Introduction
The mortgage crisis continues to affect homeowners’ ability to make their payments. Over the last several months, mortgage foreclosures (particularly, sub-prime mortgage foreclosures) are on an unprecedented climb. Homeowners in danger of loosing their homes are trying to find avenues to stop foreclosures. In an effort to stop lenders from foreclosing, homeowners are becoming creative.
In desperation, homeowners’ creativity has led them to claim they discovered multiple defects with their homes. The lure of “easy money” tempts the homeowner to file claims against the builder seeking a monetary settlement from the builder’s insurance or the builder. The target of these construction defect claims are often small and medium size residential builders.
Small and medium size residential builders are often not equipped to defend construction defect claims making them vulnerable to these types of claims. Many builders do not have the mechanisms or processes in place to prevent, deter or effectively defend a construction defect claim. Consequently, builders, particularly small and medium size, fail to effectively defend against homeowners who claim defective workmanship in their home.
This guide, although not comprehensive, introduces five steps residential builders should act upon to more effectively prevent, deter and/or defend against construction defect claims by homeowners. Although no set of tips guarantees complete success, these five steps go a long way towards protecting builders against construction defect claims from homeowners. Moreover, these five steps give builders an advantage in the event a homeowner files a claim.
One — Register with the Texas Residential Construction Commission
In 2003, the Legislature adopted the Texas Residential Construction Commission Act (TRCCA). TRCCA created an alternative mechanism for residential builders and their customers to solve disputes arising out of construction defects.[1] As a residential builder, the most important protection against defect claims filed by homeowners is to register with the Texas Residential Construction Commission (TRCC). A builder’s TRCC certificate of registration is the first line of defense against construction defect claims.
Under the TRCCA, no claim for damages arising out of a construction defect may be filed in Court against a builder until the homeowner has submitted the claim to the state-sponsored inspection and dispute resolution process (SIRP).[2] The greatest advantage residential builders currently have against construction defect claims is SIRP. SIRP is an effective mechanism because 1) the State is a third party inspector, eliminating bias; 2) TRCCA allows the builder to cure any defects found by the state inspector in lieu of monetary compensation; and 3) if a homeowner is not satisfied with SIRP and files a claim in Court, the homeowner must overcome the presumption of the existence or nonexistence of a construction defect established by the SIRP recommendation or ruling by a preponderance of the evidence and must establish that the recommendation or ruling is inconsistent with applicable warranty and building and performance standards.[3] The unbiased nature of the process, the ability to cure any defects and the need to overcome the presumption deters homeowners seeking monetary compensation from filing frivolous claims of defects against builders.
However, a builder cannot is not protected by the process if the builder was not registered at the time the builder and homeowner entered into the contract, or if the certificate of registration of the builder was revoked.[4] Consequently, in order to ensure a first line of defense against construction defect claim, builders must register with TRCC.
Two – Customer Service
In any industry Customer Service is the key to increased sales and customer satisfaction. The residential construction industry is no different. A residential builder with extraordinary customer relations is a successful builder.
However, Customer Service is also a key to avoiding construction defect claims. Builders who cultivate longstanding relationships with their homeowners through customer service throughout the building process can rely on that relationship to prevent claims of construction defect. A builder with established customer relationships is more likely to here from a homeowner about a potential defect prior to a homeowner filing a complaint with TRCC or filing a claim in Court.
Builders with excellent customer service relationships address potential construction issues with their customers during the project making it less likely to face a defect claim two or three years down the road. Even so, maintaining that customer service relationship through the entire warranty period and in some cases beyond can go a long way towards avoiding construction defect claims.
Excellent customer service is no guarantee that a claim will not be filed, but it can make a builder aware of potential issues and probably avoid a claim.
Three – Everything in Writing
One thing a good lawyer learns is that everything should be in writing. There is a saying in Mexico “la mas palida tinta es mas fuerte que cualquier palabra“, loosely translated it means “even the most faded writing is more powerful than any spoke word.”
As a residential builder the worst thing to do is to leave your business open to potential litigation. From the subcontractors to customers, as a builder it is very important to create a paper trail to protect business interests. If TRCC is the first line of defense against potential claims, a well documented paper trail is the reinforcements.
Subcontractor agreements, inspection documents, construction plans, engineering reports, soil reports, warranty documents, homeowner inspection reports, sales documents, repair requests, etc. are important documents needed to defend against a SIRP or a lawsuit. The strength of any defense is only a solid as the quality of the reinforcements. The more extensive and rigorous the paper trail that is created, the more likely a builder can avoid construction defect claims.
A homeowner that elects to continue a construction defect claim after the SIRP must overcome the rebuttable presumption of the third party inspector or panel report.[5] A thorough and comprehensive paper trail can reinforce the inspector or panel’s report making more difficult for the homeowner to overcome presumption. No document or report is the “Holy Grail”, however, collectively, contracts, inspection reports, signed approvals, signed warranties, signed repair requests, etc. can become the reinforcements needed to bolster a defense during SIRP or litigation.
Four – Create a Process
If TRCC is the first line of defense and a thorough paper trail is the reinforcements, the processes established by the company prior to, during and after construction of a residence is the preemptive strike. Residential builder should establish a process that covers the preconstruction, construction and post-construction phase. Processes create business efficiencies. More importantly, processes create the paper trail needed as reinforcement during a construction defect claim.
Processes that involve the homeowner and require the customer to sign, inspect and sign off on certain phases of the work can be very beneficial to the residential builder. Processes during the construction phase that establish homeowner and third party inspection points at crucial construction junctions will go a long way towards avoiding construction defect claims. During the first year after a sale of a home, repair and replacement processes that involve: 1) call intake and documentation; 2) job assignment and scheduling; 3) prompt repair and replacement (i.e. response time); 4) homeowner sign off on the work; and 5) builder re-inspection.
Most construction defect claims stem from a builder’s lack of response to customer requests for repairs. Processes like the one described above will ensure that a customer requests are addressed promptly. More importantly, the process creates a paper trail supporting the builder’s diligence in addressing any customer requests.
Five – Know the Law
Residential builder’s efforts are focused on the business. However, it is important to become familiar with the TRCC and SIRP. A builder should at a minimum, understand the function of TRCC, the state-sponsored inspection and dispute resolution process and the minimum warranties.
TRCC is an unbiased arbiter between a customer and the builder. TRCC’s function is to ensure that costly litigation is avoided in favor of a builder making the necessary repairs requested by a customer. The majority of customers want their homes repaired rather than having to file a lawsuit. The majority of builders want to satisfy their customers in order to receive repeat business. TRCC helps accomplish this through their inspection and dispute resolution process.
The state-sponsored inspection and dispute resolution process is three easy steps. 1) A customer makes a complaint which TRCC evaluates and either rejects or accepts; 2) If it accepts the complaint, it sends a state-inspector to inspect the property based on the complaint and the inspector files a report; and 3) based on that report a builder is give the opportunity to repair and the state to re-inspect. Of course, this is a simplified version; the TRCC website can give you a more detailed overview of the process.
The legislature has set minimum warranty standards for residential construction. A homeowner is entitled to at a minimum: 1) one year warranty on workmanship and materials; 2) two years on plumbing, electrical, heating and air-conditioning delivery systems; and 3) ten years for major structural components of the home.[6] A builder and customer can contractually create more stringent warranties, but the statutory warranties cannot be waived.[7] Therefore, a residential builder who is aware of these minimums can establish alerts that signal when the warranty period ends for the benefit of both the customer and the builder.
Having a working knowledge of the law can help a builder make the correct decisions prior to a customer filing a construction defect claim. A few minutes registering with TRCC, focusing on customer services, creating a thorough paper trail, developing pre-construction construction and post-construction processes, and reviewing the TRCC website can save residential builders thousands of dollars in litigation costs.
[1] Section 426.001 (a)(1) Vernon’s Texas Statutes Annotated
[2] Section 426.005 (a) Vernon’s Texas Statutes Annotated
[3] Section 426.008 (a) Vernon’s Texas Statutes Annotated
[4] Section 426.005 (f)(1-2) Vernon’s Texas Statutes Annotated
[5] Section 426.008 (a) Vernon’s Texas Statutes Annotated
[6] Section 430.001(b) Vernon’s State Statutes Annotated
[7] Section 430.007 Vernon’s State Statutes Annotated
