Construction Defect Litigation CAS Ratemaking Seminar 2005 Peter S. Mack, Markel Corporation

SCOPE OF PRESENTATION Background Legal Developments Emerging Issues 1

BACKGROUND California Population Growth between 1980 – 1996 –United States Population grew by 16.7% –California Population grew by 36% –2.8 Million New Housing Units Built (1 for each 3 new residents) –Demand For Housing Exceeded Supply By Over 600,000 Units 2

WHEN HOUSING DEMAND OUTPACES SUPPLY Builders Rush to Meet Demand Unskilled Construction Labor Enters the Market Laborers Are Unsupervised Short-Cuts are Taken Construction of Multi-Family Units Construction on Difficult Sites 3

IN MATHEMATICAL TERMS Unskilled Labor + Poor / No Supervision + Unrealistic Deadlines ____________________________________ = Substandard Housing 4

WHAT HAPPENS WHEN SUBSTANDARD HOUSING IS SOLD? Got Litigation? 5

HERE COME THE SUITS Owners Paid a lot of Money for the Homes Lots of Lawyers Early Suits Were Successful Suits Brought in the Name of HOA You Better Sue or Get Sued Plaintiff Only needs to Sue the Developer 6

GENERAL CHARACTERISTICS OF THE SUITS Fact and Documents Intensive Long Statutes of Limitations (Latent & Patent) Expert Driven Numerous Site Inspections Destructive Testing Many Cross-Complaints 7

GENERAL CHARACTERISTICS (Continued) Extremely High Defense Costs Numerous Coverage Issues & Disputes Strict Liability for the Developer Difficult to Settle 8

WHAT ARE THESE CONSTRUCTION DEFECTS? 9

CATEGORIES OF DEFECTS DEFECT Framing Roofing Poor Soil Prep Window Install Electrical Masonry Plumbing EFFECT Structural Failure Water Intrusion Cracked Foundations Water Intrusion Fires Retaining Wall Failures Water Damage 10

ARE THESE DEFECTS INSURABLE? Per Policy Holder – “I bought insurance to cover me for everything” Per Insurance Company – Yes & No. Resultant Damage is Covered but Work Product is Not Courts – We Will Do Everything We Can to Find Coverage 11

LEGAL DEVELOPMENTS Montrose I (1993) Montrose II (1995) Calderon Act (1997) Presley V. American States (2001) Chapter 40 - Nevada 12

MONTROSE CHEMICAL vs. SUPERIOR COURT Issue – Is an Insurer Obligated to Defend With Respect to a Proceeding Related to a Discharge of Hazardous Substances Ruling – Complaint Only Needs to Allege that Damages May Have Occurred to Trigger a Defense Obligation Impact – Leads to the Defense of More Claims, More Frequency 13

MONTROSE CHEMICAL vs. ADMIRAL INSURANCE Issue – Is There a Continuous Injury Trigger for the Duty to Defend Hazardous Waste Actions Ruling – All Insurers “From Shovel to Gavel” Have Potential Liability. Many Policies for Each Party May Apply Impact – Increases Claims Frequency & Makes Them More Complicated 14

CALDERON ACT Legislative Effort to Reduce CD Litigation Required Communication Between Owner & Builder as Pre- Requisite to a Suit Encourages Mediation Efforts Plaintiff Used as Tool to Get Information Generally Ineffective In Resolving Claims Without Litigation 15

PRESLEY HOMES vs. AMERICAN STATES INSURANCE Issue – Does an Additional Insured Endorsement on a Sub- Contractors Policy in Favor of the Developer Require that the Issuing Carrier Defend Developer? Ruling – A Duty to Defend the Entire Action Applies if there is a Mere Potential for Coverage Impact – Shifts Much of the Defense Costs to Subs, Some Peripheral 16

CHAPTER 40 – NEVADA LAW Cumbersome Rules & Deadlines Puts Onerous Duties on Builder Right to Repair but Owner Must Approve Repair Allows Plaintiff to Recover Attorney’s Fees, Costs and Interest if Successful in Trial 17

EMERGING ISSUES 18

MITIGATION EFFORTS Settlement Efforts Coverage Restrictions 19

SETTLEMENT PRIOR TO TRIAL Specialized Mediators Appointed by the Court Creative Approaches Such As CPR Extremely Expensive to Try Jury’s Biased Towards Homeowners Be Prepared to Try a Case that is Winable 20

COVERAGE RESTRICTIONS Montrose Exclusions – Many Variations Wasting Limits Policies – Expense in Limits SIR’s, Deductables Prior Defects Exclusions COE Requirements Subsidence Exclusions Mold Exclusions BE SURE TO MAKE IT CLEAR!! 21

OH… THOSE CREATIVE LAWYERS!! So Much Money at Stake Mold BI and PD Claims Sulfate Claims WHO KNOWS WHAT ELSE!! 22