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NEVADA CONSTRUCTION DEFECT LITIGATION - DRIVING DOWN PLAINTIFFS' EXPECTATIONS


Members of the Firm’s Real Estate and Construction Law Practice Group recently participated in a panel discussion held by the Construction Defect Claims Managers Association regarding the defense of construction defect lawsuits in Nevada. As many of our clients and colleagues are exposed to these types of claims, the within summary of the panel discussion is provided followed by our comments and recommendations.

The primary topic of the panel discussion was N.R.S. Chapter 40, with an emphasis on taking advantage of the provisions in the Statute that encourage early offers to settle. Specifically, that a “reasonable” written offer that is rejected by a plaintiff made in Chapter 40 pre-litigation proceedings will bar recovery of plaintiff’s attorney fees, pre-judgment interest, or both.

While Chapter 40 contemplates resolution through monetary settlement or performing repairs, it was agreed that the best approach is via monetary settlement. This is because a party can obtain a release in exchange for a monetary settlement while no release can be demanded when repairs are performed. Further, there is concern that performing repairs may rewind the clock on warranties and statutes of limitations.

One of the obstacles is the short time-frame the statue provides from the date the notice is filed to the date the offer must be made, 180 days. During this time, the developer/general contractor is required to perfect his own insurance coverage; obtain and organize experts including facilitating their investigation and developing a scope and cost of repair; conduct an investigation into the claims and defenses; and identify, find, and provide notice to the potentially responsible subcontractors and get them up to speed.

The Panel also discussed the use of tolling agreements, however agreed it is uncertain how effective they are. Further, concern was expressed about whether a developer/general contractor entering into such a tolling agreement without the approval of a subcontractor will act as a waiver of indemnity rights, if any, of Chapter 40 damages from the subcontractor. The alternative is a “pay and chase” scenario which most parties and insurers tend to avoid.

Another important element of a Chapter 40 pre-litigation offer to compromise is its “reasonableness.” Specifically, in order to bar plaintiff’s recovery of fees, costs and interest, the offer must be adjudicated to have been reasonable. The statue does not provide guidance as to what constitutes a “reasonable” offer or how it is to be adjudicated. Some courts feel it is a post-judgment decision of the trial Judge, while others have deferred the issue to a jury.

The Panel attempted to provide a reality check about Nevada Construction Defect litigation. They described Nevada’s system of handling these cases as “broken” and getting worse. In Nevada, litigation expenses in the form of attorney fees, expert fees, special master fees, mediator fees and associated costs far exceed the total indemnity dollars spent to settle cases or pay judgments. Any effect caused by the advancement of two of the “dirt court” Judges to the Supreme Court is unclear.

There was discussion regarding the Sheuette v. Beazer case and the rulings that came out of it. For example, the court ruled that the pre-judgment interest provision of Chapter 40 commences when the home was built, and not when the claim was made or the suit was filed. It also provides for pre-judgment interest on the attorney fees, including on contingent fees. The panel discussed concerns about “last man standing” issues and the potential of a relatively minor subcontractor getting saddled with the entire attorney fee and cost burden.

There was discussion about the Albios case. In that case, a verdict for the plaintiff in the amount of $100,000 resulted in a post-judgment Chapter 40 award of approximately $700,000, or 700% than the verdict itself! This alone was sufficient for the Panel to recommend making settlement offers early in order to trump the Chapter 40 entitlements. With respect to joint offers, it was pointed out that although they can be made, they should be carefully worded so that the offer can be directly compared and contrasted with any subsequent judgment.

The next part of the meeting focused on proposals to manage Nevada Construction Defect Litigation more effectively. The Panel addressed the failure of mediated settlement discussions due to lack of party preparation. This resulted in a proposal for a shortened litigation track with mandated litigation bench-marks with mediation limited to three sessions per case. However, the Panel agreed there is little chance this system will be adopted - so it will not be discussed into detail in this report.

The last part of the meeting focused on dealing with WRAP and OCIP policies. While the Panel members had some experience in this area, it was relatively minimal. In general, the concerns over these policies appear to be focused on the minimal amount of aggregate coverage the policies provide and the various conflicts between the parties and counsel in litigation.

Concern was also expressed about developers/general contractors exhausting what is typically a limited aggregate policy limit through settlement and litigation expenses, thus leaving the subcontractors without coverage under the WRAP policy. Further, if the subcontractor’s coverage has a WRAP exclusion, then the subcontractors would have no insurance coverage whatsoever.

Another concern is that most WRAP policies have burning limits, in that the legal expenses are deducted from the aggregate limits. This creates a problem if a case is heavily litigated between the developer/general contractor. The problem is greatly exaggerated if conflicts develop between the developer/general contractor and the subcontractors that require multiple attorneys that must be paid out of the WRAP policy.

Further, most, if not all WRAP addendums provide conflict waivers and for a defense by a single counsel and set of experts, but are silent on a defense strategy, i.e., defense of issues versus defense of parties. If a specific construction issue is defended in a certain manner, this may directly conflict with the defense of a particular party which when combined with the potential of no coverage is very problematic.

Another concern is that the typical WRAP addendums, as well as contracts between the developer/general contractors and the subcontractors, contain express indemnity obligations in favor of the developer/general contractor. This requires the subcontractor to personally indemnify the developer for all sums that fall within the scope of the indemnity agreement that are not covered by the WRAP policy, which subjects the subcontractor to personal exposure assuming the subcontractor has no other applicable insurance. Further, there is always the potential for inconsistent or even conflicting express indemnity obligations between those contained in the WRAP addendum and in the construction contract.

Comments and Recommendations:

As a preliminary comment, while the seminar was helpful, it did not address the central issue. What actions can the defense bar take to “drive-down” settlements, verdicts, and plaintiff’s expectations?

Currently, the plaintiffs’ bar in Nevada has created an environment where they have minimal risk in prosecuting claims and using the Chapter 40 entitlement threat as an excuse to hold out for top dollar, irrespective of the merits of a specific case. A defense approach based on developing and executing a litigation strategy focused on “driving down” the plaintiffs’ expectations will have the collateral affect of reducing the Chapter 40 risk.

Determining whether or not pre-litigation offers to settle a specific case are appropriate requires a risk versus reward analysis as there are a number of potential drawbacks and conflicts to consider. As such offers are based on minimal information obtained through limited investigation and no discovery, it requires making a significant number of assumptions as to what evidence such efforts would reveal. This is particularly difficult given that for an early offer to have its intended effect, it must be adjudicated as “reasonable” in post-judgment proceedings.

As pointed out above, if the unaccepted offer is NOT adjudicated as “reasonable” then it will fail to bar the plaintiff from being awarded attorneys’ fees, costs and pre-judgment interest. There are no guidelines as to what factors are to be considered in determining what is or is not “reasonable.”

The primary concern with Chapter 40 pre-litigation offers is that if such an offer is not accepted, it will act as a floor for future settlement negotiations and increase even further the expectations of the plaintiffs and their counsel. Also, an early offer to settle sufficient to satisfy both the plaintiff and its attorneys carries the risk of grossly overpaying the case, and further increasing expectations in future cases.

If the offer is not accepted, then there is a risk that the case will proceed along the usual course and incur the same defense costs, but with a settlement floor being established up-front. This leads to a real conflict if the evidence obtained through investigation and discovery is favorable to the defendant and will not justify the offer in the future. From a practical perspective, it would be very difficult to take the money off the table. If the evidence turns out to be significantly more adverse to the defense than earlier assumed, then the settlement demands can be expected to significantly increase. In the end, while the defense costs will remain high, there is a risk the indemnity costs will increase and exceed them.

In general, the approach taken by the panel appeared to be predicated on the theory that throwing money at the problem will make it go away. However, as noted above, throwing money at the problem up-front may simply result making the potential for reasonable settlement worse. The preferred course of action may be for litigation counsel to use the broad range of tools at its disposal to “drive down” the plaintiff’s expectations. This requires acquiring evidence through investigation and discovery that will support affirmative defenses, testing those defenses via motions for summary judgment and adjudication of issues, and to make sure the experts are carefully controlled and prepared to provide supporting opinions.

There are cases that justify early offers and the need to be very quickly identified, and should be subject to a “triage” approach. This includes the client and/or insurer having readily available an “on-call” team of experienced and qualified claims personnel, attorneys, and/or consultants. This team should be supported by technology and systems designed to quickly and efficiently process, analyze, and store the large amounts of information and documentation customarily generated in construction defect cases. When an appropriate case arises, this “team” should be given the assignment of conducting a front-loaded investigation and to take those actions necessary to provide the client and/or insurer a written report that reflects a detailed analysis of exposure, a strategy for defending the case, and the risks and advantages associated with an early offer.

“Driving-down” the settlement expectations of plaintiffs for litigated claims simply requires good lawyering. Cases need to be given to defense lawyers who will take responsibility and ownership of the case and remain personally involved. Affirmative defenses must be quickly spotted, and a strategy developed to obtain the evidence necessary to support them. Cases should not be abandoned to attorneys or experts, but rather require an on-going working relationship to insure the attorneys and experts focus on investigation and discovery in obtaining the facts and opinions necessary to support the defense. It is not necessary for more money to be spent in defending the case, but to focus the same defense dollars on a litigation strategy that goes to the heart of the lawsuit and plaintiff’s damages claim.

With respect to the WRAP and OCIP policies, an issue that was not addressed by the panel has to deal with the WRAP insurer defending covered and non-covered causes of action. It is not unusual for a complaint to have a fraud or misrepresentation cause of action for economic damages mixed in with a breach of contract or negligence cause of action for property damage. Although the WRAP insurer is required to defend the entire case, it customarily does so under a reservation of rights which leaves the insureds exposed to the uncovered causes of action and creates a serious conflict between the developer and subcontractor - requiring separate counsel. Further, this could very well require separate claims adjusters for the WRAP insurer, and competing claims for the same limited aggregate policy limits given the burning-limits nature of the policy.

When this new round of WRAP and OCIP coverage goes into full-swing litigation, there will be a lot of casualties. WRAP policy administrators, producers and agents, will face their own exposure for failing to disclose the known limitations of such insurance. Defendants and cross-defendants will look for other sources of insurance in addition to the E&O claims against producers and agents. For example, a developer who is also a declarant under the HOA liability policy will look for coverage there (which is already happening in the Washington State area).

We hope this report has provided you with valuable insight and assistance in dealing with Nevada Construction Defect cases. We also have available for presentation material which specifically focuses on proven techniques and strategies for developing affirmative defenses and working with experts in construction defect cases. If you are interested in having Tharpe & Howell provide a presentation on this issue to your team, please contact Firm Partners Robert Freedman or Byron Ames, as follows:

Robert Freedman is admitted to practice law in California, the District of Columbia, and Washington State, and Pro Hac Vice in Nevada, Florida and Illinois. He is a Partner in Tharpe and Howell’s Los Angeles office, and specializes in commercial litigation and business transactions. Mr. Freedman can be reached at (818) 205-9955.

Byron Ames is admitted to practice law in Nevada and is a Partner in Tharpe and Howell’s Las Vegas office. He specializes in commercial and personal injury litigation and manages Tharpe and Howell’s Nevada construction litigation practice. Mr. Ames can be reached at (702) 562-3301.

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Related Attorney(s):
Robert M. Freedman

Related Practice Area(s):
Real Estate and Construction Law

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