Legislature(2003 - 2004)
04/11/2003 01:15 PM House JUD
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* first hearing in first committee of referral
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HB 151 - DWELLING DESIGN/CONSTRUCTION CLAIMS Number 2327 CHAIR McGUIRE announced that the final order of business would be HOUSE BILL NO. 151, "An Act relating to claims and court actions for defects in the design, construction, and remodeling of certain dwellings; limiting when certain court actions may be brought; and amending Rules 79 and 82, Alaska Rules of Civil Procedure." [Before the committee was CSHB 151(L&C); in packets was a proposed committee substitute (CS), Version V.] Number 2314 REPRESENTATIVE KEVIN MEYER, Alaska State Legislature, sponsor of HB 151, explained that the bill provides a process for homeowners and builders to resolve construction defects without litigation, a process called "notice and opportunity to repair" in the Lower 48. He reported that 13 states are considering similar legislation; several have it in place, including Arizona, California, Nevada, and Washington, which perhaps have the biggest housing booms. REPRESENTATIVE MEYER told members the bill requires homeowners to provide the builder or contractor with written notice of construction defects at least 90 days before taking civil action. During that period, the builder and owner must get together and set deadlines to make a reasonable attempt to resolve defects that are subject to claim; if the defects or complaints aren't resolved by repair or arranging for [monetary] settlement, then the homeowner may proceed to litigation. The homeowner has one year from the date a defect is discovered to begin this process [by providing notice, under Version V of the bill]; however, the ten-year limitation in statute cannot be exceeded. REPRESENTATIVE MEYER offered reasons he believes this legislation is important. Alaska requires contractors and builders to have general liability insurance, which has become increasingly difficult to obtain - primarily, in his opinion, because of the ease of proceeding directly to litigation and suing for expenses. If they can get insurance, it often is very expensive, or they must get reduced coverage. Offering that these costs are often simply passed on to the homebuyer, and noting the rising prices of homes for first-time buyers in particular, Representative Meyer suggested the need to keep prices down. He added that a pending civil action can also affect the home's value to a potential buyer. REPRESENTATIVE MEYER characterized this as a consumer-protection bill in the sense that it allows timely repair without the expense and loss of time due to a trial. Suggesting that most builders when notified of a defect would repair it immediately, he said there are times when a more formal process, such as provided in this bill, is necessary. CHAIR McGUIRE drew attention to the memorandum from Representative Meyer to the committee describing the changes in Version V from CSHB 151(L&C). She asked him whether there are substantive changes. REPRESENTATIVE MEYER described the changes as "primarily just minor," in some cases just grammatical changes. He noted that [Chair McGuire's] staff and his own had conferred on many of them, and said Version V doesn't change anything substantive. [Representative Gara raised a concern that was negated later when it was clarified that Section 2 of Version V changes the wording such that a claimant has one year from discovery of a defect to begin the process outlined in AS 09.45.881-09.45.899, whereas CSHB 151(L&C) gave the claimant one year from the discovery to begin an action.] Number 2085 REPRESENTATIVE ANDERSON moved to adopt the proposed CS, Version 23-LS0499\V, Bannister, 4/10/03, as a work draft. There being no objection, Version V was before the committee. Number 2059 ROBIN WARD, Co-Chair, Legislative Affairs, Alaska State Home Builders Association (ASHBA), noting that this has been a mission of [ASHBA], told members the following: Most of our homebuilders in this state today have been given notice that within this year we will all lose our current general liability carriers. Most of our carriers have left the state or are planning to leave the state, and all of us are struggling for liability insurance. One of the things in the research that we found nationwide is that there are a few things that we can do, as homebuilders, to make ourselves more attractive to the insurance industry. This is one very key piece of legislation. Most of them are looking for some kind of a state legislative fix. ... They want to see something that the state is involved in, along with making ourselves attractive by better contracts, warranties, and so on - OSHA [Occupational Safety and Health Administration] programs, safety programs in our businesses. But one of the main things that we need to do is something like this. They have looked at this and said, "This is something that we like." Therefore, the national ... homebuilders association has given us national legislation, model legislation, to pattern after, and have been helping us work on this so that we can adopt it ... to bring forward to the Alaska legislature for adoption. So that's really the reason we're here, and we want to make sure you understand why we're doing this. This is not a huge problem right now in our state, but it can be. And we want to try and not only prevent it, but make ourselves attractive [to insurance companies]. So the "driver" here really is our liability insurance. Number 1992 REPRESENTATIVE GARA asked whether insurance companies have said that if the legislature passes a bill like this, they will reduce their rates or stay here. He also asked whether states that have similar legislation requiring notice and an effort to resolve problems also have cut the statute of limitations to one year. MS. WARD replied: No and no. No, they will not guarantee that if we do this ... they will come back in ... or anything else. They're just giving us a list of things that they feel would make us more attractive, without a guarantee that if we pass it, we're going to get liability insurance again. And no to the second because, respectfully, I'm not sure that that does that here, either. ... But no, ... not that I know of. REPRESENTATIVE GARA asked whether the most important part to [ASHBA] is the general concept of requiring negotiation before suing. MS. WARD affirmed that. MS. WARD, in response to a question from Representative Holm, said: We expect that we will lose 25 percent of our small homebuilders, because we know that even if we do get insurance, the cost of it will definitely go up. The new premiums that we're getting right now sometimes increase the cost of the house [$2,000 to $3,000]. Well, in an appraisal that will never be reflected. That's not ... an added value. So we find there's an awful lot of the small builders who have fairly low profit margins ... or whatever [that] we expect will go away. We do expect a certain percentage of our industry will go away this year because of that. You have to have liability insurance to be able to operate. REPRESENTATIVE HOLM emphasized that builders cannot function in Alaska without liability insurance. MS. WARD concurred, saying that is why it is [ASHBA's] main issue. "This is critical to us," she added. Number 1901 REPRESENTATIVE GARA said he is always skeptical when the insurance industry suggests that someone do something with the incentive of possibly lowering rates later. He asked whether Alaska has a significant amount of homeowner litigation. MS. WARD replied: Not in this state. But ... all of our carriers are ... nationwide carriers. ... We are such a small pool that they don't even hardly use us in their actuarials. What we're being painted with is the brush of the Lower 48, and especially the larger states with large construction booms. Arizona, California, [and] ... Washington had huge ... construction defects. And one of the problems that we have is, ... the insurance industry, as they manage a claim, tend to settle. They're not necessarily practical about the ... technical side of it. ... And I can give you an example of an Anchorage contractor that this did happen to, and basically the owner took them to court - with no notice to the builder - ... [over] a list of what normally [are] warranty items that our contractors would have fixed. ... The contractor turned it over to his insurance carrier, which is a normal situation. The insurance carrier looked at it and said, "Let's just pay it. ... It's going to be cheaper." ... And it was $52,000 on normal warranty things that the contractor probably could have repaired for $2,000 doing their own work. ... It doesn't take very many of those managed claims to put us out of business without ... notice. That contractor never even got notice. REPRESENTATIVE GARA reiterated support for the concept of negotiating before suing, but indicated that if there is no problem in Alaska, he has a problem taking away Alaskans' rights, when there isn't abuse in the state, just to make the insurance companies happy on that score. Calling it a statute- of-limitations issue, he added, "If the insurance companies spent the time to do their actuarials in this state, where they should be doing them, they'd also confirm that." He indicated that this is a portion of his concern with the bill. Number 1781 THOM ANTONOVICH, Custom Builder; President, Alaska State Home Builders Association, informed the committee that he would testify on behalf of himself and the 900 members of ASHBA across the state who make their livings building homes. He said Ms. Ward had summed up the feelings of ASHBA's members quite nicely, and noted that there would be testimony via teleconference from some of ASHBA's larger builders across the state, who could provide "dollar and cent figures" of what this is doing to his industry and the consumer. Speaking personally, he said he renewed his liability insurance last October and was surprised with an 85-percent increase over the previous year, in spite of the fact that he has been in the business about 25 years without a liability claim or workers' compensation claim. MR. ANTONOVICH said Alaska is such a small market for the insurance carriers that they probably don't need much of an excuse to pull out of the market; he suggested this "right to repair" will create a better business climate for them. He surmised that the only reason some builders still have liability coverage is because they also insure their homes and automobiles, for example, with the same company; the company doesn't want to lose that business. He added, "I think a better business climate would help at least keep those operators in the market supplying us." MR. ANTONOVICH also reported that until this year, his general liability insurance was a minor part of his overhead; this year, however, it is a major line item that must be passed on to the consumer. Characterizing himself as a "medium-sized builder," he said there are many small [companies] in the state, especially in outlying areas, that won't be able to operate if they experience an 85-percent increase in liability [insurance costs]. He suggested that many would lose their businesses in the next year or two if something isn't done. He added, "I don't think we view HB 151 as a cure-all. These folks aren't going to flood back into the state and fall all over themselves to write insurance policies. But it'll certainly be one step in the right direction to get more competition in the insurance market in the state of Alaska." He closed by stating wholehearted support for HB 151. Number 1636 MR. ANTONOVICH, in response to a question from Chair McGuire, reported that ASHBA is seriously looking at forming a self- insurance pool, which has been done successfully in four or five states. It would still require attracting an underwriter. He said having a bill in place would allow [ASHBA] to provide an underwriter with facts and figures, and show the underwriter that the builders in Alaska are a good risk and are protected somewhat from major litigation through this bill. MR. ANTONOVICH, pointing out that it may not be true, also reported hearing that, yes, there will be [companies] willing to "write liability" in Alaska, but that it probably will cost a small builder a flat $20,000 fee. It would be doable for someone building 20 houses a year. For someone building 3 or 4 houses a year, however, either it would cost the customer a lot of money or the builder would go under. CHAIR McGUIRE called it a critical point, noting that legislation this year would allow formation of some of these risk pools. She emphasized the importance of having the state get involved in some of these areas to set up the framework. Countering an argument she'd heard that companies could do it on their own, she said the problem is that insurance companies are charging $20,000 as a flat fee, which is cost-prohibitive. MR. ANTONOVICH concurred, saying that, ultimately, the consumer usually ends up paying the bill. REPRESENTATIVE GARA, noting that many industries have said insurance rates are skyrocketing, emphasized the need for a bigger answer to either regulate insurance companies or find ways to help lower premiums. He suggested there must be a better way than just changing liability statutes. He asked Mr. Antonovich to share with the legislature any future findings that would assist in insurance reform. MR. ANTONOVICH responded by offering to work with legislators to try to help come up with something that would assist all of Alaska's industries in this regard. Number 1444 REPRESENTATIVE OGG asked about liability insurance costs - both before and after the 85-percent increase - for a home that costs $160,000 to $200,000. MR. ANTONOVICH answered that it depends on how many houses the builder constructs a year. He said he used to pay about $2,600 a year in general liability on about $2.5 million in sales. This year, he'll probably pay $26,000 on slightly higher sales; if he builds seven houses, it likely will cost $3,000 per house. He reiterated that previously it wasn't a line item, but was just part of his percentage. Noting that the increase was over a three-year period and specifying that the 85-percent increase was just one year, he concurred with an observation by Representative Ogg that it had risen 1000 percent. Mr. Antonovich said he hadn't illuminated that, however, because his sales had risen too. He said his sales will be the same this year as last, so 85 percent is a hard-and-true number. REPRESENTATIVE OGG asked whether this is putting Mr. Antonovich out of the market for some types of housing. MR. ANTONOVICH clarified that the person it will hurt most is the first-time homebuyer who is stretching to make the deal work, because a thousand dollars can make or break a deal. For higher-end homes, it won't make the difference between building or not. He said, "It's not putting us out of the market." CHAIR McGUIRE called on Alan Wilson, noting that in addition to being past president of ASHBA, he was Home Builder of the Year in 2003. Number 1327 ALAN WILSON, Alaska State Home Builders Association, characterized himself as a "small builder" who focuses primarily on remodeling work. Noting that his rates are going up as well, he pointed out that people who do remodeling tend to work with their clients differently than those who do new construction, since remodelers work directly in a person's dwelling and are there daily from 8 a.m. to 5 p.m. MR. WILSON reported finding over the years that often clients don't know the process and are intimated about seeking legal counsel to remedy issues. Hence one positive thing about the legislation is that this notice, which is required as part of the contract language, outlines a system or mechanism that a homeowner can look at and thus be less intimidated, since the process begins with writing a letter to the builder. He surmised that 90 percent of the time this communication will resolve the majority of the issues. Offering his belief that few construction-defect cases go to court in Alaska, he said that when they do, he doesn't believe either the builder or the homeowner wins because of the cost of a drawn-out legal case. This bill at least provides an opportunity to fix a problem without going to court. MR. WILSON told members a presentation by the Alaska Housing Finance Corporation (AHFC) to the House Finance Committee on February 4, 2003, brought out some numbers that he believes emphasize [the reason for this bill]. He said the housing industry accounts for roughly 24 percent of the gross state product, which is equivalent to the [gross national product (GNP)]; in comparison, fishing accounts for about 19 percent. He called construction a big "economic engine" that affects a lot of people. He indicated AHFC also brought up that housing for the average Alaskan family costs approximately 28 percent of disposable income, and is probably the largest component of a family's expenses over the life of the mortgage. He suggested something like this bill is needed to protect people's assets. CHAIR McGUIRE offered that it is also good for the consumer because usually a person has only a year to bring up items that might be fixed under warranty. She suggested this bill, in another small way, provides an additional avenue for a consumer who might discover something later that is severe enough to want to sue; prior to that, there would be an opportunity to have it fixed. MR. WILSON agreed, indicating that he believes many builders try to limit the warranty by having homeowners sign one-year limited warranty agreements. CHAIR McGUIRE called [the legislation], "win-win." Number 1103 RICHARD TILLY, Builder and Contractor; Member, Alaska State Home Builders Association; and President, Interior Alaska Building Association, testified in support of HB 151. He said paying the cost of liability insurance is a major problem in the homebuilding industry. He reported that his business is currently seeking coverage for the 2003 building season; he has found two carriers for liability insurance, but only one is willing to provide a quote to his company. He said he still hasn't received a quote for the upcoming year, despite the fact that the anniversary date for his insurance is May 1 and he is right in the middle of the bidding season. In 22 years, he has never had a liability claim, he told members, and yet he still cannot get companies to offer him even a quote in order to know how to bid on projects for the coming season. MR. TILLY said that last year his rates rose a minimum of 19 to 20 percent; at best, he anticipates 20 to 50 percent this year, but doesn't have a solid number. Concurring with earlier testifiers that the bill is intended to help builders as well as clients, he said the dispute-resolution format is intended to provide a simple and definitive method to resolve problems and get the home repaired. He urged passage of the bill. Number 1005 MIKE MUSICK, Ester Construction, characterizing himself in terms of gross revenue as a "small builder," told members that this past year a large percentage of checks he has written are to his insurance companies. He suggested his situation is a little better than Mr. Tilly's because his anniversary date for liability insurance is August 8. Therefore, he has time to negotiate for the rest of the season and can go to work knowing his costs. He expressed hope that the legislature would pass this bill and provide certainty for all [builders]. Number 0931 CHUCK SPINELLI, Owner, Spinell Homes, Inc.; Immediate Past President, Anchorage Home Builders Association, testified in strong support of HB 151. He relayed that last year he built about 189 homes. It was his 17th consecutive year with State Farm Insurance Company ("State Farm"), which provided a policy for about $85,000 a year, approximately $450 per home, and the renewal date on the policy was December 2002. In October 2002 there were rumors State Farm might withdraw from the state. He obtained a quote of $150,000 from another agent, but received assurance from State Farm of coverage through 2003. On the day before his policy was to renew, however, he got a cancellation notice from State Farm giving him 60 days to renew [with another carrier]. MR. SPINELLI described the difficult timing because of vacations and getting together business information for other carriers. He indicated he'd expected the premium to be around the $150,000 quoted in October. He had 80 or 90 houses under construction and was planning to be out of town March 1, the cancellation date. About a week before March 1, he called the "insurance guy," who told him he didn't even have a quote, although someone had said he'd insure Mr. Spinelli "for $1 million on a $2- million actual premium," which the insurance person hadn't taken seriously. MR. SPINELLI expressed concern that carriers are "dropping like flies," with only two or three that will handle something in Alaska. He continued with his story, explaining that he'd finally received two quotes, one for $435,000 and one for $485,000, about $2,000 per house just for general liability insurance. In his 17 years of building at Spinell Homes, Mr. Spinelli said he has built about 1,500 homes and has had $71,000 worth of claims against him. He said $35,000 of that was for a woman who fell down the stairs in an office building from which his business is run, and had nothing to do with construction. MR. SPINELLI told members the insurance problem hasn't been brought on by the construction industry; it is a far deeper problem that insurance companies are having to deal with. He suggested the issue isn't just cost, but is availability of insurance at all. He concluded by saying HB 151 is just the first step towards bringing insurance underwriters back to Alaska, and that it would protect [builders] by giving them a chance to fix [defects] before someone sues. CHAIR McGUIRE asked that testifiers be brief in order to leave time to address amendments and move the bill out of committee. Number 0540 HARLEY SUDSBURY, Sudsbury & Sons; Vice President, Anchorage Home Builders Association, noting that he is a builder in Eagle River, stated support for HB 151. He suggested it will protect both consumers and builders, and indicated it will lead to more availability with respect to the insurance that builders need. Number 0515 STEVE ORR, Builder, noting that he has been a builder in the Matanuska-Susitna area for more than 20 years, told the committee that a year ago he spent a little under $5,000 for general liability insurance. This year it will be $80,000 - almost a 1,500-percent increase. Last year his combined insurance, including general liability, was slightly over $1,300 per unit. This year it will be more than $3,300. He explained, "My fear is that right now they've gotten us general contractors. They haven't started on our subcontractors yet." He expressed concern that in the near future he won't even know how to price a house if what has been occurring in other states occurs in Alaska. Remarking that he's fortunate to have obtained insurance, even though it took seven weeks to do so, he said someone may not even get insurance at all for attached dwellings in Anchorage. Number 0415 JESS HALL, Builder; Area 15 National Vice President, National Association of Home Builders (NAHB), told members he has been building in Alaska for about 25 years. He concurred with previous testifiers about the bill's value with respect to rate increases for insurance. More valuable, he suggested, is the bill's role with regard to the relationship between the builder and homebuyer in opening communication and avenues to cure problems. He pointed out that his company uses a warranty put together by the Mat-Su Home Builders Association that is much more detailed than this legislation. Therefore, the bill won't affect how he does business, since buyers are required to notify the company of a problem so it can be taken care of. MR. HALL told members that he once received a notice from the court of being sued for $25 for a problem; he said it never got to the trial phase because once the [homeowner] discovered the company was willing to take care of the issue, the problem was resolved. Mr. Hall reported hearing last week that Idaho passed legislation similar to this, along with a tort-reform bill that places a seven-year statute of limitations and $250,000 maximum liability on homes. He suggested perhaps taking that up in a future session. CHAIR McGUIRE asked whether anyone else wished to testify. Hearing no response, she then closed public testimony. REPRESENTATIVE GARA offered his belief that Version V is better than CSHB 151(L&C) and resolves one of his major worries about the bill. Addressing what he called minor concerns, he asked to go through them and bring amendments to a future hearing or offer conceptual amendments at the current one. REPRESENTATIVE GARA explained his first concern. A consumer who doesn't give written notice to the builder that he or she has noticed a problem with a house can lose the right to sue later on. However, if the warning to the consumer of the need to do so is in the middle of a thirty-page packet of contract language, it might not be noticed. Therefore, his concern would be resolved if the warning to the consumer were provided on a separate, one-page contract with a heading that says, "Notice that you must serve notice of your claim within a year," or words to that effect. He emphasized the need to let consumers know that the rules are changing. Number 0040 SUZANNE CUNNINGHAM, Staff to Representative Kevin Meyer, Alaska State Legislature, pointed out subsection (b) [beginning on page 5, line 30] says, "The notice required by (a) of this section may be included as part of the contract, must be conspicuous, and must be in substantially the following form". She added that the language that follows, detailed on page 6, lines 1-19, is explicit, and that staff to some members had been contacted about this. She stated the intention of making it clear to everybody. TAPE 03-37, SIDE A Number 0001 MS. CUNNINGHAM read from the language beginning on page 6, line 1. She reported that one change made was adding the statutory reference to this contract language, to clarify that this is in law, and that there are deadlines for both the construction professional and the homebuyer. She concluded, "So we feel ... that's pretty adequately addressed, as it is, in this version." REPRESENTATIVE MEYER added that the key phrase is "must be conspicuous". Whether it is a separate page or part of the contract, he said it has to be obvious to the homebuyer. REPRESENTATIVE GARA emphasized that it should be a separate page signed by the homebuyer, in order to ensure that the homebuyer has seen it. Suggesting there may be disagreement over what "conspicuous" means, he offered his belief that it could be missed otherwise. In addition, he reiterated his desire to have a heading for that one-page document that says something like "Notice of potential claim must be provided within one year", followed by the language [on page 6, lines 1-19, of Version V]. REPRESENTATIVE MEYER replied that the amendment seems harmless and is one he could live with. He added that he'd like time to discuss this, however, and suggested perhaps Representative Gara could bring these issues up on the House floor. CHAIR McGUIRE responded that she'd rather have a clean CS from the committee than have new amendments debated on the floor. REPRESENTATIVE GARA requested confirmation that the bill doesn't change the statute of limitations, but says [the consumer] must file a notice that he or she is "going to do something" within a certain amount of time. REPRESENTATIVE MEYER said yes. MS. CUNNINGHAM said that was her understanding as well. Number 0230 REPRESENTATIVE GARA remarked that it is a very good change. He then brought attention to an amendment he'd previously decided not to offer, which read [original punctuation provided]: At p. 1 line 13 change "one year" to "two years". At p. 3 line 21. Insert Sec. 09.45.884(d). Rules of equitable estoppel tolling the statute of limitations shall apply so that the statute of limitations shall not run between the time the claimant serves notice under AS 09.45, and the time the plaintiff should reasonably understand settlement under the procedures in AS 09.45 will not succeed. REPRESENTATIVE GARA said that generally in law, statute of limitations specify certain times when it's unfair for the clock to tick against the consumer and thus the statute of limitations would be stopped in those cases. Those times are when the consumer is under the impression that he/she is working out something with the person being sued. [This legislation] includes a provision specifying that before bringing suit, an individual must enter into a negotiation process. However, under this legislation the lawsuit must be filed while the negotiation process is going on, otherwise time runs out. Therefore, Representative Gara expressed his desire to have a provision similar to that [specified above], although he mentioned that it could be reviewed by Legislative Legal and Research Services. REPRESENTATIVE GARA explained that the language would specify that the statute of limitations shouldn't run during the period of negotiations, otherwise one is forced to sue while negotiations continue or the consumer is lulled into thinking that [negotiations] are working well and doesn't think about a lawsuit. There could be many circumstances that could cause the consumer to miss the statute of limitations, he said. He pointed out that there is a concept in law called equitable tolling of the statute of limitations, which he emphasized he wanted to see happen during a fairly defined period during the negotiations. REPRESENTATIVE GRUENBERG said he hoped [the committee] considered Representative Gara's suggestion favorably. Number 0443 CHAIR McGUIRE announced that HB 151 would be held over.
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