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Four Points Every Arizona Subcontractor Must Know About Construction Defect Claims

Residential Construction Defect (“CD”) litigation begins when unsatisfied homeowners file claims against the developer/general contractor (“GC”) for alleged construction defects. A common misconception amongst subcontractors is that CD claims and lawsuits are matters to be dealt with by the subcontractor’s insurer, and are not the concern of the individual subcontractor. This could not be farther from the truth. The following four points are essential for every Arizona subcontractor who wishes to avoid wasteful spending of hard earned money on CD litigation.

1. Construction Defect Claims Matter to Subcontractors.

A substantial percentage of a subcontractor’s annual budget is spent on general liability insurance for the subcontractor’s protection from all sorts of claims, including CD claims. Insurance companies rate subcontractors based, in part, on the number of CD claims each subcontractor is involved in and the amount of money the insurer has reserved for settlement of those claims. Thus, subcontractors creating greater exposure for insurers will pay more for insurance coverage annually. Stated simply, CD claims affect a subcontractor’s bottom line through increasing insurance premiums.

Secondly, a subcontractor’s reputation is at stake. These lawsuits, and the allegations asserted, are public record. GCs file lawsuits, in state and federal court, essentially naming every subcontractor that worked on the project by name, regardless of whether the subcontractor’s work is actually defective. This “kitchen sink” strategy allows GCs to obtain a larger pot of cash for settlement with homeowners. Thus, CD claims, and allegations of defective work, tarnish the reputation of subcontractors with negative publicity in a very public forum.

2. Subcontractors Have a Duty to Cooperate with Insurers.

Insurance policies purchased by a subcontractor usually include “cooperation” clauses requiring the subcontractor to participate and assist the insurer in investigating claims involving the subcontractor. It is crucial for the subcontractor to have a plan and strategy because simply ignoring an insurance company’s requests for information risks denial of assistance if, and when, the subcontractor eventually needs it. That said; the converse is also true, a subcontractor should not unknowingly disclose vital information without strategy and legal advice. Therefore, it is crucial for a subcontractor involved in CD litigation to have knowledgeable attorneys that are experienced in this complex CD litigation.

3. A Subcontractor Can Control Its Own Destiny.

Taking control of one’s own destiny is important, and retaining personal counsel is an imperative first step for a subcontractor. Insurance companies routinely provide counsel to defend subcontractors in CD matters at no upfront cost. However, this representation may not be all it seems because the insurer often sends the subcontractor a large deductible bill, sometimes many months after the matter has concluded, all while increasing the subcontractor’s insurance premiums.

It is also important to remember where loyalties may lie when counsel is retained by an insurer. Typically, there are no conflicts between a subcontractor’s and its insurer’s goals. However, when those goals diverge, and they sometimes do, a subcontractor will be well served by personal counsel that will remain dedicated to the subcontractor’s goals over those of all other interested parties. Therefore, having experienced personal counsel is a valuable tool in assuming control over a subcontractor’s destiny.

4. Reducing Future Involvement in CD Claims.

Often subcontractors become frustrated after being involved in several CD lawsuits and they ask us, “How can I avoid CD lawsuits in the future?” The obvious answer is give up construction and move to the beach. Unfortunately, this is not a viable option for most of us; thus, subcontractors must become proactive, get more involved, and obtain expert legal advice.

First, “read the contract.” Many subcontractors execute very complex contracts with large, national GCs, without reading the contract. Many of these contracts explicitly require the subcontractor to “pay for everything” when homeowners file a lawsuit. However, a proactive subcontractor, that has retained experienced CD attorneys, may be able to review and edit the contracts to remove some of the more troublesome language. This proactive upfront expenditure often results in substantial future savings when CD claims inevitably occur because the subcontractor’s edits could provide reduced contractual liability for years to come.

Lastly, subcontractors can get involved to change CD laws biased against subcontractors. Arizona Association of Subcontractors, along with Jaburg Wilk’s attorneys and clients, are currently working to change Arizona’s construction laws in order to “level the playing field” for subcontractors. When it comes to CD lawsuits, subcontractors have power in numbers. Thus, getting involved in subcontractor organizations will pay dividends in the future.

In summary, Construction Defect claims and lawsuits greatly impact Arizona subcontractors through ascending insurance premiums and harm to their reputations. Proactive Arizona subcontractors are retaining attorneys, experienced in CD litigation, to protect what they have built. Many subcontractors are taking a proactive stance against GCs and homeowners with success. Please feel free to contact the author to discuss these matters in greater detail, and find out how you too can be a more prepared and profitable subcontractor.

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