Brian L. Hill | Construction Law Musings | June 30, 2017
For the better part of twenty years, I’ve had a front row seat to over 1,000 construction lawsuits, claims and other disputes. Whether it is allegations over defective design, manufacture or installation, or claims of delay or cost overruns, or related to injuries, death, or even diminished value, there are some clear trends and patterns that have emerged over the years. The past decade in particular has seen sweeping changes to the nature of construction claims and disputes, and as a result, many veterans in the legal, insurance claims and expert services arena have struggled to adapt.
In this article, I will share some of the trends and insight I have picked up on from working with some of the top professionals in the industry when it comes to handling the increasingly complex nature of construction claims and disputes.
Single-family residential lawsuits involving dozens or hundreds of homeowners in a single tract, which at one point represented the bulk of claims in terms of both quantity and dollar value, are much more rare than ever before. The answer to why that is should be readily apparent to most: America’s home building productivity screeched to a halt during the recession and has yet to resume to previous levels. Similarly, condominium and other multifamily for sale projects just haven’t been in vogue for a decade, so we don’t see nearly as many lawsuits and claims involving homeowner associations as we used to.
Apartments, hotels, schools (K–12, and higher ed), governmental facilities, medical facilities, office buildings, skilled nursing and assisted living facilities, and other nonresidential projects are examples of the types of projects that are involved in disputes more often in recent history. Looking at that list, a common theme emerges — these are all more complex project types.
Not only that, but the stakeholders involved in these types of claims tend to have a lot more at stake, in addition to having the resources to retain top representation. The stakeholders themselves are more complex, often with sophisticated organizational structures, sometimes even involving foreign entities. For instance, one trend that insurance carriers are reporting is that more and more claims are coming forward on projects involving EB–5 Visa money.
Since insurance carriers are the entities that most often end up funding various claims, disputes and their ultimate resolution, you can be sure that insurance policy language is evolving in response to the new trends as well. Unfortunately, this means that the already high self-insured retention (SIR) requirements of many policies is only getting higher. (In case you don’t know, the SIR is like a deductible in that as an insured, your coverage doesn’t kick in until you’ve satisfied the SIR. Some publicly held builders have SIRs of $10-million.)
Because of the high SIRs, claims adjusters rarely have much if any involvement in a claim’s early stages, when early resolution is most beneficial to all parties. Another factor complicating the insurance coverage issue in today’s construction claims world is that even with the high SIRs, unless an actual lawsuit is filed, there may not be a claim for the carrier to respond to. That is a situation that can occur in an active construction project where a claim exists in absence of filing suit, or — in an increasingly common scenario — in a state where “right to repair” laws require certain criteria be met prior to actually filing a lawsuit that would trigger coverage.
The other “gotcha” that comes with the right to repair laws is that it can be extremely difficult to obtain a full release of liability in return for making repairs. Plaintiff counsel are reluctant to grant full release unless both the repair methodology and scope meets their experts’ requirements. In response, defense counsel are often reluctant to recommend their clients undertake repairs, congnizant of the additional risk that may result, without any guarantee of release of future liability.
How Best to Manage Complex Construction Claims and Disputes?
The increasingly complex nature of modern construction claims and disputes demand a completely different skill set and level of analysis in order to achieve resolution. That applies not only to the legal team, but also to the designated team of technical experts required to make sense of various claims.
With regards to the legal team, multiple layers of representation are often required, and that goes for both the plaintiffs, defendants and cross defendants. Sure, a solid understanding of contracts and construction practices is an obvious prerequisite. But you’ll also need someone on the team that has intimate knowledge of your state’s applicable legislation and case law as it applies to design and construction.
An essential resource that is needed on most cases I’ve been involved with is coverage counsel — an expert on your state’s insurance coverage policies and interpretations, with real world experience litigating such issues. One piece of advice I hear frequently is to also make sure that you have a strong line of communication with key decision makers for the parties you are representing and make sure those decision makers show up when required. (Too many cases drag on, with millions of costs/fees wasted, all because a representative of the carrier with proper signing authority failed to show up to a mandatory settlement conference, for example.)
Another critical aspect to managing complex claims and disputes is having the right technical experts, consultants and specialists on hand, as needed. Sometimes the choice of what type of expert is obvious, but not always. For example, if you are representing the architect or engineer, you obviously want an expert on standard of care for that profession, but you might also want to consider bringing in an expert on construction management standard of care to evaluate the design professional’s relationship with the rest of the team. You also need specialty experts, available on an as-needed basis, to answer the specific highly technical issues that will inevitably come up during the process.
Economic loss is often barred as a cause of action in claims involving one’s personal residence, but as more nonresidential projects end in dispute, the possibility of economic loss may become a factor. We’ve seen this come up in delay claims more commonly in recent years. Having an economic loss expert, in addition to an expert on estimated construction costs, has proven invaluable in some of those situations.
Of course there are some other economic realities that need to be considered when handling complex construction claims and disputes, such as the cost of these wonderful legal and technical experts that have now become critical. Whether you are working on behalf of the owners, the designers, the contractors, or some other party, the more manageable the costs, the happier your client will be, and the more likely you’ll get future assignments and referrals.
The biggest cost factor by far that we see in today’s claims and litigation world involving the built environment is dealing with the massive volume of evidence. In a single family home tract, besides the drawings and subcontracts, you aren’t going to typically find too much data to go through. On a $125-million mixed-use high rise however, you could easily find yourself with hundreds of thousands of documents. What’s worse is that those documents might be in hard copy spread amongst dozens and dozens of bankers boxes, or scanned into massive monolithic PDFs each containing thousands of pages, or even scanned into individual files per each page. And of course rarely are any of these document repositories ever well organized. The key is to retain a consultant or expert on document management to reduce wasted and duplicative effort on the part of your entire team.
What you don’t want to have happen is to have one of your experts miss a critical piece of evidence because they either weren’t provided with the document (in an attempt to reduce costs) or worse, because nobody knew the document existed. Having the right document on hand, at just the right moment, has been decisive in many cases I’ve worked on over the years. A six-figure cost for document management isn’t unwarranted in a high-stakes, bet-the-company claim when tens of millions of dollars are at stake.
Perhaps the most important factor in reducing the incredible cost of today’s complex construction claims and disputes comes down to plain old good project management. No one single person or even party can handle 100% of a complex claim. It is a collaboration between multiple lawyers, their staff, experts, consultants and others. Just like on an actual construction project, communication is key. Maintaining strict protocols for communication to ensure that what’s privileged remains so, while keeping everyone informed of what they need to know, is a dance that is not for the faint of heart.
What’s Next?
Just as the design and construction of the built environment has evolved greatly over the past several decades, so too has the handling of the claims and disputes associated with it. Two decades ago when I first started out in forensics, we took pictures on actual film, took notes using paper on clipboards, and stored our project case files in so many three-ring binders. Nowadays, we use digital cameras and tablets, and have terabytes of data stored in secure encrypted private clouds.
Some of the upcoming trends I see:
- An increasing percentage of claims will be resolved in mediation and/or alternative dispute resolution, and outside of the courtroom
- More claims related to occupant health and indoor environmental quality can be expected
- Failure to achieve certain sustainability goals or incentives will become a cause of action in more jurisdictions
- Operations and maintenance of facilities will play a larger role in building performance, and will thus come into play more in future claims
- Insurance technology, particularly enhanced through artificial intelligence, will be greatly beneficial to the carriers, less so for insureds
- As BIM and other collaborative construction technologies become more mainstream, the need for digital forensics will become more critical in e-discovery
- Drones, robots, LiDar, 3D scanning, Infrared, and other advanced technologies will facilitate more advanced and less costsly/risky investigations
The one key factor that I have seen proven time and time again for handling complex construction claims and disputes is agility. Bamboo’s strength comes from its flexibility. By adapting and adjusting your approach to a given situation, and perhaps most importantly, by actively listening to opposing parties, even the most complex and contentious of claims can be resolved with minimal wasted expense.