Story #5 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015
On June 16, 2015 six students died and seven others were seriously injured when the balcony on which they were standing collapsed.
The group was celebrating a 21st birthday party at an apartment located in the “Library Gardens Complex” in Berkeley, California. The cause of the collapse is under investigation. Initial analysis pointed to dry rot caused by rainwater that had penetrated the balcony’s wood structure. A lawsuit filed by the families on November 12, 2015 alleged that wood rot was caused by a “multitude of mistakes” and construction shortcuts that were ignored by builders and owners. The lawsuits said the builders “failed to waterproof” the deck and that the landlord ignored the “presence of mushrooms growing on the deck (that were an) unambiguous red flag” of dangerous wood rot. According to the lawsuit, a year before the collapse, the owners also ignored signs that the balcony had begun to tilt dangerously away from the side of the building.
While the first news reports concentrated on the human side of the tragedy, the focus of the media, the public, and elected officials turned to Segue Construction, the building’s general contractor, when it was revealed that Segue had been named as a defendant in a number of lawsuits involving other buildings it had built. Segue had paid over $26 million in legal settlements between 2012 and 2015.
Although none of the other lawsuits involved building failures or personal injuries, the fact that Segue’s settlements were confidential and not disclosed to consumers or the California’s Contractor’s State License Board (“CSLB”), prompted State Senator Jerry Hill (13th District) to revive a previously submitted bill (SB 465) which would require any licensed contractor to report to the CSLB when it settled any lawsuit for $50,000 or more, or was responsible for any arbitration or administrative judgment of $25,000 or more.
The bill’s reporting requirements covered lawsuits and claims alleging fraud, deceit, misrepresentation, incompetence and recklessness. The bill also required the reporting of lawsuits and claims alleging “negligence” and “breach of violation of contract.”
SB 465 was initially introduced by Senators Hill and Loni Hancock (9th District) in February 2015, and did not make it out of committee. Senator Hill reintroduced the legislation following the Library Gardens Complex accident. Senators Hill and Hancock sought passage of the bill saying it would provide protection to the public by providing them with more information about building contractors with a history of constructing substandard buildings. The senators pointed out that under existing laws, the public would have no ability to research a builder’s lawsuit history, since settlements, no matter the amount, could be hidden from the public by the inclusion of a confidentiality clause in the parties’ settlement agreement.
The major California building trade groups opposed the bill, arguing that it was vastly over-inclusive, and would not accomplish its purpose of alerting the public to the “bad actors” in the construction industry. The California Building Industry Association (CBIA) argued that many contested lawsuits are settled for economic reasons. The CBIA pointed out that contractors and their insurers choose to settle lawsuits even though there is no evidence of wrongdoing, in order to avoid uncertainty and to avoid costly litigation. The bill did not provide any exception for these types of settlements. According to the CBIA, the flood of reporting that would be required would both harm the construction industry, and would provide a misleading record to the public about a contractor’s building history.
The bill again failed to advance out of committee in mid-July. It is not clear whether Senators Hill and Hancock intend to try and revive the bill in 2016 but Senator Hill asked the CSLB to hold a series of workshops to find a consensus solution. The first meeting was on September 30th. The CSLB has not provided any further information on its website about another meeting or any other action.
While SB465 was a well-intentioned piece of legislation, its inclusion of language requiring contractors to report virtually every settlement over $50,000 to the CSLB, including settlements made for purely economic reasons, appeared to doom the legislation. It also highlighted an industry-wide issue regarding the large number of construction defect lawsuits filed every year. The vast majority of these lawsuits do not include fraud or deceit allegations, and involve structures that either have very few problems or problems that could be easily addressed on a warranty basis. Of the small percentage of lawsuits involving actual – rather than technical – defects, an even smaller number involve defects that have life-safety concerns.
Often the settlement payouts come from insurance companies, with or without the consent of the general contractor, and contain non-admission of liability clauses. Other settlements are made by general contractors, who are paying either out of their own pockets to avoid the further costs of litigation, or to forward funds paid by subcontractors who have worked on the project. Under the bill as written, these settlements, would have to be reported to the CSLB and would be made public. The bill makes no exceptions for multi-plaintiff claims, for settlements paid by carriers, or settlements made solely to avoid further costs of litigation.
If the goal of SB 465 is to publicly identify and root out “bad actors” in the construction industry, requiring all civil settlements to be reported may ironically be counterproductive. A potential unintended consequence of requiring blanket reporting, would be to overshadow settlements that the public should be aware of, namely claims involving fraud or settlements driven by serious construction defects that have life-safety concerns.
While all sides agree there needs to be accountability in the construction industry, the common goal should be to identify and discipline wrongdoers without punishing the entire construction industry.
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