Study unmasks litigation myths

By R. Russell Hoyle, California Policy Research Center

13 November 2002 | A report released recently by the California Policy Research Center examines the impacts of construction-defect litigation, including its effect on condominium development and affordable housing in the state.

Aspects of California’s legal environment may have facilitated more defect litigation than has occurred in other states, say the two principal authors, Cynthia Kroll, regional economist at Berkeley’s Fisher Center for Real Estate and Urban Economics, and Larry Rosenthal, executive director of the Berkeley Program on Housing and Urban Policy.

The report indicates that litigation — and resulting problems of insuring residential construction when construction carriers leave the California market — is one of several different factors contributing to the decline of new multifamily construction in the late 1980s through much of the 1990s. “California was hit hard by both the legal climate and economic conditions during this period,” says Kroll. “As the economy improved, builders found ways to address some of the problems brought on by litigation, and they began building condominiums again.”

The study’s authors challenge some of the myths of the litigation debate in California. “Many builders will tell you that a key problem in California is that state law permits litigation on construction defects to occur for up to 10 years after the completion of a project,” says Rosenthal. “Yet we found that many other states allow such suits as long or longer after construction but have not had similar levels of litigation and insurance problems.”

According to Rosenthal and Kroll, resolving the affordable-housing problem in California will require more than reforms just in the area of construction-defect litigation. From a public-policy standpoint, they say, such reforms must be part of a broader strategy that enhances subsidies, loosens overly restrictive land controls, and overcomes unreasonable community opposition to new low- and moderate-income housing stock.

The report is based on a research study conducted by a team affiliated with the Fisher Center and the Goldman School of Public Policy.