San Diego attorneys continue to wonder about the future of a relatively little-known area of law that has kept hundreds of lawyers, expert witnesses and private judges busy for several years - construction defect litigation. Despite repeated predictions that shrinking condo construction and expiring statutes of limitations were about to extinguish construction defect practice, cases continue to be filed. But it’s true that much of the work has shifted to other counties where this practice area developed later. San Diego attorneys frequently are found litigating in Orange, Riverside and Los Angeles counties. In addition, cases increasingly involve alleged defects in one or a small number of single-family homes, rather than the hundred-unit condo projects that gave this practice its reputation for multimillion- dollar settlements and judgments.

    For good or bad, the San Diego legal community pioneered this practice area. Construction defect litigation blossomed in the mid-1980s as condominium owners sought compensation for allegedly shoddy construction. The emergence of condos as a new form of property ownership coincided with a surge in homeowner associations - self-governing owner groups set up by developers to manage common improvements such as landscaping, pools and clubhouses. In a dramatic example of the law of unintended consequences, developer-created homeowners associations turned into financially well-endowed entities quite capable of suing builders for purported construction defects.

    In traditional tract developments of single-family detached homes, neighbors share no ownership interests. But in condominiums, residents own the building structure and operating systems in common. Similarly, in tract developments covered by homeowners associations, neighbors own some amenities in common. In addition, homeowners associations have the power to "tax" members for maintenance fees and other shared expenses, resulting in significant bank accounts. Adding to this mix were key court decisions that allowed homeowners to sue developers for both strict liability and warranty, and decisions which permitted condo associations to file a single suit that covered all owners. These legal developments made cases easier to win. Strict liability is easier to prove. They also made cases worth a lot more money. A single lawsuit could involve millions of dollars in claims by hundreds of owners.

    It took builders and insurance companies a few years to react, but eventually both industries began looking for relief from the multimillion dollar settlements and judgments common in the 1980s. Many insurers abandoned the residential development market entirely or refused to cover condominium construction. Builders and tradespersons were hit, because without insurance it was impossible to get construction financing.

    For builders, the ultimate result has been a chilling decrease in condo development, from 36 percent of all new construction in 1986 to about 12 percent last year. On the other hand, plaintiffs' attorneys say the ultimate result has been vastly improved construction; the adversary system worked by forcing developers and tradespersons to build better homes.

    What is certain is that pressure is mounting to curb construction defect lawsuits. The building industry and insurers have been trying for years to gain legislative relief. Their wish list includes caps on damages, caps on attorney fees, mandatory arbitration clauses in sales contracts, shorter statutes of limitations and a narrower definition of what constitutes a construction defect. Such changes would mirror the successful efforts of California doctors who won statutory caps on medical malpractice awards. Plaintiffs' attorneys thus far have repelled most of these proposals, arguing homeowners are entitled to protection when quality is sacrificed for profit.

    On the legislative front, the score is probably a zero-zero tie. In the session just completed, two bills aimed at curbing construction defect litigation failed to become law. Senate Bill 262 died in committee and Assembly Bill 594 was recently vetoed by Gov. Pete Wilson. Both measures attempted to divert cases away from the courts by promoting settlement before cases were even filed. Neither garnered sufficient support to make it into the code books.

    At the same time the building industry and plaintiffs' bar are battling it out in Sacramento, recent case law developments suggest court decisions are shifting the balance of power slightly in ways that benefit defendants. Defense attorneys are dusting off an old legal principle - the economic loss doctrine - and using it to argue successfully for limits on the types of damages owners can recover. Recent decisions in California, other states, and at the U.S. Supreme Court reveal judges are looking more favorably on this doctrine than in years past, and citing it more often to dismiss some claims.

    Decisions which could further alter the playing field if upheld on appeal include one trial court decision undermining California's ban on mandatory arbitration clauses in home sales contracts. Plaintiffs' lawyers also are concerned about a handful of rulings where single-family homeowner associations failed to qualify for class action treatment. Without class action status, cases are more costly and difficult to prove, and fewer homeowners are likely to join as plaintiffs.

    It’s still too soon to say where these developments will lead, but attorneys representing both sides of the issue are waiting to see: will construction defect practice continue to be a busy area or will it dwindle to a trickle of cases accounting for only a small amount of San Diego’s legal work?

Pamela Lawton Wilson was a legal affairs reporter in San Diego from 1989 to 1993. She is now an associate at the civil firm of Sullivan Wertz McDade and Wallace.