Water intrusion & construction defect claims

32:35Finding the cause of a leak

Great, sounds good, Jim. That was really great. What I’m going to do is follow up on Jim, because he’s totally right that a lot of these claims really have to do with water intrusion. Probably a lot of the attendees here may be board members or otherwise associated with association management. Oftentimes, a condominium will experience leaks, just like Jim said, around its windows.

In the claims that I deal with, probably 80% of the time it’s something with windows—occasionally roofs, but a lot of times windows and window leaking. Oftentimes, the association contacts a contractor, and the contractor invariably recommends recaulking. That’s what we see happen all the time. When that happens, and I’m sure that probably has happened to some of you in association management, the important thing to understand is that it might be a proposed repair, but there might also be concealed defects that are the source of the problem involving flashing or the weather barrier.

Just like Jim had with that great graphic, it’s really important to get to the root cause of the issue. When you see this bid from the contractor that says, ‘Recaulk the windows,’ that just tells you what the contractor proposes. It’s not necessarily telling you why the water is entering. The actual problem might be defective flashing, improper installation, deteriorated sealant, or something else entirely.

Just like Jim said, you have to be really careful with early labels. This is so critical, because the first label something gets starts forming the narrative of the claim. It forms the narrative for both the homeowners association and the insurance company. Then people start looking for evidence that’s consistent with their own idea of what happened, as opposed to taking a step back and asking: Was that contractor who just said to recaulk the windows doing a full investigation, or were they only on the site for 20 minutes?

Those labels are so important because, at the end of the day, 90% of determining who’s responsible depends on the labels. It’s so important to get the labels accurate. I think the better approach, when you notice these problems, is to document what’s known and what remains uncertain. That’s very important. Please do not reach conclusions before you have all the evidence to support them. That’s really critical.

35:55Preserving evidence during repairs

The second thing I tell people is that if you have to make emergency repairs to your association because the water intrusion is too much, or there’s some other issue, of course you’ve got to take photos of the problem. A lot of times, people take their cell phone and photograph the actual windows themselves and the water leaking from the windows, or something to that effect. But that is not enough, because that doesn’t actually establish what caused the water intrusion.

Oftentimes, the critical evidence is concealed behind the drywall or the siding. When the siding is being removed or there’s an emergency repair, you’ve got to take photos of all that to determine: How was the flashing installed? Were the windows properly integrated with the weather barrier? How did the water enter? If you can, actually maintain the physical components as well.

Of course, don’t delay mitigation. You’ve got an obligation to mitigate your damages, but definitely do not get rid of the evidence of what happened when you’re mitigating.

37:11Choosing the investigation team

The third thing I really want to impress upon people is that the contractor is one party, and oftentimes it makes a lot of sense to hire a second party: a consultant. Usually, they don’t give free estimates. You’ve got to pay them by the hour. Their job is really to figure out what happened here, what the scope of repair is, and what the reasonable cost is for that scope of repair.

That’s really important because contractors a lot of times know a lot of stuff, but they are not necessarily thinking in terms of an hourly employee. They might be thinking more in terms of: I give a free estimate, I get the job, I get this big job, I get 10% for overhead and profit, or something to that effect. There’s an opportunity there for a misalignment of interests. The consultants oftentimes do have more credentials, and they tend to have engineering backgrounds and things like that. Their incentive structure, being paid by the hour, is much less designed around how to get this job to be large, and more around how we actually figure out what happened here.

There are probably some lawyers here in the audience too, but if you’re not a lawyer, when you’re going to the consultant phase, frankly, you probably want to hire a lawyer. It’s not rocket science, but construction lawyers deal with this stuff all the time. When you’re constantly hiring consultants, talking with consultants, looking for the right kind of consultants and understanding the policies, it really helps to have that built-in judgment of having done it a lot, in order to make the right decision on what to say to the consultant and how to manage them.

If you’re going to the consultant phase, I’d recommend hiring a lawyer. Also, what’s good about hiring a lawyer is that you’ve got attorney work product privilege too, in case, when you communicate with the consultants, you need to keep certain things confidential. If you go to the next slide, please.

39:26Mapping the potential recovery paths

For this next slide, just like Jim said, water intrusion is usually more than just one claim. There’s one problem, but there are many potential payers for that problem. What I tell our association clients is that, of course, you’ve got to determine the preliminary facts. For the water intrusion example, some water is coming in through the windows. Then you want to think about the potential recovery paths.

Just like Jim had that huge map of all the different recovery paths, there are a ton of them. We’ve got property insurance, the contractor’s insurance, the subcontractor’s insurance, warranties from maybe the seller, the contractor or the developer, additional insured coverage, indemnity rights and all these different kinds of things in risk shifting. Really, you want to map out all of the potential recovery paths.

After you do that, you want to investigate with those recovery paths in mind. Of course, the goal is never to change the facts to fit coverage. It’s to investigate objectively. But you need to make sure you’re spending those investigation dollars and that investigation time on stuff that will actually address the question that matters, rather than conducting a bunch of investigation into something that will never result in any money for the HOA or association, regardless of how it turns out. You really want to spend that money and time in a way that’s productive.

41:12Organizing the claim record

After you do that, the really important thing is to make the insurance adjuster’s job easy. That means you’ve got to organize the photos by location and date and obtain a reliable causation analysis. If you can, get the itemized repair on Xactimate, which is the software tool that insurance companies tend to use to determine the cost and scope of repair. Explain how the evidence supports that.

Basically, if you can, do the adjuster’s job for them so it’s easy for them to try to get authority from the claims committee or different higher-up levels to get your claim paid without having to go through litigation. If the adjuster’s job is not easy, that’s where you get denials and things like that which sometimes are not correct, but frankly, the adjuster was overwhelmed by stuff and got confused. A big thing is to try to make it so easy for the adjuster that they don’t get confused.

42:19What an insurance denial resolves

If you do get denied, remember: one denial does not end the claim. If somebody says the damage is not covered, you’ve got to ask: Under what policy? Under what contract? What particular costs and what particular damage? What is the stated reason?

Just because the insurance company denies the claim does not necessarily eliminate the contractual liability. Just like Jim said, there are all these different potential paths for recovery: warranty rights, coverage under another policy, or maybe you’ve got additional insurance somewhere. You really want to make sure you’ve got all the potential recovery paths before you come to the conclusion that it’s not covered, and definitely before the association imposes any kind of assessment on the homeowners. Please do not treat one denial as the answer to the entire property claim. If you go to the next slide, please.

43:14Board decisions and repair contracts

Some of the risks that I’ve seen boards do not see coming: when you have a problem as a board and call up a contractor, what I see, 95% of the time, just like Jim said, is that they give you their form contract. Jim said it very artfully: they’re not looking to take on risk. Usually, these form contracts that contractors provide the homeowners association are the most one-sided thing known to man. You’ve got to be really careful, in particular with this provision.

You’ve got to get emergency repairs done. If they need to get done, they’ve got to get done. But just because you need emergency repairs does not mean you have to surrender the HOA’s or association’s entire rights under that claim to the contractor. Oftentimes, it’s in these contracts that you’re giving the contractor the right to manage the claim on your behalf. Almost certainly, you do not want to do that. If you take one thing from my talk here, it’s to write that down and make sure you look for it when you get a contract.

Honestly, if you cross that part out of the contract, you’re still going to get those repairs done. There’s no reason the contractor needs to have your claim forever. You need to have the ability to bid out your claim and look for different consultants. You definitely do not want to sign your life away with the first contractor who comes to your property.

45:01Diagnosis, policies and durable repairs

Another issue is that you’ve got to separate diagnosis from repair. You’ve got to get the consultant as opposed to the contractor. Just like Jim said, certificates of insurance are not coverage. They are not coverage. If you can, today, call up your broker or insurance professional and see if you can get the actual policies. They will give you the actual policies, and that’s really what’s important, because the certificates of insurance are usually these one-page or two-page things.

I can promise you that is not your policy. If you’re a homeowners association, your policy will probably be somewhere between 150 and 200 pages. If you’re looking at something less than that, you should really wonder if you actually have the real policy. That’s important because you’ve got to understand: Did I just get a great deal on this policy, or did I buy a really old, broken car and think I bought a Ferrari? You’ve got to make sure of what you bought and that you actually do have coverage. Certificates of insurance are not coverage.

A completed repair is not necessarily a successful repair. Again, that goes to the consultant issue. You’ve got to make sure you’re not just caulking over something that is a major structural or building-envelope issue, and that it’s just a temporary fix. You’ve got to make sure you get to the real source of the problem.

What I see as the biggest mistakes boards make is not necessarily choosing the wrong repair, though oftentimes they get contractors who aren’t incentivized to do a very all-inclusive scope of repair. Where I see the biggest mistakes is about the repairs, responsibility and making decisions about those things—making decisions about repairs, responsibility and insurance before they understand how those decisions affect their ability to recover money.

Really, you want to understand all of those issues. You’ve got to understand the insurance, the responsibility and the repairs at the same time, and then come up with an actual strategy to recover the money on behalf of the homeowners association or the community. All right, and thanks. With that, I’ll pass it on to the next presenter.