One Mediator, based in San Diego’s North County,
is the mediation office of Matthew W. Argue practicing in
Los Angeles, Orange and Riverside counties and beyond.

Business, Private Life Collide In Luxury-Home Mediations

Published in The Los Angeles Daily Journal on July 11th, 2007

My first experience with luxury-home construction-defect mediation was in 1991 in the case of Seidman v. Dover. The home sold for $1.7 million, and the plaintiffs estimated that the cost of repair was $1.2 million plus fraud damages. Seidman, along with other luxury-home cases I have handled, demonstrates some important considerations that are involved in the mediation of a luxury-home construction-defect case. Mediation of a luxury-home construction-defect case involves all the typical issues of insurance coverage (such as property damage and work product exclusions), indemnity, breach of contract, and negligence claims found in other construction-defect cases. In addition, it involves someone’s (very expensive) home, which brings an important emotional element into the case. Frequently, a homeowner’s feelings of trust and confidence in the contractors have been replaced by feelings of frustration and deceit. This is evidenced by the fact that many luxury-home construction-defect cases include a claim for fraud in addition to negligent construction and breach-of-contract claims. In such cases, the mediator must work toward rebuilding the relationships among the parties before progress can be made on settlement. When homeowners’ confidence is restored, they may be ready to discuss a reasonable approach to repairing the defects.

In contrast to the sometimes-volatile emotions of the homeowners, the contractor defendants, or their insurance carriers, are most often totally unemotional about the case. A mediator can help homeowners and contractor defendants and/or their insurance carriers evaluate the case from the other party’s point of view. This means that homeowners must be encouraged to adopt a less-emotional and more businesslike approach and that insurance carrier representatives must acknowledge the emotional impact of the case on the homeowners. By helping the parties to be more balanced in their views of the case, the mediator can move the parties toward a common ground for settlement.

One problem that frequently arises in luxury-home construction-defect cases is that a plaintiff’s estimated cost of repair exceeds the purchase price and/or the original cost of construction. For example, in Seidman the home sold for $1.7 million, and the plaintiff’s estimated cost of repair was $1.2 million plus fraud damages, which made the potential recovery exceed the purchase price. In addition to posing a problematic legal issue on the measure of damages, it frequently becomes an emotional issue for the homeowners who are faced with a home that may be worth substantially less than they paid. Thus, settling for less than what their hired experts say all the repairs will cost becomes difficult for them. In this case, the mediator should attempt to shift the homeowners’ focus to those repairs that affect the structural integrity and resale value of the home. One approach is using the “mediation privilege” to convene expert meetings to discuss less-expensive methods of repair. In these circumstances, the parties may or may not agree to a “mediated cost of repair,” which, as a tool of settlement negotiations, would remain privileged if the case does not settle.

The high cost of the expert witness and legal fees involved in looking for construction defects in a luxury home can be an obstacle to settlement. Absent a ruling by the court after trial, defendants generally are not willing to pay investigative costs to settle a case. However, plaintiffs who have spent substantial sums to “prove” their case are reluctant to settle without recouping all or part of their investment. The mediator should encourage the parties to put this issue into perspective and not allow it to derail the mediation process. Once progress occurs on the main issue, the mediator can help the parties negotiate a reasonable sum for the plaintiffs’ investigative costs.

If the cost of litigation is not a factor for the plaintiffs (which frequently is the case for luxury homeowners), then the mediator must find other ways to convince the plaintiffs that settlement may be in their best interest. For example, luxury homeowners tend to be personally involved in the case; often, one or more of the homeowners attend (and are upset by) key depositions and mediation sessions. This can be a drain on time and energy, as well as a distraction from the homeowners’ normal pursuits or business. Often, the intangible benefits of settlement, such as finality and closure, can add value and help settle a case. The prospect of avoiding the nonmonetary effects of litigation can be used to rationalize a monetary settlement that otherwise might not be acceptable.

The successful mediation of a luxury-home construction-defect case depends on whether the mediator deals with the emotional aspects of the case, identifies a reasonable approach to repair the defects, effectively manages the case to keep the costs down, focuses on the nonmonetary benefits of settlement and persuades the parties to acknowledge the others’ points of view. Absent a reasonable amount of cooperation on both sides of the case, the many viewpoints presented by competing experts, the cost of repair estimates, the layers of insurance and coverage defenses, the numerous potentially responsible subcontractors and the shear cost of litigation can make resolution difficult, if not impossible. By addressing the underlying emotional issues early in the mediation process, the mediator can begin moving the parties toward a more business-oriented approach, which is more persuasive to insurance carriers and allows homeowners to achieve their goal of a reasonable settlement that avoids the expense and delay of a trial.