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Catching the Legal Low Ball

By Tracy Powell

| Business Articles

CatchingLegal

As our society becomes more litigious, lawsuits that might never have been filed years ago are becoming more pervasive.

Some years ago, an upscale planned community was built in a valley, close to the beaches. Almost ten years after construction, the homeowners sued the landscape contractor, among others. The suit claimed that the irrigation system was not properly installed and was throwing water on the buildings, thereby causing the wood siding and overheads to rot.

Forced to defend this action, the insurance companies involved sent experts to do a site inspection. Although it sounds relatively simple, being a sleuth takes time. One cant leave any stone unturned.

On inspection, the experts found that the wood siding that was rotting was on the second story of the houses and close to the eaves. The lower half of the buildings appeared to be fine. How could it be that the spray heads could shoot so high?

The inspectors examined the irrigation system and found that no water was shooting up as high as the second story. Upon further examination, they determined that, in their opinion, the irrigation was properly installed and that the water was not hitting any part of the houses.

Being so close to the ocean, the experts finally realized that every morning a dense fog came over that area, Since these homes were built in a valley, the fog lingered longer. This dense fog created droplets of water that clung to the siding and overheads. After ten years of moisture accumulation it was determined that this is what caused the rotting. The suit was dropped.

Youre a landscape contractor with adequate liability insurance covering your back end just in case one of those "what ifs" becomes an "as if." This means your business interests are covered from financial reprobation in the case of accidental property damage during a job, right? Think again. Its a little known fact, and an unwelcome trend for insurers and landscape contractors, thats sweeping through the countrys courts homeowners and their associations can discover a perceived construction defect, look back 10 years, and sue practically any contractor, along with his insurance companies, who has worked on any of the propertys projects in that time frame. This is due in part to a 1993 California Supreme Court ruling known as the Montrose Decision.

As Efraim Donitz, CFO of Golden Oak, a green industry co-op corporation, which is endorsed by the California Landscaping Contractors Association (CLCA), explains:
Montrose Chemical Company (manufacturer of DDT) dumped waste material down a sewer over a period of time, and when detected, was sued. Montrose passed the suit to its insurance company, who in turn denied the claim. They said that the insurance company Montrose was using at the inception of the dumping was a different company, and it was responsible. The case eventually ended up in the Supreme Court. The Court ruled that because the hazard was created over a period of time, all insurance carriers involved had to share in the defense of the claim.
But, you ask, what does an outlawed pesticide have to do with my insurance company and me? The answer lies with money-hungry lawyers and their innate ability to sniff easy earnings miles away.

The case started a trend, says Donitz. That trend went over to whats called construction defects. Some lawyers then went out and started suing construction companies for defects. But they didnt just sue the contractor, they sued everyone on the job, all the subs, including the landscape contractors.

Construction defects have a 10-year statute of limitations. So when new condos or tracts of homes are built, the HOAs (Home Owners Association) have 10 years to file a lawsuit. There are attorneys who specialize in these types of cases and they contact HOAs during the eighth and ninth year after the project has been completed. They look for such things as water incursion in the buildings, any damage to the grading, damage to the structures, etc.

The suit would be filed against the developer or general contractor, et al. Then all of the subcontractors would be pulled into the suit. It would be easier to settle for $5,000 than go to court. The defense costs could be in excess of $40,000.
Being dragged into a lawsuit, from out of the blue, plays into the suing litigants strategy, as confusion leads to a desperate plea to settle.

Now you have a lawsuit on your hands. You dont even know why, but you have a lawsuit, adds Donitz. And you have to defend that lawsuit. Not only is the insurance company that a landscaper had at the time responsible, but all the insurance companies from that time to the present.

Golden Oak does not sell insurance, but is responsible for finding insurance programs that best meet the needs of CLCA members. Golden Oak president Nelson Colvin, who is also a licensed contractor, has seen landscape-specific lawsuits swell in recent years, following the Montrose Decision, and most suits are totally unbased.
I just went through a bunch of lawsuits, and it took me three hours to read the reports, says Colvin. There were two legitimate construction defect claims and about 20 that really werent. In one such claim, theyre suing because they say that the drainage didnt work and the grades were changed. They do a site inspection, and find that the individual homeowner hired someone else to put in a patio, which changes the drainage, or puts in sidewalks which affects the drainage. But they keep you in the lawsuit, and its cheaper to offer a settlement than to defend the case. And they know this.

Contractors caught in the middle are indeed trapped, but its not only the suing attorneys who are subjecting landscapers to this legal flogging. As with the Montrose Decision in 1993, all other parties are brought to the table to foot the legal bills, taking into account all the insurance companies a contractor had on board during and since the alleged defective project.

Just how big a problem has the legal bantering become? As with many issues dealing with the courts and eager legal eagles, the extent of the problem can be measured in dollars.

The average payout is $5,000, but what this amounts to is paying the lawyers to defend it, informs Donitz. What this means is that the average payout is $1,600 to $2,000, even if theres no damage, just to get out of it. But if you multiply that, times, (in our case) 1500 contractors, then you see the impact.

We are closing a book of business that we started writing in 1995, Donitz continues. We currently have 76 open cases; weve already closed hundreds, and there are still cases being opened. Weve already spent over $4 million in expenses, and were a very small company.

The math is relatively simple, yet devious. One common, clarifying example Donitz uses is a lawsuit against a general contractor, lets call him Company A.

Attorneys go to homeowners associations and say, We can make money for you; tell us whats wrong with your project.

Attorneys normally approach the associations in the eighth or ninth year after a project has been completed. At this time, the appearance of cracks in sidewalks or driveways are fairly common, and these are shown to the lawyers. The evidence is pounced upon and declared to be construction defects. Its then that, with list in hand of all the projects that Company A has on record, they sue all these projects on behalf of the homeowners associations.

But simply settling to rid oneself of a burdensome suit isnt the whole of the matter. Dishing out substantially higher expenses for defending the case is what has socked the insurance companies books.

Generally what happens, because these suits get dragged out, is that you may settle for $5,000 after four or five years of depositions and such you also pay the attorneys, explains Colvin. Weve had some cases where weve paid out less than $10,000 in liability and $40,000 or $50,000 in defense costs.

Oakwood Insurance Company, LTD, is a Bermuda-based reinsurance company, owned by Golden Oak Cooperative Corporation and individual members of CLCA. Oakwood reinsures a portion of the liability and auto insurance for members of CLCA.

Right now, if you read the Wall Street Journal, insurance is getting to be more expensive, says Donitz. This is one of the reasons for that. Another thing thats happened is that a lot of insurance companies dont want to insure in California.
The suing trend isnt limited to California. Colvin suggests that because its a States Supreme Court decision, and because many larger companies operate in more than one state, future lawsuits are imminent across the country. In fact, filings have already occurred in Nevada.

Negating Negligence
While the surface situation looks bleak for landscape contractors, there are ways to ready your ramparts for a possible legal barrage. The closest thing to sue-proofing your business is keeping good records.

We, as an industry, dont do a good job of documentation, says Colvin. What really needs to be done should begin on-site. When contractors are working on a project, they are generally working off a plan by a landscape architect or developer. When changes are made, they should be marked on your (the contractors) plan. Then have the owner, or the developer, or the landscape architect sign the plan indicating that the change was authorized. Then they cant use that as evidence against you. As a matter of fact, it turns around as evidence for the individual.
Good record keeping also involves using and tracking change orders consistently. Instead of moving a project along as quickly as possible (at the developers beckoning) and easily overlooking a completed change order, make the documentation a priority. It will pay off in the future.

RoadcracksAs all contractors are eager to build a backlog, many are too quick to jump at a job, and a certificate of insurance is a common, unseen trap laid for future demise.
Oftentimes, a developer or general contractor will make the subcontractor provide a certificate of insurance naming them as additional insured, and as part of the additional insured it says youll defend the general or developer in any lawsuit, reveals Colvin. Thats another thing that the contractor has to take a look at and not jump into. Although it may only cost $25 for a certificate of insurance, theyre so anxious for the job and to build their backlog, they dont think about the long term ramifications of that certificate.

One of childhoods lessons was to look both ways before crossing the street; the same can be said of looking before you leap at a job know what youre signing when in cahoots with a developer.
Not only is the heat-of-the-moment documentation indispensable, keeping the records for years to come is essential in avoiding being on the losing end of a defect accusation.
Job records should be kept for about 10 or 15 years, even if it means putting it in storage somewhere, advises Colvin. Many times contractors finish the job, get their final check, get their retention payment 35 days after the completion, and they say, Well this ones done, and they toss it.

Donitz has some final advice concerning these lawsuits. Keep records and save them. After about five years contractors are running out of space in their filing cabinet, and they look at these jobs which were done five years ago and think they dont need them any more. They have to put them in boxes and put them in storage so they can retrieve them if they should have to. Otherwise, theyre at the mercy of the owners records or the generals records.


 
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