Insurers to bear brunt of home construction defects Insurers to bear brunt of home construction defects 12:00 AM CDT on Thursday, September 6, 2007 By ERIC TORBENSON / The Dallas Morning News email@example.com Sep. 6--If a homebuilder fouls up your foundation and cracks appear in the walls shortly after you move in, is it an accident or something the builder could have prevented? That question has been in front of the Texas Supreme Court for nearly two years. The court ruled late last week that construction defects are generally accidents and should be covered under contractor liability insurance. Lawyers say the ruling could force insurance companies to raise their rates to contractors on the argument that they'll now have millions of dollars a year in defective home construction complaints to defend. "We appreciate the court recognizing that there is coverage there," said Scott Norman, vice president and general counsel for the 14,000-member Texas Association of Builders in Austin. Higher rates for builders “are a possibility," he said. For consumers, the ruling doesn't change the process for resolving construction defects. They still must take unresolved complaints about builders to the Texas Residential Construction Commission for dispute resolution before they can take legal action. Consumer advocates, who have criticized that process as favoring builders, praised the ruling. "This is a small sliver of light at the end of a very long, dark tunnel," said Alex Winslow of Texas Watch, a nonpartisan consumer advocacy group based in Austin. "Assuming consumers get over the hurdle of the TRCC, this ruling means that consumers will get the chance to hold their builders accountable" because the builders will have coverage. Recent changes to state law also have made builders more responsible, Mr. Norman said. New homes now must come with a 10-year foundation warranty from the builder. Another impact on consumers may be higher costs for homes because builders may have to pay more for liability insurance. However, it's unclear whether homeowners would even notice a cost increase in the multitude of factors that go into home prices. Insurers have been collecting far less in premiums than they need to adequately cover their new liability, said Anthony Cox, an insurance lawyer for Dallas' Hermes Sargent Bates LLP. "The rates on those policies are going to go up dramatically," Mr. Cox said. An 18 percent annual penalty plus attorney fees face insurers that fail to provide a legal defense where a court rules they should have, according to the court's interpretation. Mr. Cox called the new rules the "credit card penalty" because the interest rate is close to what credit card issuers charge for annual interest rates. "It's a tremendous win for the policyholders" -- the builders and contractors who buy insurance, he said. The rulings will force liability insurers to recalculate their risk in the state and possibly exit some markets, another insurance lawyer said. "That puts the insurance companies in a very, very precarious situation," said attorney Thomas Culpepper of Thompson Coe in Dallas, who heads the insurance law firm's liability group. Insurers may have little time to decide whether claims will require legal defense; missteps could cost them under the new penalties. "We're going to see a greater volume of litigation from these changes," Mr. Culpepper said. In expanding the definition of what constitutes an accident, the ruling also creates questions about liability in other forms of insurance, such as homeowners and auto insurance. The Independent Insurance Agents of Texas, an Austin-based association that represents insurers, said it will study the ruling and possibly issue a formal response in coming weeks, spokesman Bill Roof said. The case, Lamar Homes Inc. vs. Mid-Continent Casualty Co., began when homeowners sued Lamar Homes for cracks in the walls of houses and foundation problems. Mid-Continent declined to cover the suit, and Lamar sued in federal court, arguing that the work had been undertaken with the intention of doing it correctly, making any defects "accidental" and covered under the policy. The case applies to residential construction but may extend to commercial building as well.