Leading Out Loud: Construction

What trends are permeating construction? Are environmentally friendly building techniques and materials affecting developments? What challenges has COVID-19 brought? See what two top industry experts say we can expect in construction claims and litigation this year.

From your individual perspective, what trends are you seeing in the construction industry in terms of litigation or claims?

Michael Zech, Koeller Nebeker Carlson & Haluck, LLP: Although litigation had initially slowed following the onset of the COVID-19 pandemic, the number of filings and other construction defect claims has increased significantly over the last 12 months. We have also seen attorneys representing homeowners and homeowners associations attempt to take advantage of the delays made necessary by the pandemic and social distancing restrictions, arguing that by seeking to defer inspections until it was safer for all involved, our builder clients waived their rights under California’s “right to repair” law and contractual alternative dispute resolution procedures. The courts before which we have litigated the issue have, to date, sided with the builders, finding that they acted reasonably.

Although not to the extent we initially expected at the outset of the pandemic, we also continue to see an increased interest by all involved in discussing and working cooperatively towards early resolution of construction claims and litigation. We view this to be largely a result of the continued uncertainties associated with the COVID-19 pandemic and the courts’ significant backlogs of criminal and civil jury trials. Although we are encouraged by the courts’ continued diligent efforts and progress towards resuming normal operations, given the ongoing challenges faced by the courts and the recent surges in COVID-19 cases, we expect this trend to continue in the foreseeable future.

Dan Ducommun, MC Consultants, Inc: Claims, per region, appear to be processing at numbers like those we experienced pre-pandemic. However, trends related to claims and litigation vary from state to state. For example, Florida is moving forward at warp speed (no major slow down due to COVID-19 pandemic), while California appears to be fine pushing calendar dates out, which creates less of a litigation pressure point on all parties serving or supporting litigation. The increased use of OCIPs and CCIPs has decreased the adversarial relationship between the various contractors and subcontractors. This may result in fewer traditional construction-defect claims, but it creates an incentive for standard of care claims to be filed against design professionals.

Have you seen any new developments in the construction-defect claims landscape stemming from the trend toward new and more environmentally friendly building techniques and materials?

Dan Ducommun, MC Consultants, Inc: Yes, however, limited in numbers of claims originally anticipated. We have noticed claims involving new product compatibility failures, specific to design and installation of green roof systems. Several years back, the claims industry anticipated an increase in standard-of-care claims towards architects and engineers; however, those claims failed to materialize. It will be interesting to see if any standard-of-care claims develop from the new “WELL” certification.

Michael Zech, Koeller Nebeker Carlson & Haluck, LLP: The trend toward new and environmentally friendly building practices and materials has not yet resulted in a significant number of new or novel claims in California. This being said, we have seen an increase in the number of homeowners’ claims related to HVAC systems that are designed to comply with Title 24 of the California Code of Regulations. Homeowners have expectations about the on-demand nature of HVAC systems, which can be complicated by temperature regulations that rely on more of a steady zone temperature control system to regulate interiors.

COVID-19 and the events over the past 18 months have driven a demand for homes in suburban and rural areas. How has this shift impacted the industry, and has it led to any new types of claims or litigation?

Michael Zech, Koeller Nebeker Carlson & Haluck, LLP: Since the COVID-19 pandemic began, the demand for single-family homes in the regions where we practice has far exceeded supply. Fortunately, that demand—combined with the construction industry’s operations having for the most part been deemed “essential”—have allowed our builder clients to thrive where other industries have experienced a downturn. We have not yet seen any new or novel types of claims but, historically, when we have seen increased production in the housing market, we also typically see an increase in the number of construction defect and related claims a few years down the road.

As open real estate becomes more scarce, we are also seeing more in-fill projects where new construction abuts existing homes or developments. We have seen a resulting increase in claims of adjacent landowners who assert that the new development is damaging their existing interests. Oftentimes, that is triggered by water intrusion events that the existing owners may blame on the developer’s failure to control drainage or the diversion of prior drainage paths. We have also seen nuisance and trespass claims arising from alleged noise pollution, dust, and debris.

Dan Ducommun, MC Consultants, Inc: With the exception of a “COVID-19 interruption” in the spring of 2020, the demand for homes had been increasing at about the same rate for nearly three years. However, in the spring of 2020, there was a short-but-extreme slump in demand, which was followed by an energetic roar-back. Proven home office performance has positioned companies to consider a long-term hybrid work week model, which is driving up the demand for homes that can support a dedicated home office. I’m not aware of new types of claims, but anytime you have a rapid spike in demand for housing, future claims potential increases. This won’t likely create any types of new or unique claims, but we can expect to see an increase in the same types of construction-defect claims we have seen in the past.

We have seen volatility in both the prices and availability of building supplies over the past year. How has this impacted project costs and timelines, and litigation trends if or when contractors are unable to meet those timelines?

Dan Ducommun, MC Consultants, Inc: Anticipating the possibility of a construction slowdown (similar to what occurred during the financial crisis), many material suppliers cut back production. Contractors need to consider an allowance for higher equipment rates, higher labor rates, and higher cost of materials. Some contractors have been bold enough to add a line item on their cost estimate called a COVID-19 allowance that can be as high as 3%. These updates will upwardly impact budgeting for the construction project and should be anticipated by the claims professional. Whether or not a construction contract has a liquidated damages clause or not, it may be assumed that litigation for actual damages due to delayed completion dates will increase.

Michael Zech, Koeller Nebeker Carlson & Haluck, LLP: From a construction-defect litigation perspective, we are seeing cost-of-repair proposals that are significantly higher than before the pandemic and when materials and labor shortages truly took hold of the building industry. Repair proposals from contractors and even defense experts have similarly been affected and are volatile, often requiring earlier estimates and proposals to be updated based on current pricing There is also uncertainty regarding when repairs might actually be performed. We have seen that volatility and associated uncertainty create impediments to settlement, with plaintiffs of all types reluctant to settle their claims based on estimated repair costs that, due to labor and materials shortages, are moving targets.

With respect to construction, we anticipate that there will be some litigation down the road related to COVID-19 delays and standard force majeure and liquidated damages provisions of contracts involving projects that experienced delays. It will be interesting to see how the courts interpret those clauses in the context of the COVID-19 pandemic and the resulting restrictions and supply chain problems. 

Michael Zech is a partner at Koeller Nebeker Carlson & Haluck, LLP. michael.zech@knchlaw.com

Dan Ducommun is president & CEO of MC Consultants, Inc. dan.ducommun@mcconsultants.com