AIA Trust's "White Paper" on Risk Management Ideas For Condominium Projects

Everyone has to deal with insurance and risk when building, developing and designing condo's-including the Architects. Very often builders form LLP's that just develop the condo you are looking to buy. When all the sales are closed, often the LLP is closed too, leaving entities that are still around to deal with the lawsuits from HOA attorney's.

This White paper from the AIA Trust, issued in April 2006 and authored by attorney G. William Quatman, FAIA, Esq of Shughart Thomson & Kilroy, P.C. in Kansas City MO, discusses the condo crisis and defect suits from the Architects' side and discusses how to deal with the problems in condo building.

EXECUTIVE SUMMARY
Here are the highlights of the attached White Paper on risk management as relates
to condominium projects:

There has been incredible growth in the housing market nationwide. Construction
defect litigation has exploded in several states, drawing aggressive plaintiff law firms to
what has become a “cottage industry” of filing suits on behalf of condominium owners
and Homeowner Associations (“HOA”) against developers, contractors, architects and
others for actual or alleged defects. Some architects and contractors have dropped out of the condominium market due to suits and high insurance. Insurers for contractors have invoked exclusions in new policies for any residential construction and insurers for architects charge increased premiums and require a supplemental application for
condominium projects. With many condominium projects developed by single-purpose
LLC’s, which are dissolved after all the units are sold, the unit owners and HOA’s often have no recourse against the entity who sold them their unit. As a result, many sue the contractor and architect.

As of January 2006, a total of 27 State Legislatures have passed “Right-To-Cure” Acts
(or Construction Defect Acts) that are aimed to reduce suits by requiring the HOA and
the condominium unit owners to give advance written notice of a defect to the contractor prior to filing a lawsuit. In 14 states, the law also protects architects. See Appendix G for the full text of these statutes and hot links to the actual laws. These laws set out a pre-
claim procedure whereby the contractor (and sometimes the design professional) have
the right to inspect the property, conduct testing, and then offer to repair or settle the dispute, or to deny liability, before any lawsuit is filed. In a few states, the HOA must give advance notice to the unit owners and explain the options and the cost of litigation. In at least one state, the HOA board must send the owners a copy of the contractor’s responseto the claim and a vote is required before suit can be filed. These laws can greatly assist in reducing costly litigation, however in nearly 75% of the states there is currently no protection for the architect. AIA has lots of work to do in this area. Of the 27 states with “Right-To-Cure Laws”, only 14 of those include design defects or specific mention of architects.


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