Contractors’ Right Or Homeowners’ Prerogative?

Thirty-one of the 50 states in the United States have adopted laws that provide homebuilders with the right to receive notice of alleged construction defects as well as the right to repair — or at least the right to offer to repair — those defects prior to the commencement of a formal lawsuit. This collective group of pre-litigation procedures is often referred to as Right to Repair/Cure or Notice and Opportunity to Repair statutes (NOR statutes).

One central purpose of NOR statutes is to ensure that the builder and the homeowner actually communicate about the defect claims, giving the builder an opportunity to make things right before a lawsuit is filed. Many states’ NOR statutes also include provisions requiring pre-litigation mediation procedures, such as California’s SB 800 and Nevada’s Chapter 40. Ultimately, the common intent of all NOR statutes is to assist both homeowners and homebuilders in avoiding the time and expense of litigation. However, whether these goals are actually being achieved is not so certain.
NOR statutes come in two general forms:

• “Pure NOR” statutes — those that give a builder the right to repair (or at least the right to offer to repair)
• “Quasi-NOR” statutes — those that provide warranty and/or licensing requirements for contractors.

Both forms can provide an avenue for seeking resolution of construction defect claims short of litigation. A majority of states have adopted a Pure NOR statute, and only a few have adopted Quasi-NOR statutes.

How It Works

While the definition and scope of a “defect” varies by state, it is generally considered a deficiency in the design, construction and/or landscaping of a new residence. Upon discovering an alleged defect, a homeowner is usually required to give notice to the contractor of the defect within a certain period of time and according to the prescribed mode of notification (regular mail, first class mail, etc.).

After notice is issued, the contractor can either do nothing, including disclaiming liability (likely losing its defenses under the NOR statutes), or make a written settlement offer to repair at the contractor’s expense. Some states also allow contractors to offer monetary compensation to the homeowner. If the homeowner accepts the contractor’s offer to repair, the contractor must make repairs within a statutorily-prescribed number of days. Most statutes allow the homeowner to reject the repair offer, essentially making it a right to offer to repair versus a right to repair statute. If the homeowner rejects the repair offer, litigation can commence. In some jurisdictions, unreasonably rejecting a contractor’s settlement offer can result in a denial of the homeowner’s attorney’s fees and costs as well as charging the homeowner with the contractor’s attorney’s fees and costs.

Statutes of Limitation. Under most NOR statutes, the statute of limitations period is tolled while the NOR pre-litigation procedures are carried out. In Colorado, the NOR statutes provide that the statute of limitation begins to run at the moment a homeowner has notice of a defect and also tolls for up to 60 days after the defect repairs are complete. On the other hand, under Ohio’s NOR statutes, the statute of limitations is tolled from the moment notice is sent to the contractor of the defect until the homeowner has fully complied with the NOR statutes. This difference in tolling could sway the balance in favor of the homeowner or the contractor and has the potential to defeat claims.

Release from Liability. Another interesting difference between many NOR statutes relates to the ability of contractors to obtain a release from liability for the repairs performed and the scope of that potential release. Some states establish an actual right to repair where the homeowner must allow the contractor to attempt to repair the issues. Other states allow homeowners to freely reject the offer to repair. No current NOR statute allows contractors to condition an offer to repair on a release of liability. In light of these facts, and the fact that a number of insurance carriers are hesitant to provide coverage for repairing defects, contractors are left exposed and even less likely to repair. Even so, there are a few alternatives that could provide some middle ground. For example, in Idaho, while contractors cannot make offers to repair conditional on a release, they can assert as an affirmative defense that the repairs performed were successful in correcting the particular claimed construction defect.

Another approach might be to allow conditional offers, but only enforce them if the repairs meet all applicable codes and standards of practice within the industry. If nothing else, this proposed approach might at least curb the staggering number of construction defect cases filed each day in states where construction defect litigation is particularly prevalent (e.g., California, Nevada, Arizona, Florida, etc.). However, as of yet, no legislative action has been effective toward this end.

Attorney’s Fees. Interestingly, a handful of NOR statutes provide an award of attorney’s fees to the prevailing party. For example, in Maine and Vermont, attorney’s fees are available to the substantially prevailing party, in an amount determined by the court. In Nevada courts, construction defect claimants are all but guaranteed an award of attorney’s fees. However, most NOR statutes do not provide for attorney’s fees for resolution of claims during the pre-litigation process, particularly because of the NOR statutes’ underlying purpose of providing for resolution of defect allegations without the need for attorneys. Unfortunately, in large part, the NOR pre-litigation procedures have simply become a hurdle to jump through before litigation. Little progress has been made over the last few years to foster early resolution or direct homeowner-builder discussions under the NOR statutes, often leading to a stalemate over the inability to recover attorney fees without full-fledged litigation.

Primary Areas of Litigation. Over the last few years, there has been little major amendment to NOR statutes across the United States. The key areas of litigation have been on the particulars of the NOR statutes’ applicability, the scope of the notices, the potential to opt out of NOR pre-litigation procedures and requirements, and the scope and definition of any building standards established in some NOR statutes. While legislatures seem to sense the value of concise, less expensive ways to handle construction defect claims, the practical effect has not been as forthcoming as they may have hoped. The application of NOR statutes in many jurisdictions has been more of a pre-litigation process that the parties begrudgingly go through to get to litigation. While there are clearly instances where the NOR statutes have provided for more communications between builder and homeowner, as a whole, more litigation about how to interpret and apply the NOR statues has been one of the largest outcomes of the legislation.

NOR Statutes Evolution

Some interesting issues that have not come to the fore in the litigation context as a whole include what happens if a repair is performed and is challenged by the homeowner, and later determined to have been incorrect or insufficient. While many NOR statutes provide that a repair cannot be released and/or that any repair is at the risk of the builder, a more interesting question is whether a subsequent claim on those repairs would be covered by the builder’s CGL policy. Generally, since no release is obtained and the claim is ongoing, if there is coverage for the repairs offered, the coverage would continue. However, there could be coverage-related issues based on the length of time the claim continues and whether the NOR statute provides for any tolling of statute of limitations.

As a whole, the application and implementation of NOR statutes are continuing to develop, with the details just now coming to the courts. Generally, if construction defect claims can be resolved through the NOR process, there indeed can be a reduction of at least the scope of the claims in litigation, but generally there has not been much evidence of a reduction in the number of construction defect claims asserted or in pre-litigation resolution of these claims. The next few years will likely see some legislative amendment to address some of the issues raised, as well as to provide builders and their insurers with further direction on how the NOR statutes are to be implemented in regard to the specific types and defect issues being brought by the homeowners and plaintiff bar. Be on alert for continued case law and potential legislative amendments to affect construction defect litigation under the NOR statutes.