This report explores how construction defect liability, and the associated risk of litigation and cost of insurance, affect condominium and townhome development in California. Economic & Planning Systems, Inc. (EPS) has conducted this study for the Terner Center for Housing Innovation and the San Francisco Bay Area Planning and Urban Research Association (SPUR) to support their on-going research on California’s housing market. Numerous stakeholders active in California’s housing market have reported that additional costs, risks and related burdens stemming from construction defect liability adversely affect the development of higher-density, for-sale housing.
The primary purpose of this study is to examine the economic impact of construction defect liability by quantifying the associated costs to developers of condominiums and townhomes. This report also includes context and background on the construction defect liability ecosystem in California, including the current process and incentives for bringing and resolving claims as well as the insurance structure and pricing needed to protect against such claims. Finally, this report includes several ideas for potential reform that emerged during our discussion with industry experts.