Revisiting Construction-Defect Law, A Year Later

VEGAS INC.

Nevada’s homebuilding industry, long plagued by sometimes-spurious litigation under construction-defect laws, commonly known as “Chapter 40,” found relief Feb. 24, 2015, in the form of Assembly Bill 125.

Primarily, AB 125 narrows the definition of “constructional defect” to any defect that causes physical damage to the property or presents an “unreasonable risk of injury to a person or property,” eliminates the mandatory award of attorneys’ fees as a component of statutory damages, sets the statute of repose for construction-defect claims at six years, precludes the ability of a homeowners association to bring claims relating to individual homes and heightens the specificity required in a defect notice.

While many of these changes govern litigation practice once a defect notice has been issued, certain provisions call for homebuilders to update their form agreements.

Under prior law, it was common for homebuilders to require a subcontractor to indemnify, defend and hold harmless the builder for all claims, including claims caused by the builder’s negligence.

Although certain indemnification obligations now unenforceable under AB 125 still may linger in new contracts, most subcontractors want to see their indemnification obligations revised to comport with AB 125. To preserve a subcontractor’s obligation to indemnify the builder with respect to non-construction defect claims, a builder will need to revise forms and should consult with counsel to ensure that all indemnification provisions comply with current statutes.

In addition, AB 125 includes new provisions addressing wrap-up policies for residential projects. Now, contract documents must disclose the basic elements of the policy and, among other things, the total amount or method of calculation of any credit or compensation for the subcontractor’s share of the premium and the basis for a deductible payment.

Further, AB 125 limits a self-insured retention or deductible payable by a subcontractor under a wrap-up policy to an amount that must not exceed the self-insured retention or deductible that the subcontractor would have been required to pay under a traditional commercial general liability policy. Many homebuilders using wrap-ups already deliver much of the required information; however, the applicable declarations, manuals and disclosures should be reviewed for compliance with AB 125.

While homebuilders routinely include broad indemnity provisions in their contracts to shift costs and liabilities to other parties, AB 125 and the decisions of the Nevada Supreme Court have significantly diminished the protections those indemnity provisions were intended to provide. To avoid surprises, thoughtful contract preparation is critical.

Robert McPeak is a partner at McDonald Carano Wilson and practices primarily in the areas of real estate and construction law.


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