Strategies for Managing Risk and Limiting Liability
It is perennially important that builders focus on keeping whatever profits they can generate by managing their risks and limiting their potential liability. Homeowner claims for defective construction can eat away profit in the form of repeated customer service and punch list work, prolonged disputes with customers, payments to disgruntled homeowners, and attorney fees. Here are some suggestions for limiting that exposure.
Employ proper construction practices. This may seem like an elementary point, but contractors who are building new designs in unfamiliar locations or who are desperate for sales are more likely to fall short in this regard. Proper education for workers, regular inspection by builder representatives, and professional oversight from engineers and attorneys, for example, as needed, can limit builders’ exposure to homeowner claims and to other risks like OSHA fines and penalties.
Watch for and avoid subcontractor problems. Your contract is with your customer. If a subcontractor’s work harms your customer, that customer will look to you to make it right. Use capable subcontractors and inspect their work so that you know you are getting what you pay for. Make certain your subcontractors are insured and consider being named as an additional insured on their liability insurance policies.
Service your customer. As we so often hear in lending and home building advertisements, the purchase of a newly built home is almost always the largest transaction your customer will make in his life, and he will likely spend ten or twenty or thirty years paying for it. Consequently, your customer will expect you to address any reasonable post-settlement concerns he has about your product. Prompt and courteous communication with home buyers after the sale and faithful attention to those concerns that are properly your responsibility will not only create a positive buzz about you as a builder but will also reduce the chances that a homeowner will sue you.
Avoid the problematic customer. Some customers are simply not worth the trouble. They will often demonstrate this early in the relationship, before the contract is signed, by making impossible demands on your time, asking for incredible reductions in price, or complaining about other builders they have seen or other businesses with whom they have had disputes. While some such demands and complaints may be legitimate, it is important to recognize the customer who will never be happy. That kind of customer limits your ability to make a profit on a house, often retains a lawyer to sue you and should be avoided whenever possible.
Shift the risk. Make sure you have adequate insurance to protect you against liability risks and take full advantage of your associates’ insurance policies by being named an additional insured whenever appropriate. Purchase a warranty product to provide to your home buyers to shift some of the risk for construction defects onto a third party.
Don’t be afraid to settle homeowner cases. If sued or threatened with suit immediately ask your attorney for an assessment of the chances of success and an estimate of what it will cost to get to that result. Too often clients complain that fighting a lawsuit has cost them more than settling it earlier would have. Some battles must be fought, but not all of them. Pick the ones you want to fight and have at it. For each of the others, make a good business decision and solve the problem on the most cost-effective basis possible.
Manage your attorney fees. Lawyers are struggling with the same economy you are. If a lawyer has quoted you a certain rate, you should not hesitate to negotiate with her to see if she will take the case for less. Insist that a fee agreement is prepared in writing for signature by you and your lawyer. Encourage the lawyer to assign less complicated work to less expensive members of the firm like associates, paralegals, and clerks. Finally, obtain an estimate of the cost of defending the case up front. This provides you with information necessary to determine whether you should settle the case, helps with budgeting, and serves as a cap on fees by at least requiring a persuasive explanation from your attorney if the cost of defending the case exceeds what was estimated.
Consider alternative and early dispute resolution options. Arbitration is often less expensive than a full-blown jury trial. Mediations offer opportunities for adversaries to sit down together and work with a neutral third party to resolve disputes. These alternative dispute resolution options are less combative and less expensive, and when employed early, can result in significant savings in attorney fees and costs for all parties involved in the dispute.
For a builder to succeed in any economic conditions, he must accept some risk of loss and exposure to liability. It is good business sense to implement strategies to limit those risks and exposures, especially when money is tight and so many builders are conducting business in new ways.
In addition to the strategies listed here to help reduce risk and exposure, builders who include a warranty on their homes are making a smart decision. A warranty not only eases the buyer’s mind should a defect arise in the future, but it also limits the builder’s liability, thus helping them keep as much of their hard earned profit as possible.