Condo liability in the 2020's 2

In the past 15 years, my firm has done construction defect evaluations for over a hundred condominium complexes with lawsuits totaling over 100 million dollars....yes, there's litigation associated with condominiums...mostly with construction defects.

It will be interesting to see how this industry changes. Insurers are starting to have a significant impact upon this market.

Ron: I am sure there is a significant flow of condo lawsuits but is is more or less than before? My impression is maybe half as much as 10 years ago, albeit coming from a high baseline. And I am talking about the per project risk.

Per our insurer, condos still about 25x riskier than office or warehouse work. Don't know if that's down from early 00s, but the difference is still significant.

A lot of that is just based on # of potential litigants. Office buildings and warehouses have 1 owner. Condo buildings have many. Lots more owners = lots more chances for suits.

Lots more variability in owner sophistication too. Office and warehouse owners are typically experienced owners with multiple properties who know what to expect and are savvy enough to head off issues before they get bad enough to get insurers and attorneys involved. Most condo owners and specifically condo boards are...not.

I've had the reasoning explained to me slightly differently. For something like townhomes, each owner owns their actual structure and the land it sits on. For condos, the residents own the air inside. The building belongs to the association.

So for a big lawsuit against a bunch of townhomes, the lawyers have to convince each individual owner to sue.

For condos, they just have to convince whoever is in charge of the association.

My nickname for Condos is Con-Do's. Lots can go wrong to save money...

Mike McCann, PE, SE (WA, HI)

My comment about the insurers was geared at the costs for condo owners. It has always been too risky for us, but we are seeing now the owners are starting to get hit hard.

Excerpt from a recent article:
A 26-storey condominium in Abbotsford, BC has been rocked by astronomical increases to its insurance premiums – a 780% increase from its rates last year.

BFL, which insures the aforementioned Mahogany Tower, raised the property’s rates from $66,000 in 2019 to a mind-boggling $588,000 in 2020.

Owners of condominiums are rarely made whole in a construction defect lawsuit. They usually settle out for somewhere between 50 and 75 percent of the value of the defect remediation if all items are corrected. Further, most states require disclosure of conditions a real estate transaction and that can be problematic for owners if the defects are not corrected.

Many attorneys are now taking these cases on a contingency. In my state, contingencies are capped at 40 percent for personal injury but there is no cap on a contingency for construction defects...it's whatever the lawyer can negotiate with the condo association. Most of them that I have seen are in the 20 to 30 percent range. We recently were involved in a defect case that had bids for remediation by competent contractors in the $10 million range. The association settled at mediation for about $9 million. The attorney took $2 million for contingency. They paid my firm several hundred thousand for the investigative work, depositions and litigation support. There were thousands of documents that had to be reviewed over a period of 5 years. All of that left the Association with about $6.5 million to accomplish a $10 million scope of work. We helped them prioritize the repairs to reduce the financial impact and were able to complete first tier necessities (life safety work is first, followed by solving water intrusion issues, then the "gloss" restoration and alleviating disclosure issues as money permits.

If the case goes to trial and the case is strong for the Association, they can come out of it with enough money to make all the repairs. As an example, we had a case that went to trial a couple of years ago. We did the investigation and I testified at the trial for several days about the construction defects. When all was said and done, the jury awarded the condo association almost $10 million. The defendant, a major national builder, appealed the decision and lost the appeal after a 2-1/2 year appeal battle all the way to the state supreme court. The association prevailed and the state ordered the defendant to pay up plus interest. They now have enough money to fix all 20 of the buildings.

The litigation can be complicated and often takes numerous twists and turns. It is long and drawn out, leaving many associations to lose their taste for litigation and fold for a lesser settlement amount.

One way engineers can protect their liability with condos is to not be focused solely on their specialty. Look at the interfaces with other design features. As an example, I've run into many engineers who pay no attention to the impact their design has on other items in a building. One common example is deflection in walls that are to be covered with brick, stucco or other rigid cladding. Deflection control is critical for such items and many times the code prescriptive measures are inadequate for the specific application.

I see structural engineers who know little or nothing about material properties such as concrete technology. They know the design parameters but they don't necessarily know the nuances of the materials and how those can affect or be affected by their design.

Thanks for sharing your experience Ron.

Ron said:

Many attorneys are now taking these cases on a contingency

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Ugh. I mean, of course they are right? Thanks for the anecdotes too. Always good to have some color.

MrHershey said:

Per our insurer, condos still about 25x riskier than office or warehouse work

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I would love to see data so I can do some math and decide how much more to charge condo clients. Where is this stuff published? Who is your insurer?