Things to know about construction defect reform

In February 2015, Governor Sandoval signed into law AB 125, a bill containing broad reforms to construction defect litigation. It includes the following critical changes to Chapter 40 which governs construction defect claims: elimination of the attorney’s fees “entitlement” under NRS Chapter 40; changes the statute of repose to six years without exception; limits the definition of a constructional defect; increases the requirements homeowners must meet to bring a claim; eliminates common defect notices; prevents HOAs from bringing claims not involving common areas; allows for pre-litigation offers of judgment; limits a subcontractor’s contractual duty to defend and indemnify claims; and sets requirements for certain owner controlled insurance policies.

The first significant change to the law is the redefinition of what constitutes a “constructional defect.” The previous definition was very broad and allowed a claim for any building code violation, regardless of whether or not the condition was dangerous or damaged property. That definition allowed allegations of construction defects when there was no actual damage to the property.

AB 125 changes the definition of constructional defect to require actual damage to property. Under Section 6 of AB 125, a “constructional defect” is now defined as a defect which presents an unreasonable risk of injury to a person or property; or which is not completed in a good and workmanlike manner and proximately causes physical damage to the residence, an appurtenance or the real property to which the residence or appurtenance is affixed.

The revised definition suggests that the law now requires evidence that the defective work actually caused damage to the residence or some addition or improvement to the residence.

A second significant reform made by AB 125 is change to the statue of repose. The statute of repose is basically the time period allowed to bring a claim for a constructional defect. Under the previous law, the statute of repose for claims against a builder or designer depended upon the nature of the alleged deficiency. The law now provides a single six-year statute of repose for all construction defect claims. This applies regardless of the whether the defect was known or hidden. Importantly, the six-year statue of repose also applies to claims that a defect was fraudulently concealed.

Another significant change is to the ability of homeowners to recovery attorney’s fees. Importantly, AB 125 eliminates attorney’s fees as an element of recovery in a construction defect action. Chapter 40 previously allowed the homeowners to recover all attorneys’ fees as an “entitlement.” Homeowners will still be able to recover fees under certain circumstances and under other applicable laws. However, the ability to recover such fees in construction defect actions is no longer automatic. Therefore, the ability of homeowners to fund construction defect litigation will be an important consideration in bringing such claims.

Another significant change in the law directly impacting homeowners is the requirement that home warranties be exhausted prior to bringing a claim. Under the prior law, a claimant was required to “diligently pursue” but not exhaust a claim that is covered by a home warranty before sending a notice of a defect to a builder.

The changes to the act have been and will continue to be analyzed and debated both sides. However, the reforms are significant and radically change the process for bringing and litigating constructional defect claims and homeowner’s obligations with regard to bringing such claims. It is critical for building professionals in the housing industry to have a basic understanding of the reforms and educate themselves as to the impact those reforms have on their building trade.

Caryn S. Tijsseling is an attorney with the legal firm of Lemons, Grundy & Eisenberg in Reno.