The sudden collapse of the Champlain Towers South condo building in Surfside, Florida on June 24, which tragically caused at least 95 deaths and left 14 residents still missing, has prompted multiple lawsuits against those involved in the beachside residence’s construction and maintenance. As of July 10, at least a dozen suits had been filed on behalf of victims and their families, accusing the condo homeowners association, engineering firms, the city itself, a neighboring construction site and others of bearing some responsibility for the tragedy.
The Champlain Towers South Condominium Association was the first to be named in a lawsuit over the collapse. Filed less than 24 hours after it occurred, the $5 million class-action suit claims the HOA failed to “properly protect the lives and property” of residents by not implementing needed repairs. It has since been revealed that in an independent budget review prepared for the association in 2020, the HOA was considered critically underfunded for necessary structural repairs and had just 6.9% of the funds recommended to make repairs and stay financially secure.
This may be one of the worst building collapses that the U.S. has seen. It has really highlighted the need to have the proper insurance in place.
The issue underscores the potential liability taken on by those who serve on homeowners associations or other boards of directors. It is not unusual for these boards to be named in lawsuits, said Marvin Cigarroa, Broker, Professional Liability, Burns & Wilcox, San Diego, California.
“This may be one of the worst building collapses that the U.S. has seen,” he said. “It has really highlighted the need to have the proper insurance in place. When something goes wrong with the maintenance or the upkeep of a building with a homeowners association, there will be liability questions directed at that board.”
These associations should carry Directors & Officers (D&O) Insurance, which protects the board members in their fiduciary duty, roles and responsibilities, and decisions made for the condo association.
“When you look at what happened with the Champlain Towers, there are reports that there were some engineering structural issues that needed to be addressed but may have been delayed or postponed,” said Heather Schaaf, Associate Vice President, Professional Liability, Atain Insurance Companies, Chicago, Illinois. “That would be a decision that the board was part of and will be scrutinized heavily, given the travesty of this. It is possible that it could be construed as a breach of their fiduciary duty, which could trigger the D&O Insurance policy.”
Insurance needed to protect personal assets of board members
While homeowners associations may also carry Commercial General Liability (CGL) Insurance and Commercial Property Insurance, D&O Insurance is specifically designed to protect the personal assets of the board of directors and can help pay for covered expenses such as defense costs and settlement awards. The policies do not name individual board members, as these may change over time, but generally extend to any past, present or future members of the board.
“In most cases, the HOA is a volunteer organization. If you agree to serve on the board, the last thing you want to do is jeopardize your personal assets if there is a lawsuit alleged against the board,” Cigarroa said. “The policy responds to a variety of different acts, errors, or omissions by that board of directors.”
HOAs can face a wide variety of lawsuits, from disputes over fencing and storm damage repairs to serious injuries that take place on community common areas such as pools or playgrounds.1 In 2018, a homeowners association in Las Vegas, Nevada was ordered to pay $20 million after a teen was severely injured by a swing set that collapsed on him.2
“Over the last couple of years, pricing on D&O Insurance for homeowners associations has really increased because the frequency of lawsuits has been going up,” Schaaf noted.
Whether the Champlain Towers South Condominium Association could be liable for the building collapse will likely be a question of whether the board was negligent in its duties, which may include completing necessary reviews, notifying residents of concerns in a timely manner, and remaining financially sound.
“In the Surfside case, it appears there was not only an issue with the inspection of the property, but also with the association’s financial funding,” Cigarroa said. “It will have to work through the court system. Did the board act quickly enough, did they recommend the assessment in time, was there negligence? Those are big components.”
In some states, homeowners associations may be required to conduct third-party financial reserve studies to determine whether their reserve funding is adequate.3 “There may be a lot of homeowners associations out there that are not doing a proper reserve study,” Cigarroa said. “Not having an adequate reserve can lead to a lot of issues with maintenance and upkeep. With diligent planning, you can avoid large assessments down the road.”
It is important for boards of directors to find out whether bodily injury is excluded in their D&O Insurance policy, which is often the case. “That is a concern,” he said. “Boards should take a good look at their policy and if there is an exclusion, see if a carve-back can be included to allow coverage, at least for defense costs.”
Boards must consider defense costs, potential for catastrophic accidents
According to a recent Bloomberg report, most states have reserve fund requirements for condo associations, but many do not require regular reviews of whether the amount in reserve is adequate. Unresolved repairs and lack of oversight put many aging condo buildings in the U.S. at risk, sources said.4 Similar concerns over condo regulation have been raised in Canada.5
While authorities are still investigating the exact cause behind the Surfside condo collapse — a process that could reportedly take years — all homeowners associations should keep in mind the potential for a catastrophic loss.6 HOAs often buy at least $1 million in D&O Insurance limits, Cigarroa said, but limits often vary from $1 million to $5 million. It is always recommended that a board purchase “as much as they are able to.”
“In the grand scheme of things, HOA D&O Insurance pricing is fairly competitive,” he said. “Boards should really look at their limits and try to purchase as much as the financial condition of the board would allow.”
With common limits of $1 million or $2 million, an incident like the Champlain Towers South collapse would mean that policy is likely “not going to be sufficient,” Schaaf added. “If the D&O Insurance policy does not have adequate limits, then it can put the individual board members’ personal assets at risk,” she said.
Defense costs may or may not be included in that limit of liability, Cigarroa pointed out. “If defense costs are included in that limit, which is typical, any defense costs will erode any limit of liability available to eventually pay a settlement,” he said. “It is worth checking whether there is an option to have defense costs outside of the limit, and if not, taking a close look at the limits you are buying with that in mind.”
If the D&O Insurance policy does not have adequate limits, then it can put the individual board members’ personal assets at risk.
Given the rising cost of legal defense, particularly for class-action lawsuits, having defense expenses included in the liability limit could mean a significantly reduced ability to pay a final settlement or judgment.7 Even when a board of directors is not negligent in any way, legal costs can still add up quickly, Cigarroa said.
“In a litigious environment, there will be lawsuits. Whether or not there is any merit to a lawsuit, defense is very expensive,” he said. “Doing everything properly is no guarantee that you will not be sued. You will want to make sure you have a D&O Insurance policy there to pick up those legal costs.”
Professional errors a major liability risk for architects, engineers
Construction professionals named in the emerging litigation surrounding the Champlain Towers South collapse include an engineering firm that performed a 2018 structural analysis of the building, according to reports.8 For these professionals, Architects and Engineers Professional Liability Insurance is crucial for helping with expenses they would face in the event of a lawsuit.
Doing everything properly is no guarantee that you will not be sued. You will want to make sure you have a D&O Insurance policy there to pick up those legal costs.
“One of the greatest values of having these policies is being able to have a company immediately step in, assign attorneys to work the case, and have an expert in your corner really defending that claim from the beginning,” Cigarroa said.
Like D&O Insurance, Architects and Engineers Professional Liability Insurance may have an exclusion for bodily injuries because it is a component typically covered under CGL Insurance. “However, a lot of times, the General Liability Insurance will have an exclusion for professional services. This is where you can run into a gap,” he said. “What professionals need to do is take a look and make sure there is contingent bodily injury and property damage coverage, which means it will be covered as long as it is related to professional services.”
These policyholders should also ask their insurance broker how professional services are defined in their policy, aiming for the broadest definition available. “The broader you can have that definition, the more that will be covered if a lawsuit comes in,” Cigarroa said.
Construction professionals and homeowners associations alike should prioritize strong risk management protocols, maintain detailed records, and review their insurance policies regularly. They should also ask about any resources their insurance carrier may offer for risk management. “Some carriers may offer legal advice included in the cost of the policy, for example, which can be helpful,” Schaaf said.
1Schweers, Jeffrey. “In Florida, condo residents have little choice but to sue over building maintenance, other issues.” Tallahassee Democrat, July 8, 2021. 2Insurance Journal. “Las Vegas Homeowners Association Ordered to Pay $20M for Faulty Swing Set.” Insurance Journal, February 27, 2018. 3Moore, Christopher R. “Reserve Funds For Homeowners' Associations.” Homeowners Protection Bureau, LLC. 4Coy, Peter. “Aging Condos Are a ‘Ticking Time Bomb’ and Need More Oversight.” Bloomberg, July 6, 2021. 5Lorinc, John. “After Miami building collapse, questions emerge about condo safety in Canada.” The Globe and Mail, July 6, 2021. 6Shortell, David; and Flores, Rosa. “The evidence from the collapsed Surfside condo is growing by the day, but the investigation could take years.” CNN, July 9, 2021. 7Clark, Dan. “Corporate Spend on Class Action Defense Litigation Is Expected to Keep Rising.” Law.com, June 10, 2021. 8Devine, Curt; and Holmes, Kristen. “Champlain Towers South engineering firm failed to keep occupants safe, lawsuit alleges.” CNN, July 1, 2021.