-Partners in Practice -

Why is the design of condominiums such an anathema to professional liability insurers? The simple answer is staggering losses. But, while this may be true, it does little to explain what it is about the typical condominium project that has caused so many to turn sour. To understand the pitfalls, it may be worthwhile to take a closer look at one of those "typical" projects.

Picture this. A developer with more guile than resources acquires an option on a large piece of property in a prime location. It is zoned for multi-family housing. Pencils are sharpened, attorneys are brought in, and the Paradise Hills Condominium Partnership is born. Its principal objective is to make money-lots of it.

One of the early calculations is a crude estimate of design costs. Roughly translated, this means, "How much are we going to have to pay to get a building permit?" Controlling design fees is easy: The estimate is simply reduced by half, and the stage is set for an initial interview. The nightmare begins with a phone call to you.

It does not seem like a nightmare, at first. With the ominous footfalls of the overhead monster pounding closer by the day, the prospect of an unexpected new project is more of a welcome relief. You are eager for your first meeting. It goes reasonably well, but one thing is clear: This is not going to be a model client.

Somehow a fee you consider to be adequate, but just barely so, is agreed upon. This is something of a victory, for your new client has maintained the posture throughout your discussions that your competitors would be more than willing to design the complex for less. Other concessions are demanded, however, and accommodations are made. One is a reluctant agreement on your part to defer discussion of your role in the construction phase until later.

The design is completed, the project goes out to bid, and you submit a proposal for construction phase services. Against your recommendation, the job is awarded to the low bidder--an out-of-state contractor with no experience in large-scale, residential housing. Your construction administration proposal is rejected as unnecessarily costly. You are asked, instead, to be available for "consultation." Your last three invoices have not been paid.

Your client expresses great displeasure with the fact that the low bid came in some 9% higher than your "final estimate." The implication is that you not only made a costly error, but that you may even be responsible for the difference. The contractor is asked for recommendations on cutting costs. You are not "consulted."

What you are requested to do is incorporate a laundry list of changes and substitutions into the contract documents. All undermine the quality of the project, some seriously. Most represent absolute minimum standards. Your warnings about future maintenance problems are generally ignored. You discover later that your refusal to accept a substandard roofing material had no effect on the decision to use it anyway.

Seven years go by before, by chance, you read in the newspaper that the Paradise Hills Condominium Association has contracted for major repairs. The work includes new roofs and siding, regrading, and replacement of the concrete in the common areas. The cost is estimated at $3.5 million. Shortly thereafter you receive your copy of the summons and complaint. The contractor, long since bankrupt, is nowhere to be found. Fortunately, your former client has become rich and famous in the meantime. The profits from your project were invested in a series of successful rock concerts.

Your share of the settlement with the homeowners is $350,000. The settlement finally puts a cap on soaring defense costs at $294,361. The cost to you: Your $25,000 deductible, $28,500 in wasted, non-billable professional time, and, possibly, your future insurability. All this for a project on which your costs exceeded your fees.

As exaggerated an example as this might seem, it is commonplace. The losses have, indeed, been staggering, not so much as a result of negligence in design, but because of a failure of process. The purchase of a home is a critical financial decision, and when the treasured object of that decision later turns out to have major defects, the only question is, "Who, out there, is going to pay to make it right?"

Why the heavy contribution from you? Because, almost alone among the players in the construction arena, your first duty is to keep the public safe from harm. Standing by, protesting mildly, while a substandard housing product is placed on the market is not consistent with the fulfilling of that obligation. The fact that your plans and specifications are virtually guaranteed to contain errors leaves you poorly positioned to argue that the problem is not of your making. The fact that you were retained to deliver only partial services does little to relieve you of your obligation to protect the public interest.

Where did it all go wrong? Consider the typical condominium project in light of these oft-repeated, but critical precautions:

1. Beware the unsophisticated and underfinanced client. Expectations of you are likely to be far greater than you can possibly meet. The former are not beyond hope, but you will have to allocate considerable time to explaining what the design and construction process is all about. Seeking to educate the latter is a wasted effort. If there is nowhere else to turn to avoid financial disaster, you can expect to find yourself dragged in as an unwilling partner. Selecting your clients carefully is every bit as important as their selecting you.
2. Finish what you start. Your design is not complete when it goes out the door, and if you are not present in the field to finish the job, you can count on the fact that someone else is going to do it for you. They are not likely to do so with your interests high on their list of priorities. When something later goes wrong, you can be certain you will be called on to explain why. Unless your agreement protects your right to complete your work, it makes no sense to accept the project in the first place. The risk is simply too great.
3. Safeguard the integrity of the end result. Granted, this is easier said than done, but there are steps you can take to protect your interests, even if your clients insist on compromising theirs. Place the risk where it belongs. Do not allow questionable changes to slip by simply as an accommodation-you need far more in return than payment of your outstanding invoices. Put your reservations in writing, explain the risks involved, and, where they are serious, insist upon indemnification against the adverse consequences. If your concerns are ignored, at least the record will be clear as to where responsibility for the decision actually lies.

For inquiries or problems please contact us via e-mail at Earleen Thomas or call us directly at 800-705-7742.
© 2000 Hilb Rogal & Hobbs Professional Practice Insurance Brokers, Inc. All Rights Reserved. California License #0641361.