Most insurance carriers that specialize in architects and engineers’ professional liability (PL) would agree that condominium projects are one of, if not the most, hazardous project types when it comes to claims against design firms.
In fact, many of the more seasoned carriers would tell you that the average loss ratio on condo projects is in excess of 300%. In other words, for every one dollar in premium earned these carriers are paying out three dollars in losses.
No wonder A&E firms doing work in this area are finding themselves in a severely constricted insurance marketplace and paying a much higher rate than other firms for their professional liability insurance.
What Are the Risks of Condo Projects?
Whether you are currently doing condo work now or may consider it in the future, it would be wise to recognize the inherent risks of condo projects.
So, why are condo projects the riskiest of all project types?
Most PL claims against A&E’s come from their Clients versus Contractors or Third Parties. Condo projects however, are unique in that they have a significant third party exposure. While the Design Professional will negotiate their contract with their Client and hopefully make the effort to establish and manage their client’s expectations; on a condo project the Design Professional ultimately ends up in bed with their Client’s Client – the condo owners.
All residential projects are inherently risky given the consumer is typically unsophisticated. The A&E is tasked with interpreting the dreams of their unsophisticated client – which creates an emotionally charged exposure. Condo projects have this element of risk which is further increased by the fact the A&E never had the opportunity to establish or manage the expectations of these residential condo owners.
Multiple Potential Claimants
Every night these emotionally charged unsophisticated condo owners are lying in their beds looking at their ceilings. And, if there is a problem in unit #1, there most likely is the same problem in unit #301.
The Homeowner Association
After a restless night sleep these 301 or so unit owners get together for a favorite pastime, the HOA meeting. This invariably escalates into a discussion about the cracks in their ceilings and the faulty design of their units. Risk management tip: If you are going to design a condo project, design it without a common meeting space.
The Plaintiff Attorney
Sometimes it seems that there is a gang of plaintiff attorneys out there that have the statute of limitations of every condo project that has ever been built in their docket system. It’s also reasonable to suggest that these plaintiff attorneys will contact the manager of the condo/HOA just before the statute of limitations runs out and suggests that it is the HO Manager’s “fiduciary responsibility” to advise their HOA members that time is running out to bring legal action and collect for any design flaws.
The Single Purpose LLC
When it hits the fan, the developer is often nowhere to be found. They had formed a single purpose LLC which no longer exists. They have taken the money and run – leaving the A&E team holding the proverbial bag.
Not all Clients are created equal and developers have proven to be on the more hazardous end of the spectrum when it comes to lawsuits against A&E firms.
Managing Condo Risk
In 2008 I was asked to present a risk management program at the National AIA Convention in Boston titled, “Managing The Condo Craze”. By the time I showed up for my presentation the condo craze was over.
While we are not at the moment in the midst of a condo craze, it’s safe to assume that condo projects aren’t going anywhere, and I would expect another craze is not too far off.
I have a number of A&E clients that do a fair amount of condo work and have been successful at it. I believe the key to their success in this area is that they don’t dabble in this work, but rather are well versed in the challenges of condo projects and know how to manage their risk.
In a future blog I will go into detail on what firms can and should do in order to manage their risk on condo projects. This begins with having well-thought-out “go/no-go” procedures in place when evaluating:
- their prospective clients
- the contract(s)
- their firm’s team capabilities