Published November 29th, 2021 by Kyle Langan
Within the walls of the beachfront condominium development, Champlain Towers South, abundant cracking and crumbling on columns, beams, and walls of the parking garage existed. In 2018, a hired engineer warned of major structural damage to concrete slab below the building’s pool deck. So, how did this not get corrected in the 3-year window of time leading up to the collapse and tragedy that ensued?
Board of Directors’ Failure to Employ Basic Risk Management Principles
Champlain’s board of directors was responsible for maintaining and repairing common elements including buildings, pools, and parking garages. Reserve studies accomplish this – an engineer can adequately advise of all elements, along with maintenance and replacement. At Champlain, the condo’s association had only $706,460 in reserves, which was well short of the $10M needed for structural repairs.
The Business Judgement Rule has extreme significance for the prevention of another occurrence like the tragic one in Surfside. Boards must follow the advisory of the professionals; i.e., engineers, insurers, CPAs, and attorneys. Regular inspection of a building’s structural integrity and setting proper reserve levels are both vital. Board members need to be educated individuals that listen to expert business judgment from qualified professionals. More importantly, directors must follow the recommendations to prevent losses. Additionally, had business judgement been followed at Champlain, it would have provided a strong defense to litigation coming from a unit owner’s family or third party affected by the loss.
D&O coverage offers 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, which was not sufficient because of the litigation that ensued after the obvious negligence.
Preventing Another Surfside Miami Condo Collapse
Risk mitigation: For commercial properties, engineers must file copies of safety inspections with local governments. This is vital for the longevity and structural health of the property, and it is now a requirement by Florida statute.
Education: An essential part of the public sector’s mitigation strategy is the increasing education requirements for board members and property managers. Directors on any board must be nuanced in the ways of how to properly and timely maintain an entity and its assets. Also, increased education 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 addresses loss exposures, mitigation, and financing of an entity. For the design of a risk financing & mitigation plan that will increase the profitability and valuation of your entity, contact firstname.lastname@example.org.
With a strategy that implements the risk mitigation techniques above, negligence can be identified and solved. Negligence from the board of directors was the root cause of what led to the Champlain Towers South collapse in Miami; it is now being addressed reactively to prevent another similar tragedy.
Recommendation: A board of directors should follow the strategies above, avoid negligence, 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. Risks should be financed up to the level of the industry group median, at a minimum. Then, directors should identify what percentage of losses go over this median, and determine how much coverage they want to purchase based on the risk appetite of the entity. Coverage medians and maximum losses within industry groups of a company should be analyzed by your risk manager. If they are not, contact me.
Surfside Condo Collapse Webinar – Hosted by USLI <https://www.usli-events.com>
Various ideas coming out of the State of Florida concerning how to handle the collapse <https://www.floridabar.org/>