MINUTES OF THE
SENATE Committee on Commerce and Labor
Seventy-second Session
March 19, 2003
The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 7:00 a.m., on Wednesday, March 19, 2003, in Room 2135 of the Legislative Building, Carson City, Nevada. The meeting was videoconferenced to the Grant Sawyer State Office Building, Room 4412, 555 East Washington Avenue, Las Vegas, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Senator Randolph J. Townsend, Chairman
Senator Warren B. Hardy II, Vice Chairman
Senator Ann O'Connell
Senator Raymond C. Shaffer
Senator Joseph Neal
Senator Michael Schneider
COMMITTEE MEMBERS ABSENT:
Senator Maggie Carlton (Excused)
STAFF MEMBERS PRESENT:
Scott Young, Committee Policy Analyst
Lynn Hendricks, Committee Secretary
OTHERS PRESENT:
Steve Hill, Lobbyist, Chairman, Coalition for Fairness in Construction
Robert E. Lewis, Lobbyist, Southern Nevada Home Builders Association
Bruce King, Lobbyist, Board Member, Nevada Subcontractor Association
Lois Ostraat
Betty Evenson
Ellen Rosenbaum, President, Benchmark Properties
Corrie Craig, Senior Deputy Director, Nevada Partnership Office, Federal National Mortgage Association
James L. Wadhams, Lobbyist, Southern Nevada Home Builders Association
Ronald Lynn, Clark County Developmental Services
Dave Duritsa, President, Safe Homes of Nevada
Herb Goldsmith, President, Duck Creek Village Homeowners Association
Sherry Kolbet
Scott K. Canepa, Lobbyist, Nevada Trial Lawyers Association
Robert C. Maddox, Nevada Trial Lawyers Association
Danny McGlaughlin, President, Pueblo at Santa Fe Homeowners Association
Paul Hulett
Chairman Townsend:
We will open the hearing on Senate Bill (S.B.) 241.
SENATE BILL 241: Makes various changes to provisions governing certain claims for constructional defects. (BDR 3-156)
As was previously agreed, we will first hear testimony from the proponents of this bill. We will keep track of the amount of time they take to testify, and we will allow that same amount of time to the opponents of the bill.
Steve Hill, Lobbyist, Chairman, Coalition for Fairness in Construction:
This bill is exceptionally important for Nevada homeowners and the construction industry. People on both sides of the bill have a common goal: to get their homes fixed without lawsuits. I have a description of the coalition which includes a partial list of members, a summary of the bill, and other data (Exhibit C. Original is on file in the Research Library.). The coalition represents more than a thousand companies and tens of thousands of homeowners.
We need to reach a resolution on this issue, which is a crisis for homeowners in Nevada. The onslaught of lawsuits in the past 4 or 5 years has made it more difficult for homeowners to get their homes fixed. In the last few years, the cost of housing went up 24 percent while salaries went up 7 percent. Homeowners want to get their homes fixed before lawsuits are filed. If their homes are not fixed, they want to retain the right to sue. This bill does that. The bill gives contractors the opportunity to fix problems before lawsuits are filed and provides a tough but clear definition of proper construction. The current definition in Chapter 40 of Nevada Revised Statutes (NRS) is woefully inadequate. The bill gives homeowners assistance from knowledgeable professionals on the State Contractors’ Board to resolve disputes. This critical legislation will help homes get fixed, make sure contractors and subcontractors can stay in business, and keep the economy strong.
Robert E. Lewis, Lobbyist, Southern Nevada Home Builders Association:
I support this bill. Our industry wants to build good houses and have happy customers. The challenge is to devise a system that maintains the vitality of the homebuilding industry, ensures an adequate supply of affordable housing, encourages responsible behavior, and provides adequate recourse when things go wrong. The recent trend toward needless litigation is a losing proposition for both plaintiffs and defendants. It is costly, time consuming, and often fruitless. We believe that a better way is to set up a system of laws that encourages the parties to communicate and cooperate in solving problems, with litigation reserved as a last resort. The dispute resolution mechanism in this bill will lessen the need for litigation while still preserving the rights of homeowners.
Bruce King, Lobbyist, Board Member, Nevada Subcontractor Association:
I support this bill. Many bills have been passed in the Western United States on this issue recently, in Washington, California, and Arizona, and none of them give the subcontractor the right to repair. This bill does, and I applaud it. Insurance for my subcontracting business will go up 500 percent in August. If we fail to do something to deal with this issue, the future of the construction industry and the price of housing is not good. We are asking for the right to go back into the home and fix our mistakes. This bill does not take away any rights of homeowners, including the right to sue.
Lois Ostraat:
I support this bill. When my condominium community was just 7 years old, an attorney told the members of the homeowners’ association board that we must file a construction defect lawsuit or lose our rights. We told him we were not interested. Even so, he contacted the president of the association and sent an expert out to take pictures of supposed defects. The homeowners voted overwhelmingly not to sue and the builder took care of all the problems. It is sad that attorneys currently have the right to tell homeowners, “You need to sue now because you could possibly have a defect in the future.” This bill preserves homeowners' rights, gives them the opportunity to work with the builder to get repairs made, and keeps others from taking control.
Betty Evenson:
I support this bill. I own a condominium in Las Vegas. Our homeowners’ association filed a lawsuit without the consent of the homeowners. The attorneys and their inspectors used deceptive practices in an attempt to get the board to file suit immediately. Some of the pictures used to convince homeowners to sue were not even of our community. A destructive team started testing in private areas like balconies without informing homeowners or seeking their permission. Homeowners voted 156 to 16 not to sue, after which the board brought in another law firm. The homeowners then voted to throw out the board. The current board is working with the builder. Homeowners must be given a voice before they get thrown into a lawsuit. The emphasis should be on fixing problems, not suing.
Ellen Rosenbaum, President, Benchmark Properties:
I support this bill. My company manages 20,000 homes in 87 communities in Las Vegas. We have experienced the downside of construction defect lawsuits. One of our properties is a community of 67 condos built in 1984. In 1993 the board sued the developer. Of the five board members who voted to sue, four sold their homes within a year. The remaining homeowners were assessed $600 each for inspection. Claims totaled $6,500,000, the settlement was $1,000,000, and the association received $550,000, not enough to make the required repairs. When the suit was filed, there were no rental units in the community. At its conclusion, 56 percent of the units were rentals. Prices dropped from $119,000 to $93,000. I hope this bill will assist communities like this one to get repairs made in a timely and cost-efficient manner without taking away the legal rights of homeowners.
Corrie Craig, Senior Deputy Director, Nevada Partnership Office, Federal National Mortgage Association (Fannie Mae):
Fannie Mae currently has some $19 billion invested in Nevada housing. Our concern is increasing insurance rates. Local governments would like developers to build homes for ownership for community stability, but many developers say their insurance will only allow them to build rental properties. The area most affected by these insurance rate increases is the condominium and townhouse market, which is also typically the most affordable because of the efficient use of the land. In southern Nevada, there has been a 5.6 percent price increase in the entire market in the last year. In that same time, the price of mid-level condos increased 23 percent. In northern Nevada, the entire market rose 8 percent and the condo market rose 66 percent. We are losing the affordable end of the market and first-time buyers are being shut out.
James L. Wadhams, Lobbyist, Southern Nevada Home Builders Association:
I am here on behalf of the coalition to walk you through the bill. The bill is a recompilation of existing law with some changes. In 1995, the Legislature adopted a procedure where homeowners would give formal written notice to the builder to trigger repairs before litigation was pursued. Senate Bill 241 is not a dramatic change to the law, but rather a return to this basic philosophy. In 1999 a change was made in what are called “complex cases” requiring that they formally begin with the filing of a lawsuit. This has been an unmitigated disaster. We are proposing contractors be formally apprised of problems and given the opportunity to fix them. The right to sue is still there if the problem is not fixed or is not fixed properly. A detailed description of every section of this bill is included in the Legislative Summary portion of Exhibit C.
Senator O'Connell:
What part of the bill deals with the case of Aas v. Superior Court of San Diego?
Mr. Wadhams:
Section 24 describes the level of performance expected. Construction must function as intended, meet applicable building codes, and not be the proximate cause of damage. Damage is described in section 49. We have not adopted the Aas standard from California.
Senator O'Connell:
Do you think the bill will have an impact on insurance rates?
Mr. Wadhams:
This bill will not bring relief to insurance rates. The demand for housing will be unabated regardless of insurance rates. We are hoping to give responsible contractors the opportunity to make repairs and avoid litigation. It may give some predictability back to the insurance market over the next few years.
Senator O'Connell:
Do you think it will take 2 years for this impact to be felt?
Mr. Wadhams:
It may not take that long. Contractors willing to make repairs will be better insurance risks and get better rates.
Senator O'Connell:
Is this bill modeled after legislation in any other state?
Mr. Wadhams:
The model for this bill is prior enactments in Nevada. We were one of the first to work on this area. California has passed their Senate Bill 800, but this is a Nevada solution to a Nevada problem.
Senator Shaffer:
Section 31 puts a lot of responsibility on the State Contractors’ Board to make decisions they may not be trained to make. They are not certified building or plumbing inspectors.
Mr. Wadhams:
We are not trying to bring in the State Contractors’ Board to adjudicate cases. We think it may be helpful to have the advice of a board with the current statutory responsibility to see that contractors are performing their services in a competent manner. They have enough construction expertise to evaluate the quality of the licensee’s work. Their role will be to give advice to either the licensee or the homeowner on the quality of repairs. We think the expertise is there or can be developed.
Mr. Hill:
Many of the members and supporters of the coalition are afraid of what is going to happen to them over the next couple of years. We think we have put forth a commonsense solution to a grave problem.
Chairman Townsend:
I understand the court has asked for some technical changes.
Mr. Hill:
The Nevada Supreme Court has asked that section 41 be eliminated from the bill. We support this and will submit this addendum.
Ronald Lynn, Clark County Developmental Services:
We support this bill. I am available to answer questions from a building official point of view. I will note that while the State Contractors’ Board is not certified, any repair requiring a permit must pass inspection and be approved. This means the board will be involved in any case.
Chairman Townsend:
We will now hear from those opposed to this bill, then open the floor for questions.
Dave Duritsa, President, Safe Homes of Nevada:
We will present testimony from both homeowners and attorneys in opposition to this bill.
Herb Goldsmith, President, Duck Creek Village Homeowners Association:
I have been a resident of Duck Creek Village in Las Vegas for 6 years. When we had problems with construction defects, most of our complaints were totally ignored by the contractor and developer. Major problems surfaced as soon as the developer left. A lawsuit was filed when the developer failed to make repairs, after which the developer filed for bankruptcy. This same developer subsequently formed a new corporation and built more condominiums with the same contractor and the same defects. Details of the defects are included in Exhibit D (Original is on file in the Research Library.), including color pictures. I also have videotape of local news coverage of some of the problems we encountered (Exhibit E. Original is on file in the Research Library.).
We did what we could to fix the homes at a cost of $80,000, but this was not enough. The Federal Housing Administration and Veterans Administration said the community no longer qualified for funding because the litigation was initiated by the homeowners. This caused a rapid reduction in property values. It became virtually impossible to sell or refinance, and some chose to abandon their homes. We were eventually forced to settle the suit because we could not wait for the conclusion of the trial and inevitable appeals.
Sherry Kolbet:
I have been through the nightmare of buying a new home with construction defects (Exhibit F). My contractor would not make adequate repairs. Eventually my son had to be hospitalized for respiratory distress due to toxic mold. We bought the house in June 1995, resolved the suit in July 2002, and the house was finally repaired and sold last week. Repairs totaled more than $90,000. We followed the process this bill sets out, but our builder would not work with us. We did not sue until we had exhausted all other avenues of redress, but this delay caused more problems. It is hard enough to get a bad contractor to be responsible for defects, and this bill would make it harder. My contractor and developer are building more homes now. Make laws to punish bad contractors.
Senator Schneider:
How long did you work with the builder?
Ms. Kolbet:
I worked with the builder for almost 5 years. After my son came out of the hospital, I contacted an attorney and worked with him for a further 2½ years. In all it was almost 8 years.
Scott K. Canepa, Lobbyist, Nevada Trial Lawyers Association (NTLA):
I have an extensive presentation on the problems with this bill (Exhibit G. Original is on file in the Research Library.), which proceeds from the false premise that homeowners are refusing to let contractors make repairs. This bill is not justified by market conditions. There is no evidence of frivolous suits. Governor Guinn requested a task force on this issue last year. The task force held hearings from October 2002 to January 2003. Their findings do not support this bill. Recommendations of the task force that were not included in this bill include continuing education, proficiency requirements, and a certificate of merit documenting claims.
The definition of defect should be rewritten to include not meeting building codes, causing actual damage to property, creating peril, or not meeting acceptable customary practices in the immediate geographical area. “Functioning as intended” and “proximate cause of damage or injury” are not adequately defined. This provision is morally repugnant because it means the homeowner has to wait until code violation results in property damage or personal injury before filing suit. If this is not the intention, the definitions need to be improved.
Senator Schneider:
Could you give an example?
Mr. Canepa:
If a house was built without draft stops in the attic, section 24 says he has no recourse until the house burns down.
Section 49 restricts recovery of damages to diminution of value of the house or the cost of repairs, whichever is less. This concept has been rejected by every state that has considered it and was overturned by California’s Supreme Court. The NTLA recommended that contractors who are sued because they refuse to make repairs should be required to report this litigation to the State Contractors’ Board so the board can determine whether they should retain their license. I submit a history of builder responses to notices of defects in complex cases (Exhibit H). We think these repeat offenders are responsible for the rise in insurance costs. We also think homeowners should be informed if their contractor carries liability insurance.
This bill discriminates against low-income homeowners by eliminating contingent fee agreements on page 26, line 40. The bill should also include the homeowner’s right to compensation for investigation costs.
The bill will increase the cost of insurance. Section 33 gives the unilateral right to the contractor to involve his insurer in the pre-litigation repair process, and the insurance company must treat this as a formal claim and defend and indemnify. This will drive insurers away from the State. Chapter 40 currently gives the contractor 45 days to repair in noncomplex cases; this bill inexplicably gives him 150 days. This is too long. The bill makes no exceptions for homeowners who must deal with violent contractors, contractors who make bad or stopgap repairs, or contractors who refuse to make repairs. No time limit is given for the State Contractors’ Board to give their findings. There is also no fiscal note for the cost of the board to hire additional people to address claims.
Robert C. Maddox, Nevada Trial Lawyers Association:
We do not have a lawsuit problem in Nevada; we have a construction defect problem. Nothing in this bill does anything to make sure homes get built right the first time, and it takes away homeowners’ rights. Please read our white paper on this issue (Exhibit I).
Danny McGlaughlin, President, Pueblo at Santa Fe Homeowners' Association:
I served in law enforcement for 21 years in Michigan, 15 years of which were enforcing building codes. The 168 homeowners in my community have experienced terrible problems which are detailed in my written testimony (Exhibit J). The builder has taken no interest in our complaints and problems. This bill requires the homeowner to wait until something is destroyed or someone is killed before the builder can be held accountable. Builders have always had the right to repair without this bill. The provision sending homeowners to the State Contractors' Board is a runaround designed to discourage homeowners from filing suit.
Paul Hulett:
My experiences are detailed in my written testimony (Exhibit K). The customer service representatives tell me the warranty company will probably deny my claim because it is going to be expensive. The builder has not been in contact since the insurance company got involved. I cannot refinance. My home was new last year, but this year its value is perhaps half what I paid for it.
Mr. Duritsa:
Everyone on both sides of the bill wants well-built homes with no lawsuits. If mistakes are made, they should be corrected. Standards from the construction industry are tacit admission that there is a problem. The language is vague. Phrases such as “functioning as intended” in section 24 will have to be defined by the courts, which we do not want. Builders should just do it right the first time.
Chairman Townsend:
Mr. Canepa, you said there was a bill on this in the Assembly?
Mr. Canepa:
I understand there are two bill drafts not yet released from the Legislative Counsel Bureau. They deal with construction defects. They focus on building houses right the first time and include mandatory continuing education.
Chairman Townsend:
This is a two-part issue: building houses correctly, and resolving existing problems. This committee spent its heart and soul in a bipartisan manner last session on just these issues. In tomorrow's meeting, I want to see Mr. Lynn or a member of the Clark County building department, Mr. Musgrave or someone else from Clark County, someone from the State Contractors’ Board, and proponents and opponents of the bill. I am asking for someone from Clark County because I want their estimate on growth issues. Senator Carlton, who has been intensely involved in this bill, had a death in the family and will be back Friday. I would like to have copies of last session's bill on this topic. What is the number of that bill?
Scott Young, Committee Policy Analyst:
That was S.B. No. 519 of the 71st Session.
Chairman Townsend:
We will see that there are sufficient copies for all who want them.
Senator Neal:
I would like to comment that the yellow shirts worn by supporters and opponents of the bill, both here and in Las Vegas, are not going unnoticed by me.
Chairman Townsend:
There being no further business, the meeting is adjourned at 9:33 a.m.
RESPECTFULLY SUBMITTED:
Lynn Hendricks,
Committee Secretary
APPROVED BY:
Senator Randolph J. Townsend, Chairman
DATE: