Home warranty and insurance companies handle disputes with intelligence--why don't you?

Courtesy of Peter G. Merrill

If you review the dispute resolution section of a Home Warranty Company booklet or an insurance policy, it will almost always specify binding arbitration as the process to be used to handle any construction-related disputes. In addition, you will likely find language requiring the arbitrator to have construction knowledge. This dual dispute resolution procedure was selected after many years of experience by these companies with construction-related disputes. Why have the home warranty companies and insurance companies chosen binding arbitration provided by a construction-knowledgeable arbitrator to handle their disputes?

Let's explore why home warranty companies and insurance companies have selected binding arbitration provided by a construction-knowledgeable arbitrator to handle their disputes. Why do you go to a doctor when you are sick? You go to the doctor because you want someone who knows how you are built to analyze what is wrong with you. Doctors have spent years learning about your body and will have a direct knowledge of how to repair, correct or remedy your illness. If your problem requires special knowledge, you will probably be referred to a specialist who is more experienced about your special illness. The same theory may be applied to construction disputes.

If your customer thinks that his/her house is 'ill', wouldn't you want a construction-knowledgeable person deciding if the residence is built properly and how to remedy the defects or improper construction, and to decide if they even exist at all. If the problem with the building is specialized such as an HVAC issue, shouldn't an HVAC Specialist handle that dispute? Several construction arbitrators have been builders, remodelers, home inspectors, building inspectors and other construction-related specialists. Like a doctor knows your body, construction arbitrators know how a home should be built and how to properly care for or fix a construction defect or problem. Doctors spend years training; construction arbitrators should also have spent several years learning about how a home is built and how to remedy any defects or deficiencies. It is only common sense that construction disputes should be handled by construction-knowledgeable individuals.

Everyone has the right to a trial by jury according to the US constitution of the United States. Every individual has the right to sue one another through the court system. It is a constitutional right that can be modified only with your approval. You have the ability to waive your rights to the court system. You also have the right to choose an alternate method to settle your disputes. The basic rule is 'Two individuals can agree to anything as long as it is not contrary to the law.' The law will not permit you to grab two pistols and settle your dispute with a duel to the death. However, two individuals may select almost any other legal means to settle a dispute including flipping a coin, using rock-paper-scissors, or any other means including the use of Alternative Dispute Resolution (ADR). ADR includes mediation, binding mediation and binding arbitration. Binding arbitration has proven to be the best mechanism to handle construction disputes. The process is far less formal than a trial and is generally less expensive and faster than litigation if it is conducted properly. If it is not handled by a construction-knowledge arbitrator, it will likely still be better than going to court but not as effective and accurate or not as 'fair and equitable' in the outcome. It is interesting to note that an arbitration award is 'more final' than going to court as it is generally not subject to appeal. If you do not like the decision of an arbitrator, you can only appeal that decision on limited procedural grounds. If you do not like the decision of a judge, you can appeal that decision several times until you reach the Supreme Court, if necessary. Even the Supreme Court may not have the proper construction knowledge to render a fair decision and would most likely rely entirely on the presentations of the parties.

When a construction dispute goes to trial and the judge / jury has limited or no knowledge of the construction issues, it is usually the best and most convincing presentation that determines the winner. Experienced trial lawyers who know how to present a convincing case are generally successful in representing their client. They hire construction specialists, often at great expense to their client, to go before the judge or jury to try to strengthen their case. If the specialist is both credible and convincing, their client has a better chance of winning or becoming the prevailing party. It is not unusual to see specialists during an arbitration if their expertise would help a party to prove their position.

If your dispute does go to trial, you will not have the opportunity to select the judge who will preside over the case. That usually is determined by who the presiding judge is in the jurisdiction where the dispute occurred. If you specify arbitration, both parties will be involved in the selection of the arbitrator. It is to the advantage of both parties to be involved in the selection of the decision-maker who will render his/her award that will be final and binding on both of the parties. It is a common practice for the parties to agree on the arbitration provider firm and to authorize the firm's Senior Case Administer to select and appoint the arbitrator based on the knowledge and expertise required of that arbitrator in relation to the dispute issues.

Another major consideration is the time required to settle a dispute. According to the Rand Corporation, the average construction litigation dispute requires about 2½ years to complete, including appeals. The average arbitration takes only a few months and can be expedited if the parties all agree to it. Most ADR providers have 'Accelerated Arbitration Rules and Procedures' to allow for a speedy resolution of a dispute. I have seen arbitrations completed within 2 weeks of the dispute developing with the cooperation of both of the parties. Some disputes must be handled expeditiously or the project may end up slowing down or shutting down until a major dispute is settled, which will cost both parties unnecessary expenses and the mental anguish that usually accompanies disputes.

Keep in mind the cost of the dispute resolution process. Many contractors walk away from the litigation and do not pursue getting their monies due because of the high costs of court. Arbitrations are generally less expensive than litigation. Since attorneys always receive their fees, they are the only guaranteed winners in a dispute. Another good thing about arbitration is that it is not necessary to use an attorney at all. The use of attorneys is only recommended in disputes that are complex in nature, involve legal issues, and/or involve large sums of money.

Personal emotions often enter into the decision of a judge or jury which should not be the case with a construction dispute. The issue at hand is whether or not the construction is performed properly according to the specifications of the project, manufacturer's installation instructions, according to industry guidelines, standards or codes or other issues. Home warranty arbitrations usually center on whether an item should be covered or not covered according to the specifications in the applicable warranty booklet.

As mentioned earlier, home warranty companies and insurance companies have found that it is to their advantage to use the binding arbitration process conducted by a construction-knowledgeable ADR provider or arbitrator. I usually tell builders that if they are a lousy builder, they should stick with litigation to settle disputes as a good attorney can often help reduce the damages they have caused. They might even win when they are wrong if they retain an experienced construction trial attorney. If you do go to court and you are right, you may lose if the other attorney presents a more convincing case. If you are a good builder, you need to make sure that your construction contract or sales agreement specifies binding arbitration and a provider of those arbitration services who has construction-knowledgeable arbitrators on their panel. It will pay off in the long run if you take the time to research and find an ADR Provider who specializes in construction disputes.

If the home warranty and insurance companies realized that binding arbitration conducted by construction-knowledgeable arbitrators is the best choice to handle construction disputes, doesn't it make sense that builders should be using the same arbitration process? The intelligent choice for construction dispute resolution is binding arbitration. There are so many things beyond your control during a construction project that it only makes sense to specify the correct dispute resolution process, which is under your control.

Although arbitration has been the choice of the construction industry for years, I must mention that another form of ADR, 'Binding Mediation,' is rapidly growing in popularity with builders as it is even faster and less expensive than arbitration and also utilizes construction-knowledgeable ADR Specialists. Binding mediation allows the parties to first attempt to settle their dispute with the guidance and assistance of an experienced mediator prior to rendering a decision on any unresolved issues. Additional information on binding mediation is located on the CDRS website www.constructiondisputes-cdrs.com. Keep in mind that binding arbitration or binding mediation can be specified in Subcontractor Agreements as disputes between builders and their subcontractors are becoming more prevalent as contractors continue to rely on subs.

One simple sentence can protect you in your construction contract or sales agreement. For example: 'If any dispute develops related to this construction contract, or any of the related documents to this contract such as, but not limited to floor plans, addendums, change orders or any other related documents, that dispute shall be settled through the utilization of binding arbitration (or binding mediation) as provided by, and according to the Rules and Procedures of Construction Dispute Resolution Services.' Many dispute resolution sections of a contract provide greater detail on the dispute resolution process, but, that particular sentence is really all that you need as long as it states that the dispute will be handled according to a specified provider's rules and procedures.

There are some insurance companies who offer discount premiums if the insured builder specifies binding arbitration in their construction contracts. Those wise insurance companies realize that they will most likely see smaller settlements and more just and accurate awards related to construction insurance claims from those contractors who specify ADR provided by a construction-knowledgeable arbitrator. Basically, it all falls to the bottom line: If you want to protect and retain your profits, you need to specify efficient, expeditious and inexpensive dispute resolution process to handle your construction disputes that will render the most 'fair and equitable' decisions based on the knowledge of the ADR provider, not just on the best and most convincing presentation. This is not rocket science; it's just good common sense.

For further information on construction disputes including several examples of the contract language to use to specify binding arbitration or binding mediation in your construction, sales contracts, or subcontractor agreements, please visit www.constructiondisputes-cdrs.com.

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