Sometime over the next 10 years, each of the developers who are building high-rise condominium projects across Honolulu expects to be sued.
 
Today, lawsuits over construction defects are a given on every condo project, no matter how thoughtfully designed or carefully built. Lawsuits are so commonplace that the cost of liability insurance -- just like glass, steel, concrete and carpet -- is now built into the price of every unit.
In Hawaii, the cost adds an estimated average $5,000 to the price of each new condominium unit.
Even with insurance, lawsuits and the cost of remedial work have the potential to bankrupt a builder or an architect.
 
In one of the biggest cases of its kind in the United States, Hilton Hawaiian Village Beach Resort & Spa filed suit in 2002 against 18 contractors involved in the building of its Kalia Tower, which was found to be infested with mold soon after it opened. The company said it spent $55 million to repair the damage.
 
In 2003, owners of condominiums at One Archer Lane sued the builders over alleged construction defects.
 
Some of the companies burned by such claims, like the Wimberly Allison Tong & Goo design firm, which settled out of court for an undisclosed sum with Hilton, and First Insurance Company of Hawaii Ltd., one of the insurers of One Archer Lane, say they are now limiting their involvement in residential projects.
 
"We are underwriting significantly less of the high-rise residential condo business than we previously did," said Steve Tabusi, spokesman for First Insurance. "We are carefully weighing the risk, exposure and return. If we wrote more of this, ultimately down the road we could end up paying out more than we take in as premiums."
 
Hawaii is not unique in the number of construction defect lawsuits filed. As resort communities and vacation homes have sprung up, attorneys are finding lucrative work filing class-action suits on behalf of condominium associations and resort-home buyers. The statute of limitations on construction defects is 10 years.
 
More than any other kind of building, residential projects are especially susceptible to construction defect claims. Owners pay hefty maintenance fees on top of their mortgages and many believe that entitles them to buildings free of even minor flaws. Repairing foggy windows or shaky lanai railings in 300 units can easily run into the millions.
 
A state law passed last session gives contractors and developers some relief. Owners are now required to give the contractor a chance to repair the problem before they can go to court.
 
A $50 million policy The unfavorable loss history worries the insurance industry, so it pegs residential projects as high-risk. Insurance industry executives say even with high premiums, there still may not be enough money to cover the cost of repairs or lawsuits if a series of large-scale claims are made, especially because Hawaii's definition of construction defects is considered to be broad. Some states are more specific about what qualifies as a defect.
 
Most insurance policies now exclude coverage for mold.
 
KC Rainbow Development Co. LLC, which is building Moana Pacific, a two-tower residential complex near McKinley High School, secured from AIG Insurance a $50 million general liability, builders' risk and workers' compensation insurance policy. It covers the developer, its general contractor, Owen Dredging, and nearly 50 subcontractors during construction and for the next 10 years. The company will pay $6 million in premiums.
 
"You cannot do a condo project in the U.S. without the coverage. The lenders require it and contractors won't take on projects unless they have coverage," said Allan Leong, director of development of KC Rainbow. "The higher cost of insurance adds to the overall cost of the project."
 
KC Rainbow, like several local projects, took advantage of a state law passed in 1997 that allows developers of large projects to buy so-called wrap-up insurance valued at $50 million or more to cover present and future claims.
 
"Developers want the control and want to know where the insurance is when they need it later," said Rocco Sansone, senior vice president of Marsh, which arranges wrap-up insurance for nearly two-thirds of local residential projects.
 
A case in point is One Archer Lane, a project near downtown completed in 1998. The project didn't have wrap-up insurance and developer Jack Myers was left holding the bag when the tenants sued in 2003 as the other major companies associated with the project no longer existed.
The project's general contractor, Fletcher Pacific Construction Co., was bought by Dick Pacific, which said it didn't assume liability for former projects, and the architect Media Five filed for bankruptcy and was acquired by a Mainland entity. The lawsuit has not been settled.
 
Pictures tell the story Don Huang, developer of the 36-unit Loft @ Waikiki and principal for design company Collaborative Seven, said his insurance premium of $800,000 equals the cost of one unit. To protect his investment, Huang plans to photograph every phase of construction and take photos every year to keep a diagnostic report.
 
"We want to be armed with evidence to show here, this is what we did," Huang said. "We have to be more proactive in anticipation of people saying we are guilty unless we can prove we are not."
Professionals like designers and engineers get their own coverage.
 
Wimberly Allison said it maintains coverage with a $3 million limit and pays an annual premium of nearly $500,000. But it's well worth the expense, said Mike Seyle, the company's general counsel. The insurance company picked up the cost of settling with Hilton in the Kalia Tower case.
 
After the Hilton litigation, "We have been selective with projects locally because of concerns with risk management and litigation," said Howard Wolff, senior vice president of WATG.
 
Developers who apply for insurance are vetted for experience and past claims before being accepted, a process that eliminates or makes it more expensive for newcomers and companies that have been sued before, said Marsh's Sansone.
 
"The owner has to select the right construction team and make sure the work is done professionally, including making sure there are good and adequate workers, during and after construction is completed," he said. "It's all part of risk management."
 

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