Construction Defect, Mold Issues Considered During Last Days of Calif. Session

The last day of the 2001 California legislative session, Sept. 14, is rapidly drawing near. Among the remaining bills whose fate hangs in the balance are two which, if passed, would have varying degrees of impact on insurers. In fact, the two issues—construction defect and toxic mold—might, at some future date, have more of a connection than insurers would like to imagine.

AB 267 (Steinberg, Frommer): Construction Defect
A Senate Judiciary Committee analysis states: “[AB 267] would revise and add to the procedures to be followed during the pre-trial process established in existing law for lawsuits involving construction defects in the design or construction of a common interest development. The bill would establish a mandatory mediation process for all potentially interested parties.”

According to Sam Sorich, vice president and western regional manager for the National Association of Independent Insurers (NAII), at the beginning of 2001, there were several bills related to construction disputes. Two of those bills proposed sought the repeal of a 2000 California Supreme decision, Aas v. William Lyon Co.

“Basically what [the Aas decision] said was that a person could not recover for bodily injury for a construction defect simply because the property failed to comply with a building standard,” Sorich explained. “You actually had to show some negligence on the part of the builder…So the homeowners associations and the trial lawyers had legislation introduced this year to reverse that decision and expand the scope of construction defect litigation.”

While the original version of AB 267 did include mention of abrogating the Aas decision, the current version of the bill does not address that issue, a change that undoubtedly would find approval with the insurance industry, which endorsed the Supreme Court’s earlier decision.

Sorich noted that the NAII did not take a support position on the current version of AB 267 but had also withdrawn its earlier opposition to the bill, which passed out of the Senate Judiciary Committee on Aug. 28, 2001, by a vote of 7-0.

Some of the other construction dispute-related legislation have been made two-year bills, so the Aas issue is not dead in the water and will most likely come back in January 2002.

Instead, AB 267 is limited to the pre-trial procedure of a construction defect lawsuit, particularly an existing procedure called the “Calderon process” (named for Assemblyman Thomas Calderon’s brother, a former Senator), which has been around for about five years. The Calderon process creates a situation where information has to be exchanged and the parties should get together before a case goes to trial, but it is not, strictly speaking, mediation.

AB 267 proposes to formalize the process in the sense of requiring everyone to participate in the mediation. As Sorich described it, “it puts some teeth into that requirement. If you don’t participate, you’re going to be stuck with the settlement that could come out of the mediation.

“The idea of the Calderon process is you would exchange information, and it would lead to a meeting of mediation,” Sorich continued. “The problem was there was no obligation on the part of all the parties to participate in the process. Therefore, the process [though well intentioned] has been criticized as failing to meet its original goal.”

Sorich emphasized, however, that what would be required is still not arbitration. “You don’t get a decision,” he said. “It is still mediation, and if people don’t like it, they can go to court. But the hope is this will require everyone to get aboard and at least give the process a fair chance of succeeding.”

The NAII did have a couple of early concerns with the legislation. First, that the parties would go ahead and settle the cases, without the insurance companies’ participation. However, the bill was clarified to include insurer participation in the process.

“The other concern we still have is that the mediation process can go on for more than a year,” Sorich said. “Since we provide the defense for clients and are also subject to paying for this mediation process under the bill…this procedure could be quite lengthy and costly. Having said that, we at the association came to the view that there are costs, but we hope they will be outweighed by the advantages this revised procedure provides, that fewer cases will go to lawsuits and that ultimately there will be a bottom line cost savings of these reforms.”

According to Sorich, elements of AB 267 which originally caused the association some concern were addressed, and the way the bill reads now, the process is more efficient than it originally was. “There are stricter time frames and accountability that weren’t in the original draft of the bill,” he noted, adding that some cost controls had also been imposed on the process.

SB 732 (Ortiz): Toxic Mold
According to an Assembly committee analysis, SB 732 “1) Requires DHS [California Department of Health Services] to: a) Adopt the permissible exposure limits if deemed to be feasible. b) Adopt standards to address the health threat posed by mold in indoor environments. The department may adopt alternative assessment standards applicable to facilities that primarily serve subgroups more at risk, such as young children and the elderly. c) Adopt identification and remediation standards for mold in indoor environments. d) Convene a task force for purposes of consultation regarding the above activities. e) Report to the Legislature by July 2003 on its progress in developing the standards. f) Review the standards at least once every five years and revise as necessary. g) Develop and make available public education materials about the health effects of molds and methods to prevent, identify, and remediate mold growth.

“2) Establishes notification requirements regarding indoor mold for owners and tenants of commercial, industrial, and residential buildings, which would be in effect after adoption of any DHS standards. 3) Requires the Department of Consumer Affairs (DCA), after DHS standards are adopted, to report on the need for standards for mold-testing professionals and mold remediation specialists.”

Sorich noted that the legislation requires the DHS to consult with a task force, specified in the bill, which would include public health officers; environmental health officers; code enforcement officers; experts on the health effects of mold; medical experts; certified industrial hygienists; mold rebatement experts; affected consumers; attorneys; landlords; builders; realtors; and insurers.

The bill on its face doesn’t change insurance coverage, although if standards were to be established, there could be coverage implications.

It has passed two Assembly committees already and is now in the Senate Appropriations Committee, which put the bill into the suspense file. “That means it’s kind of in a holding pattern now,” Sorich said. “The Appropriations Committee is waiting for more information on how the cost of this bill would impact our state budget.”

Sorich added that generally, going to the suspense file does not mean the bill is in big trouble, but the Appropriations Committee is waiting for more information, more analysis.

While the NAII has not taken a position with respect to SB 732, Sorich said the association has never opposed the bill. Rather, it has been monitoring the legislation because of concerns over provisions that might directly say something about the coverage of policies—whether policies must or must not cover for mold.

“But the bill has never directly addressed those issues as far as I know. I don’t think there’s been any strong insurer opposition to the bill…Our hope would be that the [DHS] will proceed correctly and reasonably, and when they develop some standards, those standards will…[have] some scientific basis to them.”

Even so, due to the complexity of the issue and the evolving science, Sorich pointed out that the bill would not be a quick process. “They anticipate a couple of years from now, the [DHS] will no doubt still be working on this project,” he said. “The bill does not say, ‘Thou shalt adopt the standards by July 1, 2003.’ It says they report on their progress on July 1, 2003.”