HOMEOWNERS ASSOCIATION LAWSUITS : HOW TO AVOID THEM. Bruce N. Furukawa, Esq. Long & Levit LLP San Francisco, CA

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1 HOMEOWNERS ASSOCIATION LAWSUITS : HOW TO AVOID THEM Bruce N. Furukawa, Esq. Long & Levit LLP San Francisco, CA

2 OUTLINE FOR DISCUSSION. Risk and Liability Case Studies Insurance Industry Response Insurance Industry Trends Importance of Careful Design Does Reducing Risk Lead to Less Innovation?

3 CONDO PROJECT RISK & LIABILITY Condominium Projects Lack of affordable land/housing drive market for condominiums projects Environmentally friendly by reducing urban sprawl, location close to mass transit lines, reduces commuting time with live/work spaces Reduced cost to purchase allow opportunities for 1 st time homeowners, vacation residences, baby boomer downsizing. Condominium Projects are on the rise 23% increase since 2013 Condominium Project Claims 5% of design fees are for condominium projects 12% of design fees for other residential projects 83% of design fees spent on all other types of projects

4 CONDO PROJECT RISK & LIABILITY Condominium Project Claims (cont.) 20% of claims involve Condominium Projects 22% of claims involve other residential projects 5% of design time spent on Condo Projects, but 20% of claims are related to Condo Projects 17% of design time spent on Residential Projects, but 42% of claims are related to residential projects Why?

5 CONDOMINIUM RISKS & LIABILITY Condominium Risk Factors Experienced, knowledgeable Developers are being replaced by inexperienced Developers projects are comprised of replicated designs and details, which if flawed or installed improperly create extensive problems throughout project Design professionals charge low fees for a single design that is replicated multiple times in a project The low cost approach impacts quality Inexperienced unit owners and HOA Boards Active solicitation by attorneys to HOA Boards Threat of board being sued for not filing lawsuits Destructive testing of units tear open hidden flaws Insufficient HOA reserves due to poor planning

6 CONDOMINIUM RISKS & LIABILITY Condominium Claims - According to UC Study: 23% of Condo projects reported defects 40% of Condo projects reported major flaws 26% of Condo projects had claims or lawsuits Condominium Claim Types Building Envelope Waterproofing, Roof, Windows, Walls Fire/Seismic design HVAC Soundproofing Soil/Foundation issues

7 CONDOMINIUM RISKS & LIABILITY The average Condominium case costs $190,000 to defend. The Top 25% of condominium cases cost an average of $540,000 Contractors typically carry $1,000,000 liability insurance for each year General Contractors will have sub-contractors that each carry $1,000,000 liability insurance limits every year. Result: All the contractors may have as much as $10-20 million in insurance limits for each policy year from the time the project is completed This does not include Developers insurance and design professionals insurance.

8 CASE STUDIES Emeryville Project built in 2006 with 188 units Architect had limited Construction Observation duties Developer hired contractor that was notorious for low cost and poor construction Contractors went out of business Developer went bankrupt in 2008 real estate crash No soffit vents, flashing installed and building envelope trapped water in wall cavity After 6 years, building framing members rotted to the point of failure on all four sides of project requiring re-framing and new building envelope for all units, which had differing levels of mold in walls Result: Settlement for $13 million to repair building envelope and lost rents

9 CASE STUDIES San Francisco Project built in 2007 with 18 units Developer was general contractor and design professional Developer hired contractors with no insurance and no contracts. No soffit vents, flashing installed and building envelope trapped water in wall cavity Significant seismic and structural framing defects located after HOA Attorney performed destructive testing of walls. Litigation lasted more than 3 years at a cost of $250,000 for each party in the lawsuit. Developer almost lost coverage because he was contractor and designer. Result: Settlement for $3 million to repair building and developer had to pay $500,000 from his personal assets.

10 INSURANCE INDUSTRY RESPONSE Insurance companies will limit a company to 5% of fees for condominium projects or else increased premiums for added risk Insurance companies are excluding condominium projects from covered claims Insurance companies do not cover damage or repair of the work itself, but only the damage caused to other work Significant increase in marketing and sale of Wrap policies and project policies Insurance companies disallow coverage where there is a Wrap Policy or Project policy Insurance companies will not sell insurance policies to companies that build residential projects in California.

11 INSURANCE INDUSTRY RESPONSE Developing new insurance policies that cover both construction and design in a Wrap Policy Increasing limit requirements for wrap and project policies Providing educational programs for their insureds regarding risk mitigation, quality assurance, peer reviews Insurance lobbies pushed for legislation that requires ability for developers to repair prior to filing of litigation (Calderon/SB800) Insurance companies appealed decisions in court to enforce indemnity rights for developers against contractors and design professionals and to expand the extent design professionals owe a duty to HOA s.

12 IMPORTANCE OF CAREFUL DESIGN PROCESS Best Way to Protect Yourself is a Careful Design Process Build a true Team between Developer, Designers and Contractor Experienced, cooperative Consider Third Party review Waterproofing specialists Fire Life Safety Consultants Structural Review Use updated details and not rely on standard details and specifications Utilize experienced architects and engineers in all phases of design, especially at the Construction Administration phase. Require Mock-Ups to test systems Provide detailed maintenance instructions and require acknowledgement from HOA that they will follow

13 IMPORTANCE OF CAREFUL DESIGN PROCESS Best Way to Protect Yourself is a Careful Design Process Include protective language in Developer contracts Limitation of Liability clauses Indemnity Exculpatory clauses if no construction administration Include protective language in sale agreements with Homeowners Prior to purchase homeowners will inspect and waive claims for defects not visible upon reasonable inspection By-Laws require proper and timely maintenance Dispute Resolution and Two-Thirds Majority requirements for litigation process Require property manager who will document complaints and issues for HOA

14 DOES REDUCING RISK LEAD TO LESS INNOVATION? Innovation is more likely to occur if it lowers cost, creates efficiencies, and resolves prior problems EIFS example Building wrap Post-tensioned slabs for foundations Radiant heating systems PEX piping systems Risk is thought to be reduced by using tried and true methods for predictability Innovation sometimes involves untested materials and methods Examples above highlight problems with innovative products/designs