Factors to Evaluate in Deciding Whether the Cost of Litigation Is Worth the Likely Return on Investment

By on December 18th, 2019

Posted in Construction

Your community association may become aware of significant transition, design, and/or construction defect claims. This awareness may come from the association receiving complaints from unit owners, or perhaps your property manager or a transition engineering inspection report will have visually identified issues of concern. Whatever the source of the Board’s knowledge, in exercising its fiduciary responsibilities, the Board members may find themselves confronting a potentially expensive decision fraught with all kinds of financial and political consequences. Does the association litigate all the way to trial if necessary? Does the association file suit to posture that it is serious about litigation, and then settle without going through expensive depositions? Does it negotiate with the sponsor, knowing that the association will not litigate but will take whatever it can get?

In evaluating its options, Boards are sometimes immobilized by, among other things, the fear of how the unit owners will react to the cost and uncertainty of litigation, special assessments, bankrupting the Association, the impact litigation will have on the market for sales of units or refinancing of mortgages, and bad outcomes. The best way to overcome those fears is to take the emotion out of it, treat it as a business question, and focus on return on investment. If the amount the association can reasonably expect to collect makes sense when measured against the potential cost of the case, then, barring other considerations not listed above that may weigh on the decision, the association should most likely proceed with litigation.

When evaluating the potential return on investment the association can expect to obtain from litigation, the association should obtain a detailed, written litigation budget from experienced counsel who have actually successfully tried similar cases. The budget should break down in detail the phases of the case. In our experience, that typically includes:

  • drafting, filing and serving the complaint;
  • paper discovery;
  • analyzing insurance;
  • fact depositions;
  • working with experts on investigation and preparation of expert reports;
  • expert depositions;
  • summary judgment motions;
  • pre-trial motions to limit the proofs at trial; and,
  • trial.

Obviously, in compiling a proposed litigation budget at the beginning of a case, counsel will have to leave plenty of room for flexibility in its assumptions and estimations. The vagaries of litigation being what they are, the budget will have to be adjusted as the case proceeds, depending upon many factors including, but not limited to, the number of parties, quality of opposing counsel, new claims, issues and developments that could not be known or anticipated at inception of the case, insurance coverage issues, results of expert investigations, performance of witnesses at deposition, and decisions made by the Judge that alter perceptions about the case. Once the association has the proposed litigation budget, it needs to evaluate what the claims are worth and what the association’s counsel thinks they can recover.

Sizing up the value of the claims and the amount that can reasonably be collected requires employing lawyers and experts with great skill and experience. The right experts need to be hired. The association’s counsel should recommend experts who have experience testifying at depositions and at trials to avoid the association having to spend additional money to train experts in how to testify. An expert who is inexperienced in testifying can easily undermine or ruin the association’s case without realizing it until the damage is done. Qualified experts with substantial experience testifying are expensive and hard to come by, but they are worth the investment. Do not skimp on the experts.

Counsel will need to consult with the experts to get a handle on an estimate of value for each claim. The experts will usually have to give a wide range of potential value because they cannot definitively determine the strength and value of the claim without analyzing the original plans, specifications, and other construction documents, doing inspections, and invasive testing. The better and more experienced the experts and counsel are, the more reliable those estimates will likely be.

One of the most important factors for the association to consider is insurance coverage. Most sponsors are corporations or limited liability companies that were created for the sole purpose of building the condominium. Once all of the units are sold, the sponsor has very limited or no assets when measured against the amount of the association’s claims. As you can imagine, architects, engineers, third party inspection companies, general contractors, and subcontractors are typically incorporated or limited liability companies without any substantial assets when compared against the value of the association’s claims. (There are some deep-pocketed sponsors and general contractors, but that is the rare exception). The best source of recovery for the association is insurance policies that provide coverage for the sponsor, design professionals, general contractors, subcontractors, and third party inspection companies who may be liable for the association’s damages.

It is absolutely essential that an insurance analysis be done before the case is started and that it be the focus of early and persistent discovery and attention during the case. It is highly unlikely that the association can be certain that there are deep-pocketed defendants who can be counted upon to have enough unencumbered cash or other assets 4 or 5 years from inception of your case to pay a judgment approximating the projected value of the association’s claims. Therefore, it makes no sense to invest in litigation if it is not likely that there will be insurance coverage in an amount reasonably approximating the estimated value of the association’s claims. For this reason, at the inception of the case, the association should insist that counsel do an analysis of the potential claims and the potential insurance coverage that might be available as a source of recovery for the association. This enables the association to identify which claims are worth pursuing. For example, the association may have 500 dead trees and shrubs. However, absent extraordinary circumstances, there is generally no insurance coverage under typical commercial general liability insurance policies for dead trees and shrubs in the absence of a showing of consequential damages. Why spend thousands of dollars in expert fees and tens of thousands of dollars in legal fees to pursue a claim for which there is no reasonable expectation of collection from insurance coverage or from any other source? The association can save itself a great deal of money and avoid a tremendous amount of frustration and heartache if, as part of the association’s decision-making process in evaluating whether to file suit or not, every one of the association’s potential claims is measured against the availability of insurance coverage.

The cost of legal fees is a huge consideration for an association in evaluating what to do about design, construction and other transition claims. A case involving millions of dollars of claims can easily cost several million dollars in legal and expert fees. Stark & Stark is one of the few law firms that handles complex transition, design, and construction defect claims on a contingent fee basis. In appropriate cases, Stark & Stark is even willing to consider advancing expert fees for clients. We have relationships with some of the best engineers, architects, and other experts. While we have settled roughly 95% of our cases before trial, we are very proud of the extraordinary record of success we have achieved at trials in which we have recovered tens of millions of dollars. If your association is considering what to do about transition, design, and /or construction defect claims, please feel free to call or email us to arrange a consultation without charge.

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Hamilton, NJ 08619
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