The amount of resources and capital spent on managing and mediating construction defect claims is staggering. In fact, the cost to litigate commonly exceeds the settlement value of today’s larger claims. The
Building Industry Association estimates these costs may exceed indemnity costs by as much as five to one. Recent carrier interviews confirm payouts of four to seven times more for defense costs.
A typical construction defect claim takes two to three years on average to settle. As the fight over scarce resources (funding and personnel) continues to intensify, resolution of complex construction defect cases is more difficult to achieve than ever. Insurance coverage is becoming tougher to secure, litigation costs are soaring, significant self-insured retentions are common and many states have weakened indemnity statutes— creating a difficult environment for any party to settle or win.
In the current stagnant construction market, owners, developers, builders, subcontractors and materials suppliers can’t afford to handle construction defect lawsuits the same way. Mediators also are under increased pressure to settle cases quickly and cost effectively.
One option gaining momentum is a form of alternative dispute resolution (ADR) that uses a neutral third party of construction experts to address the technical issues and aid the mediation process. This new approach is called “value engineered” ADR. Comparable to how value engineering has saved millions in the construction industry, this approach seeks to eliminate unproductive time and effort, as well as reduce legal costs.
The ADR process views construction litigants and defendants as stakeholders rather than as competitors. At the front end of the process, the plaintiff, defense, cross-defendants and mediator come together to work toward a quick, effective and fair resolution to the claims. A conciliatory approach effectively levels the playing field and identifies common ground between the parties.
The issues are discussed and analyzed in an open forum so all parties align their perceptions with the reality of the case’s technical, insurance and legal aspects.
The most unique characteristic of the mediation team is the neutral construction experts who serve as both project managers and experts. They bring a fresh approach and view the case from a neutral, rather than a litigious, perspective. Because these construction experts are experienced on the witness stand in construction defect cases, they have broad knowledge of complex construction defect litigation. They know the severity of the construction defect and what realistic settlement can be expected. This insight helps resolve the case quickly.
Neutral construction experts serving as project managers also take a different approach when it comes to handling the settlement process. They manage the mediation process the same way they manage a construction project. For example, they set fixed deadlines for reports and information to keep the project on the fast track. They also proceed with technical, legal and insurance issues simultaneously rather than in a series, which expedites the entire ADR process.
Additionally, tools such as cloud computing and real-time data storage engage the stakeholders, share the facts and accelerate progress on a daily basis. Using a centralized project management system allows everyone involved to access the data. Maintaining and opening the lines of communication through these proven technologies helps expedite the case and saves money.
Ultimately, the parties must be willing to agree to resolve their dispute. This ADR approach works to quickly establish if anything is defective; a reasonable, solid repair for the project; and the real cost for that repair. The final result assigns responsibility to parties based on project documentation.
While value engineered ADR does not work for every case, it can help keep costs down and guide the parties toward reaching an agreement quickly.