When Home Is a Masterpiece

Editor's note: This article is based off of the presentation: “SuperSized: Analyzing and Defending Claims Involving Large Single-Family Homes,” that the authors will deliver at CLM’s virtual Construction Conference at 11 a.m. on Sept. 30. Register for the show here.

Despite recent public health considerations, data and news reports show construction and sales of luxury single-family homes as a percentage of overall market share has grown over the past several years.

As construction of residential properties with a sales price at or above $2 million rises, the number of claims associated with such properties has also increased, and claims professionals frequently are presented with factual and legal issues not encountered in claims arising out of more common types of properties, such as multifamily communities and production projects. Some may find that the policy analysis and claims-administration protocols typically used in other kinds of matters may not be as effective in these more complicated claims.

Understanding the Claimant

Claims professionals responsible for managing construction-defect claims most commonly encounter one of two types of claimants: institutional claimants—generally either a homeowners’ association or property-management company; or individual owners of a modest single-family home. Such claimants tend to view the prosecution of construction-defect claims as transactional in nature—i.e., what benefit is available and at what cost?

Those who have litigated such claims—and, more importantly, negotiated their resolution—have undoubtedly encountered an association’s goal of achieving enough of a recovery to address only the most critical of alleged defects, while ensuring payment to counsel and retained experts.

High-net-worth claimants frequently do not share this transactional view of litigation. As the breadth of home-planning materials in the public domain suggests, those designing and building homes of significant value become both financially and emotionally invested in achieving a completed project that fulfills a grand vision. To the extent no expense is spared in creating a home that meets that vision, often no expense is spared in litigating claims that result when a builder fails to achieve the desired outcome.

The larger the construction budget, the more owners tend to view their properties as works of art and not merely a construction project, especially when one enters the strata of ultra-luxury at $25 million or more. Such owners value the opportunity to make a statement through the uniqueness of their project.

As an example, a homeowner recently asserted claims against a general contractor arising out of the construction of a 14,000-square-foot house in one of Denver, Colorado’s most exclusive neighborhoods. The design and construction team included an interior designer whose role was to translate the owners’ vision into a completed project that would be revealed to them for the first time on the day of occupancy. Throughout litigation, the owners described the importance of their ability to enjoy an “unveiling” event. Due to a series of alleged deficiencies in the completion of the project, however, the home was not turned over as part of an event, but rather in phases as work was completed. Having their vision compromised, and being denied the event they had hoped for, the owners commenced litigation, ostensibly because of alleged defective work. The resulting dispute was characterized less by the merits of those claims and more by the owners’ personal grievance.

When presented with a claim involving a high-value property, claims professionals first must recognize the fundamental difference in motivation. Owners tend to not only be heavily invested financially in a project, but also bear a strong emotional connection. Achieving perfection—or as close to perfect as is achievable—is the guiding standard to which contractors are held.

When such standards are not met—either because of legitimate deficiencies or a subjective dissatisfaction in performance—affluent owners frequently resort to litigation as a means of correcting a perceived injustice, not only to achieve resolution but frequently to impose punitive measures on a contractor who has provided disappointment.

Third-Party Involvement

As with more traditional projects, complex residential projects are not built through the efforts of a lone professional. Unlike production builds, where a consumer purchases a completed project from what some jurisdictions refer to as a “builder-vendor” [see, for example, Sloat v. Matheny, 625 P.2d 1031, 1033-34 (Colo. 1981)], it is not uncommon for high-net-worth homeowners to employ their own construction liaison, in addition to a more customary design team. \

Liaisons, also frequently referred to as owners’ representatives, serve as the conduit of information between, among others, the owner, architect, engineer(s), and builder. As such, individuals in this role are critical to the proper and timely exchange of information. The involvement of additional categories of players in these matters increases the opportunity for effective counsel to deflect liability from contractor clients.

When analyzing a new claim, claims professionals must examine, early and thoroughly, the opportunity to apportion such liabilities to third parties, where possible, through the contract. Strategies should be employed to maximize the effectiveness of additional-insured and contractual-indemnity tenders, thereby shifting financial burdens to those who previously have agreed to accept them. Additionally, as there exists the potential for significantly larger exposure based on projects with higher construction budgets, consideration should be given to proper involvement of excess or umbrella carriers to ensure satisfaction of applicable notice requirements. Too frequently, carriers and their counsel wait until damages reports have been exchanged in litigation and mediation is imminent before providing such notice, potentially denying excess carriers an opportunity to analyze claims and prepare for resolution.

Expert Involvement

As one might expect, the larger the construction budget for a residential project, the more complex elements of that project may become. From novel construction techniques to unconventional materials, luxury homes often present components unique to the subject property. Because of technical specifications and requirements necessary to implement such designs, the defense of resulting claims frequently requires retention of experts across multiple disciplines.

In litigation involving more conventional properties, the issues presented often may be consolidated into a few select disciplines: a civil engineer to address foundation, grading and drainage issues; a structural engineer to address framing and building-envelope claims; and a cost-of-repair expert to address damages. More complex projects often require a higher degree of specialization. These large luxury homes can have plumbing, mechanical, electrical, and control systems that surpass even those in the most complex commercial buildings. With an increase in complexity, each of these systems offers more opportunity for unexpected problems.

Unique code requirements, construction methodologies, and uncommon materials demand experts with specific experience. Complex HVAC and energy-offset systems (e.g., geothermal wells) are increasingly used in large residential construction in the right environment and present both engineering and compliance requirements most residential contractors rarely encounter. Technological advancement in materials and systems also increases these difficulties. In a recent matter, a homeowner elected to install a window system containing an electrochromic coating (smart glass) that varied the window tint at each window based on the position of the sun at that moment. Unfamiliarity with such novel systems often serves as the source of claims arising out of their installation.

Increased Cost Considerations

Unusual claims frequently present significantly higher damages calculations based on the availability of appropriate materials and qualified labor, the concept of “resort pricing,” higher overhead costs, and increased design and review costs. In most metropolitan areas, a builder may find skilled craftspeople across a wide array of disciplines to include a novel feature in a property’s construction to achieve the desired element. In smaller “jet set” destinations—think Aspen, Colorado; or Islamorada in the Florida Keys—qualified labor may not reside locally.

Damages calculations also may reflect the insufficiency of commercially available estimating tools and software, which do not adequately factor in the types of materials or means and methods necessary to complete projects of select quality. In the “unveiling” property used in the example above, the main wing of the house was built on a radius. Rather than install rectangular hardwood floor planks in a curved space, the owners elected to have each plank individually cut to match the home’s radius – resulting in thousands of unique puzzle pieces, each having a specific designated placement.

Wall, ceiling, and floor finishes in luxury homes present additional challenges, and they can be quite complex and costly to repair. It is not uncommon to have to reconstruct all the finishes in an entire room, or even beyond a room, when only a small area requires repair. Other challenges often involve sourcing the repair materials. Tile from Italy and quarried stone from France are common choices that introduce added challenges when contemplating repairs.

The tools available to determine damages also may be limited. If using commercial estimating software, value would be determined primarily based on material and square footage. Such applications, while useful in most contexts, could not account for the complexity imposed by larger design considerations. Claims professionals should expect that cost-of-repair reports on which settlement decisions are often made will therefore likely include much larger skilled-labor components than one is used to seeing in reports for more common types of projects.

Discovery and Trial

In more common multifamily and single-family home litigation, determination of who is responsible for certain construction decisions is a straightforward process. As noted above, general contractors and subcontractors frequently are required to interact not only with a homeowner client, but also with homeowner-retained architects, construction managers/representatives, and accounting professionals. Each of these individuals is a likely source of valuable information to be gained during discovery.

As the complexity of a project increases, so too does the need for effective communication; the lack of which is a frequent cause of alleged defects in the finished product. Understanding the role of each person and preparing targeted discovery are necessary to determine how complex issues were resolved during construction and how breakdowns in the process may have contributed to the conditions identified in litigation. More importantly, however, the ability to identify and articulate potential deficiencies in the performance of others may provide the ability to deflect liability from a contractor client.

A trial also will present issues not frequently encountered in other contexts. Unlike jurors in a trial involving a condominium unit or typical single-family home, jurors in high-end litigation are likely to have little in common with the plaintiff homeowner. The personal residences of most jurors look significantly different from those with which they are presented at trial. Such differences often result in negative impressions of, and reactions to, the claims made. Jurors who may have to live daily with imperfections in their own homes could find that complaints for seemingly trivial conditions do not merit the expense of trial, or their conscription as jurors. Defense-presentation strategies should recognize these potential reactions and seek to maximize any potential benefit to contractors of highlighting the distinctions between plaintiff and juror.

Resolution

Because owners involved in high-value projects possess significantly greater resources than most litigants, they generally do not share the same motivations demonstrated by a homeowners’ association or the average owner. As discussed above, litigation tactics often are driven by personal dissatisfaction with a contractor’s performance, perceptions of having been dealt with unfairly, or a desire to control the resolution of a dispute.

Because of these varied motivations, selecting a mediator experienced in these matters is critical. Homeowners with expansive resources invest time in understanding the issues involved in their claim. If in doubt that a mediator shares that ability or the commitment to match that level of understanding, a homeowner will likely not be persuaded to compromise. Mediators who have the ability to gain the homeowner’s trust, to demonstrate proficiency concerning the relevant technical issues, and to efficiently manage the complexities of the case are more likely to achieve resolution.

As experienced professionals, most claims personnel have a well-developed set of skills and tools to effectively manage high-value property construction defect claims. With a larger understanding of a claimant’s motivation, the subtle differences in high-value property cases, and a potential juror’s perspective at trial, claims professionals will be prepared to effectively navigate a growing segment of defect claims.

The authors thank Sierra Bennett, J.D. candidate and law clerk at Wilson Elser, for her assistance with this article.