Learning from the Surfside Condo Collapse

Published November 29, 2021 by Kyle Langan

Cracking and crumbling

2018: Champlain Towers South had abundant cracking and crumbling on the columns, beams, walls of its parking garage. Prior to collapse in 2021, an engineer warned of major structural damage to concrete slab below the building’s pool deck. [1] So, how did this not get corrected in the 3-year window of time leading up to the tragedy that ensued? At Champlain, the condo’s association only had $706,460 in reserves, which was well short of the $10MM needed for structural repairs. [2]

Business Judgement Rule

Boards need to follow the advisory of professionals i.e., engineers, insurers, CPAs, and attorneys. Regular inspection of a building’s structural integrity and setting proper reserve levels are both vital actions. [3]

Directors can defer to judgment from qualified specialists and then follow the recommendations to prevent losses. [4] Sadly, the absent business judgement at Champlain would have provided a strong defense to litigation coming from unit owners’ families or third parties affected by the loss. [5]

D&O coverage should offer litigation protection for individuals on the board and the responsible entity for a loss of this nature. To read more about the importance of D&O risk financing, click here. With this in place, personnel on the board and the entity itself will both experience financial protection from any economic losses. Champlain Towers South only had $49 million in total coverage [6], which was not sufficient because of the litigation that followed.

Preventing Another Condo Collapse

Risk mitigation:

For commercial properties, engineers must file copies of safety inspections with local governments. It is now a requirement by Florida statute. [7] This innovation in the statute will see benefit in transparency for longevity and structural health of properties. The reaction, or perhaps overreaction to events like this is commonly when innovation is made. This follows a theme of “Overcompensation, Overreaction Everywhere,” as analyzed by Nassim Taleb in his book Antifragile.

Education:

Strategies for mitigation may include certain education requirements for board members and property managers. Increased education requirements can help achieve an essential goal for housing associations: balancing reserve funding with reasonable assessment for owners. This is significant because it introduces elements of Enterprise Risk Management, which holistically considers loss exposures and financial management.

Recommendation:

A board of directors should follow the strategies above, and purchase D&O insurance. That way, in case a catastrophic loss does occur, directors’ personal assets are not lost in defense costs during litigation.

References

[1-6] Surfside Condo Collapse Webinar – Hosted by USLI <https://www.usli-events.com>

[4-7] Various ideas coming out of the State of Florida concerning how to handle the collapse <https://www.floridabar.org/>