[Originally published 1st quarter 2005, in arcCA 05.1, “Good Counsel.”]
Author Kevin de Freitas, AIA, is an architect in San Diego.
The single most significant external force shaping architectural practice in the State of California is the law. Of particular concern is the lengthy, ten-year period of liability against construction defect, which is single-handedly decimating the entry-level, for-sale housing market statewide. In the residential market, the effort of dealing with demanding clients and lengthy entitlement processes and navigating the necessary bureaucracies—added to the ten-years of construction defect liability—far outweighs the fees architects can collect for this type of work.
Several years ago I designed and built a seventeen unit row home project that we insured before 9/11. The wrap policy for $1,000,000 coverage over 10 years cost $60,000. Today, we are doing a smaller project, and the same policy, which is only available through two insurers, is $325,000 for the same $1,000,000 of coverage—certainly a deal breaker for this small in-fill project, since the insurance alone adds $20,000 per unit. Hypothetically, a case against us would start deep in the tenth year following certificate of completion, and a court date would be assigned another year later, by which time there would inevitably be some degradation to the structure resulting from any number of factors besides poor construction: lack of consistent building maintenance, overgrown landscaping too close to the structure, etc. Insurance companies will almost always settle, regardless of culpability, rather than risk the expense of costly litigation that could result in a judgment on top of trial expenses. This is really risk management from the insurers’ perspective, and a nearly guaranteed payout for the defect attorney. The end results are very high premiums to secure this kind of coverage.
I once worked for a firm that specialized in production housing. I attended a meeting in which a defect attorney called together all the design consultants and contractors that were associated on a specific tract home project. He dismissed all the consultants and contractors who did not carry Errors & Omissions insurance, regardless of what their role or responsibilities had been on the development. Those who remained, he then named in the suit. The attorney’s goal was to get the remaining companies to cannibalize each other by pointing the finger of blame at the other defendants, hoping to minimize their own liability. The insurance industry responded with a policy called a ‘wrap,’ which means that all the design consultants and contractors are covered under one policy and represented under the united front of one attorney. Again, a very costly and only partial solution.
From an aesthetic and urban design standpoint, higher soft costs like insurance, smaller profit margins, and the fear that your next project could wipe out a hard-earned reputation—not to mention your personal assets—strongly discourage smaller developments and urban in-fill projects, leaving the field to larger-sized production builders whose background is almost exclusively suburban. Design innovation is not typically a goal of production builders, especially as they move from their traditional suburban developments to more urban sites. The lack of diversity is not helping our communities look or function any better.
The resulting impact on the market is that low-rise condominiums, which serve as starter homes for first-time buyers, are not being built in any significant numbers by developers in California. Individual architects and contractors cannot get the necessary insurance coverage to work on such projects, even if developers were willing to take the risk. Choking off supply at the bottom end of the market has a direct impact on affordability: the San Diego Union Tribune recently reported that the medium-priced home in San Diego just hit $565,000 and that only 11% of county residents could qualify for a home in this price range. San Diego has the third highest priced market in the State, as well as the country, behind Santa Barbara and Contra Costa Counties. In response, San Diego has become a leading voice in the urban in-fill housing dialogue, with highly innovative projects executed by architect/ developers such as Ted Smith, Jonathan Segal, Public, Sebastian Mariscal, and others willing to assume the inherent risks.
For a recent project here, we came up with what may be a novel approach to the problem. Because our project was speculative and self-developed, instead of having a client to guide the process, oddly enough we drew our inspiration from our attorney and professional liability insurance agent.
Our attorney’s counsel was that, if we did a subdivision and cut our 17,500 square foot lot into seventeen individual lots of approximately 1,000 square feet each and put a 3” airspace in between units, we could avoid being a common area project, and thus there would be no home owner’s association. The ‘row house’ typology (single family detached on individual fee-simple lots) significantly reduces the chance of being sued for construction defect, since each homeowner would have to sue individually, rather than as a class action together. The approach acts as a sort of ‘poison pill’ for attorneys working on contingency, creating too much work without the prospect of a sizable payoff.
We determined that most construction litigation is based on water intrusion and its related problems. Since there is only a 3” airspace between the rowHOMES, repairs in this area would be virtually impossible, so we settled on using tilt-up concrete, which is impervious to damage caused by water intrusion and termites, doesn’t support mold (which our insurance agent calls the “new asbestos”), and is perfect for sound attenuation and increased energy efficiency. Utilizing a tried and true commercial construction technology like tilt-up in a new way resulted in an appropriate residential solution with greatly reduced exposure to defect litigation.
Tort reform in the area of construction defect would be the single most important step the State of California could take toward easing the staggering residential affordability gap. The State Legislature has initiated a few reforms, such as allowing contractors the opportunity to repair specifically identified defects to avoid lawsuits. Another modification to the law limits suits to known defects. Defect attorneys can no longer fish for unknown defects through destructive demolition; their case has to be based on problems that have already surfaced. These measures represent a few small steps in the right direction, but not enough to create a sea change.