The Developers Defense Kit: Reducing the Attack of HOA Attorneys on Common Area Projects

The management and control of risks facing real estate developers and contractors has been in the forefront of the building industry's goals for the past 15 years as law suits for defective and negligent design and construction have flourished.

By Bill Dexter & Mary S. Jones

For the past two decades, Homeowner Associations’ attorneys have been cutting a wide path through the assets of insurance carriers that underwrite contractors, architects and building products manufacturers. The drill has been perfected to a highly detailed and orchestrated attack on the builders and their consultants to coerce as much money from their insurance carriers while dangling expensive and drawn out litigation as the ultimate consequence of not settling early.

After this repeated and well-rehearsed drama, one would think that as developers and homeowners we would have learned how to solve building problems and eliminate the waste of inflated claims of defective workmanship, erroneous designs and non-performing products. Each new matter brings with it the certain promise of the time involved (years), the money expended during discovery that is often paid for by special assessment from the homeowners, the endless hassle to the unit owners during discovery and destructive testing, the drawn out deposition process that involves every homeowner (including both spouses), and at the end of the lengthy settlement process, the realization of a fraction of the monetary claim and the long term consequences of having a file of cited defects prepared by recognized industry experts which must be disclosed by each owner when they put their unit up for sale. This does not include the obligatory relinquishing of future warranty claims through the release process that the insurance carriers demand as a condition of payment of the settlement funds. After all, when the dust settles from the years of investigation, destructive testing and endless settlement conferences, no one emerges as a clear beneficiary to the process except the attorneys and their consultants.

Consider the tactics employed by the drug companies to mitigate their risks as a blueprint for construction risk management measures. The strategy was born from a recent New Jersey trial known as Humeston v. Merck & Co., Inc. A New Jersey jury decided on October 3, 2005 that Merck & Co. was not legally responsible for the heart attack suffered by an Idaho postal worker taking the arthritis painkiller Vioxx -- concluding that the company had properly warned doctors of the drug's possible risks.

Jurors in Atlantic City rejected claims by Frederick Humeston, 60, who blamed his 2001 heart attack on Vioxx. The verdict didn't address whether the drug caused his heart attack , (it was medically determined that it did) but jurors focused on whether the drug manufacturer adequately warned doctors and patients of the known possible side effects.

The hundreds of prescription drug commercials that are aired on television channels directed to the general public spend as much effort touting the benefits of the drug as they do disclosing the possible side effects that range from hair loss, sleepless nights, anxiety, indigestion, nausea, blurry vision and so on. The surprising aspect of this risk management policy is that the advice and disclosures developed by the drug manufacturer is not always conveyed to the patient by the physician.

There’s a lesson for the construction and housing industry in this example. Although Merck probably has many more battles ahead in court, the New Jersey verdict provides a reasonable plan for litigation avoidance through better and more detailed disclosures of the “known side effects” of standard construction materials and methods of assembly.

When the HOA attorneys file a law suit against a developer, they typically will allege the following causes of action:

1. Failure to follow the plans and specifications.
2. Defects in the “Common Areas” of the HOA buildings.
3. Deviation from building codes and industry practices.
4. Premature failure of equipment and finishes (especially in ocean front locations.)
5. Defective and substandard workmanship.
6. Erroneous plans and engineering.

It is clear after thousands of construction defect law suits nationally that the plaintiff’s attorneys gather up the developer-created documents and then proceed to charge them with failure to follow the instructions and misrepresentation of the suitability of the units for occupancy and use.

The blatant facts of the matter are that all construction materials and processes have “known performance limitations” much like the “known side effects” of prescription drugs. Consider that the developer took an aggressive position to disclose and advise of the long standing industry side effects that new home owners were most likely to encounter and couple that with an iron clad warranty policy that precluded the possibility of a frivolous law suit that focused on irregular texture on the drywall and fading paint on the south exposure of the building and a missing nail in the drywall board. Clearly, there can be far more serious defects in a given project that may result in building settlement, or roof leaks, but when addressed in a responsive manner by an attentive developer, the probability of an HOA lawsuit drops significantly.

Bill Dexter, in conjunction with attorney Mary S. Jones, has developed a detailed plan to create sales documents, contracts, advertising plans and CCC&R tips to reduce the targets for HOA litigation attacks. For more information, contact Bill at (805) 544-0852 or e-mail: wdexter@pacbell.net.