit the effect of purported disclaimers, unless they are clearly part of the bargain. (11)

Be careful to address any warranties that the builder obtained from an insurer on the homeowner's behalf, such as Residential Warranty Corp. and Homeowner Warranty Corp. These warranties offer homeowners little substantive protection. See what effect these warranties may have on filing claims. In some jurisdictions, such as New York, claims under these warranties must be made before filing suit. (12) Additionally, some agreements require arbitration of claims. Builders will occasionally waive such provisions to litigate in the court system and assert third-party claims against subcontractors and architects.

Insurance coverage. Insurers' obligation to cover contractors' property-damage claims depends on the jurisdiction. Some states employ a "manifestation rule," meaning the court identifies the date on which any previously latent damage was manifested to trigger coverage. (13) In those jurisdictions, it may be necessary to distinguish "manifestation" for coverage purposes from "discovery" for statute of limitations purposes to keep both the claim and the coverage alive. This is particularly important for homeowners in manifestation states who discovered problems shortly after moving into their homes but did not learn that they had a claim against their general contractor or other parties for construction defects until a date after the coverage expired.

Other jurisdictions use exposure triggers, (14) injury-in-fact tests, (15) or continuous-trigger rules. (16) There are almost as many interpretations and nuances in this area as there are jurisdictions.

As a matter of law, generally the insured subcontractor, not the homeowner, possesses the direct claim to enforce coverage. As a practical matter, however, the absence of coverage can drastically affect the homeowner's recovery.

Be aware of coverage issues to avoid the unhappy experience of obtaining a verdict against a general contractor who has no assets and questionable, or no, coverage. Few homeowners relish the idea of enforcing a verdict through a declaratory-judgment action. Careful pleading can trigger the insurer's duty to defend, which may obviate the unappealing prospect of subsequent coverage litigation.

Economic considerations

Conventional wisdom is that bad-house cases are not worth bringing because of the usually small amounts at stake and the large time commitments associated with the litigation. Many cases, however, involve significant claims and potential damages that justify filing suit.

Lawyers considering bad-house cases should establish rough monetary thresholds below which litigation should be avoided. Although there are no ironclad principles, there are some rules of thumb:

* If a house can be repaired for $20,000, litigation will be difficult to justify, either on an hourly or a contingent fee basis.

* Cases where damages exceed $50,000 may be sizable enough to warrant initiating a lawsuit, assuming that you are familiar with the technical and legal issues.

There are exceptions to these guidelines. For instance, it may take you 30 hours to handle a case that has a strong liability position and in which the homeowner spent $30,000 for repairs. Whether you accept this case on an hourly or a contingent fee basis, your time and money will have been well spent. On the other hand, a strong liability case involving over $200,000 in home repairs and hundreds of hours in pretrial and trial activities may prove less worthwhile--for you (if you handled the case on a contingent fee basis) and for your client (if billed hourly).

Technical considerations

At the outset, consider the amount of expert work necessary to establish liability. The investigation supporting the case can produce superficial reports provided by home inspectors or comprehensive evaluations by licensed, professional forensic engineers.

The cost of an expert's report can run from a few hundred dollars to several thousand dollars. Generally, you get what you pay for. While an exhaustive engineering evaluation with all the bells and whistles is not always required, it certainly strengthens a case. On the other hand, it is difficult to recommend that a client spend several thousand dollars on an engineering report unless there is a strong indication that the damages award will be substantial.

There are several reasons to have the client engage a respected engineer to perform a thorough evaluation before filing suit. First, the more complete the inspection, the more likely that all serious building-code violations and defective conditions will be revealed. Second, an exhaustive evaluation should help you resolve the case before substantial discovery and pretrial preparation. Third, most homeowners appreciate the need to hire the qualified experts who can do battle with the hired guns retained by the defense. A credible report from a well-credentialed expert will serve as a reality check for the defendants.

After a competent engineer determines that seriously defective conditions exist, the next step is to quantify the costs of repair. Experienced attorneys will be able to reliably predict substantial repair expenses based on the nature of the defects. For example, the removal and replacement of exterior cladding is typically extremely expensive. If you are in unfamiliar territory, it may be helpful to have a competent repair contractor review the engineer's report and recommended repairs and provide an estimate.

Once you have established a rough value for the case, you can assess whether litigation is an appropriate course.

Practical considerations

Representing homeowners in construction-defect cases can be similar to representing parties in domestic disputes: The homeowners look at and live with their problems every day, and in most situations, their concerns have transcended economic worries and become emotional issues.

Explaining the dynamics of litigation to an unhappy homeowner is neither an easy nor a pleasant task. Before seeking an attorney, most homeowners have endured lengthy, agonizing communications with general contractors and product manufacturers. In many cases, these communications have spanned a number of years, during which the builder or manufacturer has made empty promises or done Band-Aid repairs. By the time the homeowner seeks a lawyer, the case already has a lengthy history.

Help your clients understand that most homeowners cannot be made whole through litigation. Few states provide recovery for attorney fees. And most states do not permit juries in construction-defect cases to award plaintiffs general damages for emotional distress, pain and suffering, and other intangible losses. The exception to this rule arises in personal injury suits, such as those associated with toxic-mold contamination caused by defective construction.

Usually, the only opportunity plaintiffs will have to recover damages beyond the costs of repair arises from defendants' willful or wanton conduct. In such cases, punitive damages and attorney fees may be available. (17) Similarly, consumer protection statutes in many states allow treble damages for unfair and deceptive acts. (18) However, plaintiffs rarely can establish facts that warrant the imposition of punitive awards and attorney fees. Even where the case facts may present a viable claim, you must balance the benefits of vigorously pursuing such allegations against both the significant costs of litigation and the risks of prevailing only on repair damages.

At least four significant punitive awards were recently rendered in bad-house cases, one of which was upheld on appeal. (19) But even if you obtain a punitive damages award, a party's inadequate insurance coverage may make the award difficult or impossible to collect.

Building a case

In bad-house cases, prelitigation demands and presuit mediation or negotiations will often prove disappointing; litigation is almost always required to bring all potentially responsible parties to the table.

Make sure you understand the nature of the defective conditions before filing a complaint. The engineering report will provide the basis for the allegations. Next, determine who may be responsible for the defects. Potential defendants include general contractors, subcontractors, product manufacturers, and developers, or some combination of these parties.

In most jurisdictions, the implied warranty of habitability imposes strict liability on the general contractor. The most direct and often easiest route of recovery is to bring claims against him or her. After all, the general contractor applied for the building permit, selected the products used to build the house, hired subcontractors, coordinated construction, obtained the certificate of occupancy, and sold the house. (The contractor also owes a duty to people who buy the home from the original homeowner.) The strongest claims will be those that arise from the implied warranty of habitability, express warranties, contract, and negligence.

Do not leave it up to the contractor to bring third parties who may be at fault into the suit. The better tack usually is to file claims against all potentially liable parties, including subcontractors and manufacturers. This approach will help you avoid problems that arise when the general contractor is uninsured or has serious coverage problems. It also allows you to control the case and move it forward to prompt mediation with all important parties present.

Claims against peripheral third parties--such as architects, real estate agents, previous homeowners, home inspectors, and termite companies--should be rare. These parties frequently have minimal assets or no insurance, and allegations against them are often convoluted and difficult to prove.

There are exceptions:

* previous homeowners who were aware of defects but sold the home to unsuspecting buyers without disclosure, particularly if they have assets to support a judgment

* developers who require homeowners to use "approved builders" and know that the builders lack necessary licenses and are financially unable to complete a job

* real estate agents who are aware of defects in the house but do not share that information with buyers.

The most compelling claims against subcontractors arise from their negligent acts, which, when they are violations of residential-building code provisions, often amount to negligence per se.

Each of these situations requires careful analysis on a case-by-case basis. Consumer protection statutes vary from state to state, and some have sharper teeth than others. But one simple truth remains constant in every state: A home should be constructed in conformity with the applicable residential building code, prevailing standards of workmanship, manufacturers' product specifications, and house plans. How you enforce these requirements will necessarily vary among jurisdictions.

Damages claims

Given the difficulty of making homeowners whole, establishing damages and maximizing recovery are of paramount importance. There is always a wide gap between what the defendants contend is sufficient to repair the structure and the actual amount the homeowner will be forced to expend to restore the property to the condition bargained for. Establish damages that will help the homeowner adequately and permanently correct the construction defects.

The most reliable and comprehensive way to establish the costs of repairing a structure is to have a reliable general contractor or a professional claims estimator prepare an estimate based on the work specified by the forensic engineer.

Be wary of damages assessments supplied by defendants. Typically, they will seek incomplete, lowball bids from friendly contractors who are unqualified and unable to perform an adequate repair for the amount specified.

Damages are easiest to establish when the homeowner has already had the work to repair the construction defects performed. In that case, there are no uncertainties about the scope of the work or latent damages. Defense counsel may object to certain repairs, claiming that they were "betterments" or unnecessary. Generally, however, hard numbers result in an easier and more predictable case.

One other aspect of damages to consider is "stigma" damages, or the difference between what the house would be worth if it had no defects versus its actual value with the defective conditions. Stigma damages can even arise from the unfavorable market perception that attaches to a house that has been repaired. But beware: The appraisal evidence necessary to support this theory can be expensive, and the strength and viability of such claims varies among jurisdictions.

Litigation for homeowners in bad-house cases is challenging. Typically, it involves doing battle with defense counsel from several different areas of the bar--construction litigation, insurance defense, and products liability. Although the cases can be difficult, they can also be rewarding.

A house is most homeowners' single most valuable investment. It is the place where they live, rest, and raise their families. To them, it is more than bricks and mortar, wood and nails. Helping homeowners feel safe and secure in their houses is a noble endeavor.

Notes

(1.) N.C. GEN. STAT. [section] 1-50(a)(5)a (2001).

(2.) S.C. CODE ANN. [section] 15-3-640 (2000).

(3.) N.C. GEN. STAT. [section] 1-50(a)(5).

(4.) N.C. GEN. STAT. [section] 1-52(16).

(5.) See Simmons v. Owens, 363 So. 2d 142 (Fla. Dist. Ct. App. 1978); Pembee Mfg. v. Cape Fear Const. Co., 329 S.E.2d 350 (N.C. 1985).

(6.) Casa Clara Condo. Ass'n, Inc. v. Charley Toppino & Sons, Inc., 620 So. 2d 1244 (Fla. 1993).

(7.) 2000 Watermark Ass'n v. Celotex Corp., 784 F.2d 1183 (4th Cir. 1986).

(8.) 12 P.3d 1125 (Cal. 2000).

(9.) Hartley v. Ballou, 209 S.E.2d 776, 783 (N.C. 1974).

(10.) Buecher v. Centex Homes, 18 S.W.3d 807 (Tex. Ct. App. 2000).

(11.) Griffin v. Wheeler-Leonard & Co., Inc., 225 S.E.2d 557 (N.C. 1976).

(12.) N.Y. GEN. BUS. LAW [section] 777-a (1996).

(13.) Gaston County Dyeing Mach. Co. v. Northfield Ins. Co., 524 S.E.2d 558 (N.C. 2000).

(14.) Ins. Co. of N. Am. v. Forty-Eight Insulations, Inc., 633 F.2d 1212 (6th Cir. 1980).

(15.) Great Lakes Chem. Corp. v. Int'l Surplus Lines, 638 N.E.2d 847 (Ind. Ct. App. 1994).

(16.) Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974 (N.J. 1994).

(17.) Allen v. Roberts Constr. Co., Inc., 523 S.E.2d 534 (N.C. Ct. App. 2000).

(18.) N.C. GEN. STAT. [section] 75-1.1.

(19.) Allen, 523 S.E.2d 534.

Gary W. Jackson is a partner with Lewis & Roberts in Charlotte, North Carolina. Fred W. DeVore III is a partner with DeVore, Acton & Stafford in Charlotte.