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Jeff Masters: 'Be holistic about risk management'

Staff

December 1, 2005

Building Design and Construction

Jeffrey D. Masters is a partner with Cox, Castle & Nicholson LLP, Los Angeles, specializing in complex insurance coverage, construction defect cases, and real estate litigation. A graduate of UCLA Law School and UCLA's Anderson Graduate School of Management, he has 20 years' experience structuring insurance and risk management legal programs for AEC firms, developers, and building owners.

BD&C: How can developers and building owners better protect themselves from litigation?

Jeffrey Masters: The trend among successful developers is for "holistic," or "enterprise," risk management. For a developer, that means looking at everything from land acquisition, to how you form the legal development entity, to design and construction, to your relationships with buyers or tenants.

BD&C: Why this holistic approach?

JM: This is all being driven by an adverse litigation climate—more claims by building owners for defects in design and construction. Nobody tracks this except the insurance companies, and they won't share their data.

This started with single-family, but now we're seeing more instances of construction defect litigation in the multifamily residential area.

BD&C: How can Building Teams protect themselves from these suits?

JM: One tactic we recommend is peer review. Have a second architect or structural engineer review your plan to see if there's a way to design out problems before you go for a building permit. Most sophisticated architects and engineers see the value of having a second set of eyes look at their work. As a liability reduction tactic, it's very prevalent in the multifamily field, and it's becoming more so in commercial.

Another tactic is quality control inspections during construction. On the commercial side, we've had QC inspections for a long time, but now insurance companies are requiring QC inspections during construction in multifamily projects.

BD&C: OK, peer review and QC inspections. What else?

JM: Have a strong moisture intrusion protocol. Really pay attention to preventing water intrusion in the design phase and construction phase, even to the point of bringing in a consultant who specializes in water intrusion issues.

A water intrusion consultant will also be able to troubleshoot problems after the building is occupied, when you need someone to be available within hours, not days, to get the problem corrected immediately to prevent mold problems.

You also need a plan for responding to water intrusion events. In addition to your water intrusion consultant, have a remediation contractor in place. Have a plan for temporarily relocating a tenant or buyer. We put all this in a manual for our clients, and make it user friendly, not overly complicated—basically a road map.

BD&C: So, you need to plan ahead.

JM: One of the ways we do holistic risk management is to look at the client's insurance policy and make a list of all the risks that are not covered, and then come up with a game plan to deal with all those "residual" risks.

For example, if policy doesn't cover mold—and none of them do—we help the client develop a plan for what happens upon completion of the project. For example, we recommend having an industrial hygienist in place to deal with water intrusion and mold issues. A hygienist can tell how serious the problem is and how to remediate the condition, rather than just guessing. They can be a marvelous resource, because they can walk you through the steps. The important thing is to get someone who's both practical as well as academically smart.

BD&C: Anything new in insurance?

JM: One thing that's come up is "wrap-up insurance," where the owner or developer buys the liability policy for all the parties to the construction process, rather than each party bringing its own to the job. The coverage and the cost are usually better than the individual parties can get, and it gives the owner a lot of control over the insurance.

The one part that's not working well right now is coverage for architects. It's very hard for any design professionals to get coverage for residential projects right now.

BD&C: What else is scary out there?

JM: Terrorism insurance. It's a hot issue among owners, lenders, and developers. I'm a strong proponent of renewing the federal Terrorism Risk Insurance Act, which expires December 31. If TRIA is not renewed, a lot of transactions are not going to go forward. The Senate has passed an extension, but the House has yet to act.

BD&C: Any other major risks, Jeff?

JM: Yes, something that's not on the radar of a lot of private developers: directors and officers insurance, or D&O. The risk is that, if you make a bad management decision, the creditors could sue you. There's a myth that only public development companies need D&O, but private developers do, too. It's relatively inexpensive, and every private real estate company should be looking at it.

  

© 2008, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.

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