LEGAL/LEGISLATIVE UPDATE – SEPTEMBER 24, 2017

Published on: September 24, 2017

TIME TO WORRY?

The housing market weakened in July as the chronic inventory shortage worsened and the rising prices it has triggered undercut buyer demand. New home sales declined by 9.4 percent to an annualized pace of 571,000 units – almost 9 percent below the year-ago rate and the slowest annual pace in three years. “It has been surprising the extent to which new home sales have not picked up more,” Aaron Terrazas, a senior economist at Zillow, told the Wall Street Journal. “It does seem to reflect a bit of a market breakdown,” he observed. Existing sales fell by 1.3 percent to a seasonally adjusted rate of 5.44 million units, about 2 percent above the year-ago level, but the slowest pace this year.

“This slide isn’t enough to make us question the broader economic outlook, [at least], not yet,” Chris Rupkey, chief financial economist at MUFG Union Bank, told the Journal. “But if you’re the worrying type it’s headed the wrong way certainly,” he said. Lawrence Yun, chief economist at the National Association of Realtors (NAR) has been worried for months, and his anxiety level has increased as scant inventories continue to shrink, limiting choices for buyers and forcing prices higher. Pending sales, which had recorded an encouraging gain in June, retrenched in July, falling by nearly 1 percent, providing more evidence of what Yun termed a “staggering” inventory shortage.

ECONOMIC RIPPLES

Tremors in the housing market are causing ripples in the broader economy. Spending on home construction and improvements fell by nearly 7 percent in the second quarter, shaving an estimated 2.6 percent off the growth rate for that period. Despite that downward tug, GDP increased at an annual rate of 3 percent ─ the strongest pace since the first quarter of 2015 – evidence that the recovery, now in its ninth year, continues to roll, albeit with less exuberance than past recoveries. Employers added 156,000 workers to their payrolls in August, falling short of analysts’ expectations and falling back from the nearly 200,000 worker-average recorded for April June and July. The unemployment rate increased a hair, to 4.4 percent, as more job-seekers entered the market. “For the markets, it is a Goldilocks report,” Brent Nyitray, director of capital markets for iServe Residential Lending, told Bloomberg News. “Strong enough to keep the recovery going and weak enough to keep the Fed from tightening too aggressively.”

HOME BUILDING HOPE

While disappointing in some respects the August labor market report contained a glimmer of potential good news for the housing market: The construction sector gained 28,000 workers, which may ease the labor shortage that builders say has impeded efforts to ramp up home construction. But even with that increase, the supply of workers still falls well short of the numbers needed to keep up with demand. And that problem is going to worsen, according to Redfin Chief Economist Nela Richardson, who notes that while job openings are increasing at double the year-ago rate, wages are barely keeping pace with inflation. “The construction industry is between a rock and a hard place,” Richardson told Housing Wire. Although the labor shortage is finally beginning to push wages up, she noted, “builders can’t easily pass on higher wage costs to homebuyers, because home prices are already challenging consumer budgets.” The repercussions from Hurricane Harvey will exacerbate the problem, she warns, “further [amplifying] the disconnect b etween the economy’s need for more construction workers and the wage it’ll take to attract them.”

CONSUMERS PILE IT ON

Consumer debt levels are rising – there’s no question about that trend. But there seems to be a big question about whether it is evidence of strength in the current economy or cause for concern about the future. Household debt levels have climbed close to the $13 trillion mark and are still rising, as consumers continue to add auto loans, home loans and credit card charges to that growing pile. Americans have amassed $784 billion on their credit cards and owe another $1.34 trillion in student loans, according to the Federal Reserve Bank of New York. Some analysts look at those numbers, see a reflection of the run-up to the Great Recession, and say, “Oh, no. Not again!” Others see significant differences, among them: A stronger economy, solid employment, rising incomes that enable consumers to manage the debt they are accumulating, and more conservative underwriting by lenders, especially for home mortgages, deficiencies in which were a primary cause of the last downturn.

“I don’t think this is anything like what we faced in 2007,” Sung Won Sohn, an economist at Cal State, told NPR. But Sohn is by no means sanguine about consumer debt levels. “We are beginning to forget the lessons learned from the painful recession in 2007 to 2009,” he fears. Another recession is inevitable at some point, he notes, and when it comes, outsized debt levels, even if manageable now, “are going to make the situation worse.”

OVERTIME RULE

A Texas federal judge has overturned an Obama Administration rule fiercely opposed by business groups that would have made an estimated 4 million workers previously exempt from mandatory overtime subject to it. The rule issued by the Department of Labor (DOL) would have set the salary cap, above which overtime is not required, at $47,000 – about double its current level. U.S. District Judge Amos Mazzant, who temporarily blocked implementation of the rule last year pending his decision, said the salary cap was unreasonably high and would improperly expand the overtime requirement to employees who were supposed to be exempt from it. Attorneys general in 21 states, backed by a coalition of business groups, had sued to block the rule, arguing that it would impose a financial hardship on state governments and trigger job losses sin the private sector. In his ruling, Judge Mazzant agreed that the Department of Labor has the authority to establish a salary test, but said the overtime rule must consider employee duties as well as their wages.

IN CASE YOU MISSED THIS

The reluctance of existing owners to put their homes on the market is exacerbating the supply problem, according to a Fannie Mae report.

Treasury Secretary Steven Mnuchin says GSE reform, which was supposed to be a priority issue for the Trump Administration this year, won’t be addressed until 2018.

The legislation authorizing funding for hurricane relief efforts also includes a three-month extension of the National Flood Insurance Program.

Speaking of hurricanes, the Economist reports that the number of people living in hurricane-risk areas tripled between 1970 and 2010; the United Nations estimates that during a two decade period ending in 2015, storms and floods caused $2.7 trillion in damages worldwide.

Although administration officials insist the mortgage interest tax deduction is safe, CNBC reports that it is still on the tax reform table.

LEGAL BRIEFS

POLLUTION EXCLUSIONS

The “absolute pollution exclusion” clauses common in insurance policies may not always be absolute.

Washington State The Temple of Justice

The Washington State Supreme Court reached that conclusion in litigation triggered when the incorrect installation of a water heater released carbon monoxide into a residence, harming the owner. The owner, Xia, sued the builder, Issaquah Highlands, which filed a claim with its insurer, ProBuilders. ProBuilders refused to defend the claim, citing the pollution exclusion clause in the builder’s policy. As part of a settlement with the owner, Issaquah assigned its rights under the insurance policy to Xia, who sued ProBuilders for breach of contract and bad faith, among other claims.

An Appeals court agreed with the insurer that it had no duty to defend the builder, but the Supreme Court overturned that decision. The court ruled initially (in Xia v. ProBuilders Specialty Insurance Co. RRG), and then refused to reconsider its finding, that while the pollution exclusion clause precluded coverage for the carbon monoxide release, the incorrect installation of the water heater, which caused the release, was a covered claim.

Striking a Balance

In previous cases analyzing pollution exclusion clauses, the court noted, “we have sought to strike a balance between the application of the policy’s plain language, the underlying purpose of pollution exclusion clauses, and the expectations of the consumer purchasing insurance. Ultimately, what matters most,” the court said, “is whether the occurrence triggering coverage originates from a pollutant acting as a pollutant….When a nonpolluting event that is a covered occurrence causes toxic pollution to be released, resulting in damages, we believe the only principled way for determining whether the damages are covered or not is to undertake an efficient proximate cause analysis,” the court explained. The efficient proximate cause rule provides coverage “where a covered peril sets in motion a causal chain, the last link of which is an uncovered peril,” the court added.

The court cited several previous decisions in which it has ruled consistently that if the “efficient proximate cause” is a covered peril under the policy, “there is coverage…regardless of whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.”‘

In its defense, the insurer had cited “plain language” in the policy that specifically denied pollution coverage under the proximate cause theory. The policy stated: “This Exclusion applies regardless of the cause of the pollution and whether any other cause of said bodily injury, property damage, or personal injury acted jointly, concurrently, or in any sequence with said pollutants or pollution. This Exclusion applies whether any other cause of the bodily injury, property damage, or personal injury would otherwise be covered under this insurance.”

Unacceptable Evasion

The court rejected that argument as an unacceptable effort to evade a clear legal requirement, noting: “The exclusion cannot eviscerate a covered occurrence merely because an uncovered peril appeared later in the causal chain. The efficient proximate cause rule exists to avoid just such a result,” the court said, by “ensuring that an insurance policy offering indemnity for a covered peril will provide coverage when a loss is proximately caused by that covered peril. Inasmuch as the causation language in the pollution exclusion here conflicts with established Washington law, it cannot defeat Xia’s recovery as assignee of rights under the policy.”

While it is clear that the carbon monoxide spewed by the hot water heater was a form of pollution, subject to the policy’s pollution exclusion, the court said, under the efficient proximate cause rule “it becomes equally clear that the ProBuilders policy provided coverage for this loss. The polluting occurrence here happened only after an initial covered occurrence, which was the negligent installation of a hot water heater that typically does not pollute when used as intended…. Like any other covered peril under a general liability insurance policy, an act of negligence may be the efficient proximate cause of a particular loss,” the court continued. “Having received valuable premiums for protection against harm caused by negligence, an insurer may not avoid liability merely because an excluded peril resulted from the initial covered peril.”

The court also affirmed the plaintiff’s argument that the failure to defend the builder in the negligence action constituted bad faith and a breach of its duty under the insurance policy. Noting the difference between the duty to defend and the duty to indemnify, the court issued a stark warning about the risks of concluding too quickly that there is no duty to defend.

An insurer acts in bad faith if the refusal to defend was unreasonable, frivolous, or unfounded. Thus, an insurer takes a great risk when it refuses to defend on the basis that there is no reasonable interpretation of the facts or the law that could result in coverage.” An insurer must defend a complaint, the court said, “until it is clear that the claim is not covered.”

In this case, the court found, there was “reasonable and conceivable basis” to suggest the coverage might be required under the proximate cause rule. But there was no indication that, before declining coverage, ProBuilders conducted an analysis “that might have alerted them to the rule of efficient proximate cause and this court’s unwillingness to permit insurers to write around it. Accordingly,” the court concluded,” ProBuilders wrongfully refused to defend its insured [against] Xia’s complaint.”

WORTH QUOTING

“It is unlikely that progress in Washington D.C. is the source of continued owner optimism, because there isn’t any.” — National Federation of Independent Business statement on the group’s survey of business owner sentiment.


Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.