Headline:  Electrical subcontractor ordered to pay $48.05 for construction repair under a Chapter 40 settlement; ordered to pay legal fees totaling $43,380.

Headline:  Nevada plumbing contractor estimates at least one employee daily is engaged in a task relative to a Chapter 40 notice.

For decades, a home has long been known as the “American Dream.”  For some involved in the home building industry, that dream has evolved into a nightmare.  Construction defect legislation, commonly known as “Chapter 40” after the section of Nevada Revised Statues that contain the provisions, has become a Frankenstein monster to many—builders, subcontractors and homeowners alike.  Without going into a complete history of the legislation, the original intent was to provide a means of targeting the resolution of construction defects between homeowners and contractors. 
   Unfortunately, due to the intervention of attorneys, experts, and emotions
the end result is a far cry from the original intent.  An article by John Boyden, appearing on the State Bar of Nevada website, pointed out that while
“the goals of Chapter 40 remain admirable, its methodology fails from inception by instantly separating the parties into fighting adversaries.”  Boyden goes on to state that additional provisions contained within NRS 40.655, which allow a homeowner to recover attorney’s fees, reduction in the market value of their house, loss of use during repairs, the cost of repairs, and expert fees, “…virtually guarantee litigation”.  Even if an expert can dig up only one or two small defects, the plaintiff attorney has nothing to lose—Chapter 40 will pay
him back for all expert costs incurred during the study of the complaint.  No other body of law allows this type of recovery.
   Examples abound, and this article contains a number of interviews with affected industry professionals—both builders and subcontractors alike.  A constant theme will be noted: the amount paid by defendants is usually insufficient to make repairs after all of the attorney’s fees are paid and costs are recovered.  In fact, a June 20, 2010 article in the Las Vegas Review Journal points out that less than 15 cents of every tort-cost dollar goes to compensate plaintiffs.  Numerous organizations, including those that comprise the Coalition for Fairness In Construction, are calling for meaningful tort reform, particularly as they pertain to the provisions of Chapter 40.  It will certainly be a long and arduous challenge, but one that is of prime importance and immense benefit to an industry that simply wants to play on a level legal playing field.
   In response to a request from The Builders Magazine, Sue Cavallero of Cavallero Heating & Air Conditioning, Louis Polish of Sun City Landscapes, Kreg Rowe of Tanamera Communities, and Darren Wilson of Sierra Air Conditioning all contributed some of their experiences with the provisions of Chapter 40 as it exists today.  Their responses are enlightening
Q.  Chapter 40, originally intended to allow homeowners to receive prompt repair of real defects, has evolved into a process that rarely benefits the homeowner.  What has been your experience with the law?
Louis Polish:  I can’t help but feel that Chapter 40 has become a loophole for trial attorneys to get their guaranteed fees and costs.  Guaranteed.  That’s not right.  I have had instances where I have talked to the homeowners on an inspection and they don’t have any idea what is wrong with their landscaping, but our company is listed on the Chapter 40 claim.  We have over 100 lawsuits and have spent thousands of dollars going to inspections and paying our attorney to answer claims, and have yet to make a repair and get out of the suit.
Sue Cavallero: I’ll give you two examples.  The first was for a Chapter 40 claim relating to “uneven” heat in the home.  Our original quote to the builder was $4,000 for the system we installed.  The plaintiff’s expert cited wrong size furnaces.  We inspected, made minor repairs and adjustments.  The settlement demand was for $137,000—we settled for $20,000…still 5 times more than our original quote in 2003. The other was a case regarding water accumulation under the house—nothing related to HVAC.  We were named in the Chapter 40 claim anyway, as the “expert” had discovered another case of “uneven” heat in addition to the water.  The settlement demand against us in this case was $17,856.  We settled for $5,610—nearly 2 ½ times more than our job quote of $2,400.
Kreg Rowe: We are currently embroiled in a $43 million Chapter 40 suit regarding our Fleur de Lis project in Reno.  Even though it’s illegal, attorneys have gone door-to-door, encouraging participation in the suit using fear tactics and inferring that problems they may have—or may yet discover—can worsen.  To date, there are over $17 million in attorneys fees.  Most likely, when all is said and done, homeowners will only see about $600,000.
Darren Wilson: Chapter 40, since its inception, has done little to get repairs made.  Most of the “defects” have little to do with real defects….they’re just plain maintenance issues.  Remember that the attorneys are targeting homes that are 5-10 years old.  The attorneys promise the homeowners a lot of money, while the lion’s share of the settlement goes to the guaranteed fees and costs.  Unfortunately, our insurance costs are being detrimentally affected.  They’re settling with these attorneys because they feel it’s cheaper to settle than go to court.  It’s what these guys are counting on.  There is rarely enough money left over to make the repair.
Q.  What have you found to be your costs to defend against a Chapter 40 claim?
Rowe: The costs are outrageous.  In addition to needing to pay ongoing attorney’s fees, we currently have one full time staff person within our office just to monitor and coordinate all of our cases.
Cavallero:  In addition to the settlement amounts previously mentioned, we have to inspect—or pay others to inspect—each home we’re involved with.  We also have to use administrative staff time to copy files, send documents, attend mediations, speak and correspond with attorneys and insurance companies, and answer interrogatories.  It’s time consuming and labor intensive.  It’s challenging to quantify each case.
Wilson: The amount spent by the homebuilding industry in Nevada is immense.  I have 2-3 people on staff at any given time just to handle the crush of claims we’re faced with as a large HVAC contractor in Las Vegas.  We offer to make a repair if possible, only to be turned away by the plaintiff’s attorney.  They don’t want a repair…they want to drive the money machine. 
Polish:  We’ve spent thousands of dollars in labor costs, as well as my time and my attorney’s time.  The result?  No repairs made to date.
Q.  Has Chapter 40 affected your ability to obtain liability insurance, or the cost of that insurance?
Wilson: Premiums have risen out of control.  What’s happened as a result of these out-of-control suits is that good companies have left the state and are no longer willing to write in Nevada.  Those that are left have priced so high that it has caused many businesses to just close their doors.  Also, the coverage that is offered tends to be of lesser quality.  The homebuilding industry has been forced to go to Wrap Insurance programs (OCIP) to attain coverage for all subs they employ to build a home.  It’s expensive and adds tremendously to the cost of a home.
Rowe: Premiums are definitely on the rise as a result of the current legislation.  It’s going to be important for insurance companies to get on board with the reform program and help stop the bleeding.  They need to allow the contractors the right to repair BEFORE the attorneys get involved and generate fees that are sky high.
Polish:  Our premiums have stabilized somewhat after the big, 300% spike that occurred in 2002/2003.  The problem we’re having now is that there are fewer companies available to quote us and our deductibles per occurrence are through the roof—about 3 – 5 times higher than last year.  It’s a big commitment to take on, especially with the economic conditions in which we currently find ourselves.
Cavallero: This is difficult to answer, because our company was forced to downsize as quickly as the economy did last year.  Many contractors have put Wrap policies in place to help deter the Chapter 40 claims.  I can tell you that during the “boom years” we saw our premiums increase by more than 200%--and fewer companies are issuing general liability policies, so the competitive nature of buying insurance has been impacted.
Q.  As both Nevadans and business owners, please share your thoughts on resolving these issues.
Rowe:  I believe it will take a drastic reduction in the amount of fees that can be awarded to a plaintiff’s attorney.  As it stands right now, anything they spend money on is reimbursable.  We would be wise to take a look at California to see how they initiated reform; I understand that they have capped fees, making it unpalatable to the attorneys. In my 35 years of building, the current climate in which we find ourselves is the worst I’ve ever seen for construction defect!
Wilson: To fix it completely, I believe we’d need a full repeal of the Chapter 40 statutes.  I believe the Nevada State Contractor’s Board would need to step up and play a bigger role in the process.  They would have the authority to evaluate a “defect” and if necessary, issue a repair order to the builder or sub.  They would also be charged with enforcing the repair under penalty of license forfeiture.  This mandatory repair process, if a true defect exists, would put an end to nearly all litigation, as there would be nothing in it for attorneys.  As it stands right now, most claims take more than 2 years to resolve….this would make for prompt repairs.  If the problem was too big for the Board to settle, another procedure would be implemented that would assure repairs are made.  The Nevada State Senate attempted to resolve this terrible issue in 2009 and was met with a closed door at the Assembly.  The time is now to fix this issue—it’s as big as any other in the state of Nevada
Cavallero:  We, too, believe that the State Contractors Board should be the first step in resolving issues of construction defect.  As it stands now, oftentimes the homeowner is not left with enough money to repair the defect after all of the attorneys fees are paid—a fact that few homeowners filing claim are aware of.  If experts are used in a case, they should be licensed in the state of Nevada.  Too often professional “experts” are used who have no experience with Nevada conditions or Nevada construction techniques.  Lowering the statute of limitations for bringing a claim would also help. 

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Louis Polish

Sue Cavallero

Kreg Rowe

Darren Wilson