REPERCUSSIONS

Construction-defect and related lawsuits and claims have drastically affected the cost of insurance.

Homeowners-insurance premiums are soaring, in part because of water-damage and mold-related claims. Premiums rose 20 percent in some areas in 2000 and 2001 and 10 to 15 percent in 2002. They are expected to have risen up to 10 percent in 2003. In Texas, some insurers stopped writing new policies when the state tried to impose price controls and to mandate mold coverage. The situation threatened to slow sales of new homes in Texas when potential buyers couldn’t get coverage because lenders wouldn’t extend credit on uninsured collateral. Similar problems have been reported in California and elsewhere.

HIDDEN MOLD
HOMEOWNERS Renee Haynes, 41, a homemaker, her husband Paul, 44, a pilot, and their sons Michael and Liam, of Sandy, Ore. PROBLEM In 2002, four months after moving into their semicustom $66,000 house on land they already owned, the Hayneses say they discovered mold throughout the walls. They have moved out, citing allergy-related problems. Repair costs: $70,000, their lawsuit says.
Don Marr Photography

Liability insurance for builders and subcontractors also has skyrocketed in the last few years, with recent annual premium increases of more than 400 percent for some contractors. The increases became so high in California and Nevada, for example, that some builders and insurers withdrew from those states, and others slowed the pace of condominium building because they believed condo associations were especially litigious, say insurers, builders, and lawyers.

Builders have responded swiftly to those developments by trying to stamp out new lawsuits. They started including mandatory-arbitration clauses in many new-home contracts, requiring homeowners to take disputes with builders to an arbitration panel rather than to court, and to abide by the panel's decision.

Builders say arbitration is faster and cheaper than litigation. But homeowner and consumer groups, including Consumers Union, the publisher of Consumer Reports, say arbitration panels may be stacked in favor of industry and deprive citizens of their constitutional right to a jury trial. The outcomes may also be sealed, meaning the public can’t learn about serious issues.

Resale buyers are not bound by arbitration clauses because they were not a party to the original contract. In part to keep these buyers from suing over defects, builders have successfully lobbied states to pass “right to cure” laws. These require builders to be given a chance to fix defects before homeowners can sue.

Eighteen states have passed such laws in the last two years, and legislation is pending in at least two others. But homeowner groups complain that right-to-cure laws create unfair obstacles to justice. For example, if, after abiding by a right-to-cure law, a homeowner still wants to sue, he may not be able to if the statute of limitations has expired. In any case, no one we spoke to said they sued their builder without first trying to get repairs made.

Computer databases that track the claims history of a house are another development in the property-insurance industry that could have an effect on the resale housing market. A house with many claims may be difficult to insure or sell without major repairs. Prospective buyers who don’t check the claims history in the home’s Automated Property Loss Underwriting System (A-PLUS) report or Comprehensive Loss Underwriting Exchange (CLUE) report could find out too late that they must pay huge premiums to insure it.

Lenders could also suffer if shoddy construction problems multiply, and the effects could ripple throughout the economy. Banks and federally chartered institutions that buy bank mortgages, including Freddie Mac and Fannie Mae, with $3.3 trillion in mortgage-backed securities, could end up with a significant inventory of reduced or worthless collateral. Consider the case of one New Jersey homeowner who in 1995 paid $278,000, including a $150,000 mortgage, on a property recently reassessed at just $90,000 because of serious structural defects.

While mortgage lenders require real-estate appraisals as a condition of lending for a mortgage or equity loan, they generally don’t require a property inspection that would reveal defects that could undermine its value.