Since liability cannot fully be avoided or delegated, here’s a comprehensive, customized management plan that can assist in limiting risk from Robert Alfert, Esq., of Nelson Mullins Broad and Cassel.
The liability assumed by condominium developers in Florida is both significant in breadth and in duration. Under Florida’s Condominium Act Warranty Law, developers are as equally liable as the contractor to unit owners, successor owners and the association for “fitness and merchantability for the purposes or uses intended.” Fla. Stat. 718.203.This broad warranty covers all improvements, specifically including structure, building envelope, mechanical, electrical and even some personalty associated with the condominium. The period of liability can extend up to 10 years under Florida’s very liberal statutes of limitation and period of repose. Contrary to the interpretation of many developers, and even their lawyers, the warranties running for three to five years do not end the exposure. The limitations periods, under Florida case law, are then tacked onto these warranty periods.
Not surprisingly, Florida’s Condominium Act has spawned a cottage industry of contingency fee lawyers targeting associations as clients. They aggressively market to associations and property management companies, and along with their go-to consultants, offer their services often at no charge to the association or unit owners unless a recovery is obtained. The association itself has the power to sue on behalf of all unit owners for matters of common interest. Fla. Stat. 718.111(3).
Liability cannot fully be avoided or delegated. It can only be managed. A comprehensive, customized management plan, however, can assist in limiting risk. This two-part series highlights ten key risk management measures, in no particular order, that developers can implement to lessen and manage risk on their condominium projects. These measures, coupled with sound design, construction, operations and maintenance protocols, can go a long way to combatting the enhanced liability on condominium projects.
The Florida Condominium Act defines “developer” as a “person who creates a condominium or offers condominium parcels for sale or lease in the ordinary course of business…” Fla. Stat. 718.103. The entity that records the declaration of condominium is the presumptive developer. Fla. Stat. 718.104. Arguably, however, any other entity involved in the process of creating the condominium is potentially exposed. For example, if a parent company commences the design of the condominium, perhaps even executes the early contracts for design and construction, prior to the formation of the SPE, that entity is also at risk of claims and suit. As early as possible in the planning process, an SPE should be formed to serve as the contracting entity on all agreements for the development of the condominium.
Given the liability carried by a developer on a Florida condominium, the SPE itself requires separate insurance with coverage limits that are commensurate with the project value and risk. The Commercial General Liability policy is the most important coverage for the developer in this respect, providing certain protection for injuries, property damage and potentially even construction failures that cause damages. Recommending a $25 million umbrella for projects exceeding $50 million in value is not out of line.
Our Construction Team has been involved in claims exceeding even this umbrella limit, on examples like a pool diving accident that caused quadriplegic injuries, and water intrusion cases where the building envelopes had to be replaced and significant structural damage remedied. Depending on the involvement of the developer in designing the project, a base level of professional liability insurance may be in order as well. Relying on coverage from the architect and contractor may not suffice, especially given the independent liability of the developer. Moreover, any policies obtained by the SPE likely provides for legal defense of claims as well, a cost that often is not insubstantial on major association claims.
Most architecture and engineering firms are under-insured for professional liability coverage on projects that start ranging over $25 million, and definitely once they push over the $50 million construction cost thresholds. Consider that most professional firms, except for the larger national firms, tend to carry professional liability often as low as $1 million per claim and generally not more than $5 million per claim. And these are corporate policies, covering all projects on a declining balance basis; meaning, one claim on another project can drain the policy, leaving the claim on another project essentially uninsured. Developers should explore alternative coverage approaches, and compare pricing on, having the professional services firm buy a project-specific layer above the corporate policy or buying its own professional services umbrella policy, an Owner’s Protective Professional Indemnity policy.
The developer should also consider requiring the contractor to obtain a base layer of professional liability insurance if that contractor is providing preconstruction services or is serving in a construction management at risk or design-build role. To the extent the contractor provides any professional services, such as constructability reviews, design reviews, BIM conflict detection, estimating, etc., it arguably is exposed to a claim that would fall under a professional liability policy.
Both the architecture firm and the contractor should carry Commercial General Liability coverage also in amounts that are commensurate with the scale and complexity of the project. The CGL values can range to over $100 million for large contractors or CCIP plans, that can correspond to projects of considerable size. Often $10 million to$25 million in coverage suffices for projects of $50 million to $200 million.
The key to the CGL policies is ensuring that the carrier does not issue endorsements that essentially eviscerate the coverage for condominium projects. The most important endorsement to avoid is the ISO Form exclusion for condominium and residential projects. The other important endorsement to avoid is the ISO Form CG 2294/2295, which deletes the exception to the exclusion for damage to other property, which in plain English, simply means that the CGL policy no longer covers construction defects. It is critical to avoid these endorsements. Even exclusion endorsements for mold damage and anything involving EIFS have become commonplace. The language disallowing such endorsements must be written into the contract, and the developer should demand a copy of the full CGL policy at time of contract signing to verify that the policy contains no such endorsements, or any other endorsement that could limit coverage for the specific project.
The most effective way to supplement an architect’s corporate professional liability policy is through an OPPI. OPPI is basically an owner-procured umbrella policy that sits on top of the architect’s professional liability policy. The advantages are significant. First, most OPPI policies are project-specific, so that the value of the coverage obtained applies to the project itself. Second, most OPPI policies have a retroactive period commencing at design development, running for the entire period of limitations and repose, which in Florida can be up to 10 years after completion of the project. Third, most OPPI policies cover the professional services provided by any entity performing work on the project, which can include additional project consultants like building envelope specialists, program managers, estimators, and potentially even the developer and contractor. OPPI policies are also generally more cost-effective than having the architect acquire project-specific coverage.
Succinctly stated, a performance bond is the most comprehensive form of coverage that a developer can obtain with respect to the contractor’s performance. The scope of coverage can far surpass a CGL policy, which only covers damages ensuing from a defective condition, but not necessarily the defect itself. In Florida, and in other states, performance bonds are even interpreted to cover post-completion latent construction defects for the period of limitations applicable to contracts, which in Florida is five years. A performance bond follows the contract, so if the contract clearly specifies a certain level of performance, including time of completion, and provides for remedies in the event that the contractor does not perform, the bond will cover it. The bond is a third-party guarantee from a surety company that will either pay for the defects and damages, or the cost to complete, or will step in with a replacement contractor to remedy the issues. A bond can even cover liquidated damages for delayed completion. The contract should be drafted as broadly as possible, with the bond explicitly required, and in a form that follows the contract―the AIA 312 bond form is generally a very decent form.