The construction community faces growing risks related to climate change

A 2018 report prepared by Morabito Consultants following a structural analysis at Surfside identified evidence of “major structural damage” to the concrete slab below the pool deck and “abundant” cracking and crumbling of the columns, beams, and walls of the parking garage under the 13-story building. The Morabito report further indicated that many of the garage concrete repairs were failing, resulting in additional concrete cracking, spalling, and leaching of calcium carbonate deposits.¹

It is too early to identify what caused the collapse of the Champlain Towers South building, and it remains to be seen whether harsher conditions from climate change, such as flooding, saltwater intrusion, heavier rain, higher temperatures, more intense hurricanes and other environmental impacts, played a role in the building’s failure. What is clear is that the growth in incidents related to the impacts of climate change has placed new risk management demands on the construction industry.

Although these incidents have spurred many constructive responses such as substantial improvements to building codes, significant vulnerabilities remain, threatening major complications for the industry. Construction companies need to take additional steps to manage the evolving risks of both property damage and bodily injury to construction workers.

Impact of climate-related incidents on both coastal and inland developments

While fierce debate continues about global climate change, it is clear that extreme weather and climate events have become more frequent and intense in recent years and are creating powerful aftereffects in vulnerable localities. These events range from massive and severe winter storms to severe drought and more intense wildfires; rising sea levels creating land erosion and flood losses, both on the seacoasts and increasingly inland; a global rise in sea temperatures that is increasing the frequency and intensity of storms in coastal areas;² and recently, even to a state-wide power blackout.³

Additional cause for concern arises from current flood maps, which fail to consider future weather patterns and changing coastal conditions exemplified by the acceleration of daily tidal flooding in more than 25 Atlantic and Gulf Coast cities and in communities along the Great Lakes. Direct average annual flood losses quadrupled from approximately $4 billion per year in the 1980s to roughly $17 billion per year between 2010 and 2018. With 39 percent of Americans now living in coastal areas, exposure to costly flood-related damages has increased; but these same trends may also be found far from coastlines and have impacted millions of families in the Midwest and South.⁴

The potential for damage is even greater moving forward, as is illustrated by CoreLogic’s 2020 Storm Surge Report’s national analysis of risk level for single family (SFR) and multifamily (MFR) residences. As shown in Table 1, CoreLogic found there were 7,110,779 SFRs and 252,657 MFRs at risk of storm surge. The reconstruction cost value (RCV), meaning the potential cost to rebuild a building assuming complete destruction, exceeded $1.7 trillion for SFRs and $95 billion for MFRs, which have less potential to be affected by storm surge since they tend to have multiple stories.

Table 1: Potential impact from surge

Again, these figures represent the number of homes at potential risk and not the actual number affected by hurricane activity.⁵

Resulting strains on construction capacity also lead to higher claims

The growth in incidents so far, along with the vast and growing scope of potential incidents, poses additional complications for repairs. Builders who are already struggling with storm-related delays and labor shortages are increasingly being forced to enlist the help of contractors from other states, who lack detailed knowledge of local and state building ordinances. Increased construction defect claims tend to follow, as claimants look for reasons to attribute damages to defects in design, faulty construction, or improper building materials.

The resolution of claims is also being delayed by greater complexity in determining whether wind, rain, or defective construction caused the actual damage. Builders’ adherence to customary industry practices in planning, designing, and constructing projects is less likely to be deemed sufficient as a defense against negligence claims. And although “extreme” weather and climate events are, by definition, unprecedented, a trier of fact may be more likely to find that a particular weather and climate event was foreseeable and should have been accounted for in planning, designing, and constructing a project. Builders may be expected to conduct research and consider publicly available weather data, projections, and models and to consult with experts to assist them in interpreting such data.

How will claims arising out of climate issues play out in the construction industry?

The following fact pattern is an example of the “perfect storm” that can occur when a construction defect claim surfaces after a weather event, complicated by poor document management and a lengthy statute of repose. While hypothetical, it is a likely scenario.

In 2009, Joe’s Roofing performed roofing work at three of the five buildings at a high-end oceanfront condominium complex on Ocean Boulevard, Coastal State, USA. Joe’s Roofing fully subcontracted out the work. Eight years later, in 2017, an extreme storm wreaked havoc on the condo complex. In 2019, the condominium association filed a lawsuit against the developer of the complex. In turn, the developer filed suit against the general contractor, and the general contractor filed suit against every subcontractor who performed work at the project, including Joe’s Roofing.

ABC Insurance provided Joe’s Roofing with commercial general liability insurance during the years from 2006 to 2014. There are various liability and coverage issues for the insured (Joe’s) and the insurer (ABC). The roof was nearly at the end of its useful life, and water intrusion ensued from an extreme storm, yet the association is claiming that the leaks resulted from a latent construction defect and are demanding a new roof. Ten years have passed since Joe’s Roofing was on the job site, and Joe’s cannot locate their subcontract agreement, the certificate of insurance with their subcontractor, or any documentation confirming which buildings they worked on. Joe’s also cannot confirm when they completed operations at the job site.

This fact pattern can easily result in the following insurance complications:

• Difficulty in establishing an accurate allocation of time on risk. “Time on risk” is an industry term that essentially means the number of days an insurer’s policy or policies are triggered for the purposes of allocating indemnity obligations for claims with no discernable date of loss, and/or a latent defect. Because Joe’s could not locate any job records, they could not confirm when they began or finished the work. In the case against Joe’s, this resulted in six potentially exposed policies that were in effect during construction.
• No risk transfer. Joe’s cannot locate their records to identify or locate the contract for their subcontractor. Therefore, the insurer ABC is unable to tender this claim to the subcontractor as an additional insured, and Joe’s cannot tender based on contractual indemnity.
• No records to defend the work at issue. Joe’s cannot locate the job file that includes the exact scope of work. Joe’s remembers three of the five buildings but has no proof of what it did or did not work on with which to defend against the construction defect claims. Since there was another roofer on site who also worked on the project, this poses additional challenges for Joe’s.

This is a relatively simple scenario. Additional types of claims that may occur shortly after hurricane or storm surge events can arise out of “house lifting” operations and dock or seawall work. For example, contractors who perform house lifting or piling work may see an influx of claims involving damage to foundations and other components of the elevated structure.

Severe weather can also place unexpected strain on a seawall, which is a wall or embankment erected to prevent the sea from encroaching on or eroding an area of land. A prolonged period of heavy rain or the crashing of storm waves over a seawall on an area without proper drainage can trap water behind the seawall. This trapped water can create an increase in pressure on the wall. If the seawall cannot withstand the pressure, it fails. The failure of the seawall is then likely to lead to damage to adjacent homes and buildings.

Managing these climate-related risks more effectively

Given the growing risks to the construction industry posed by these climate-related factors, builders must have a risk management plan in place and prepare to engage inspectors or other experts early, before clean-up and reconstruction begins. Further, builders should explore the steps available to mitigate damages, including protecting storm-damaged structures from further damage caused by exposure to the elements. By adopting a proactive approach, builders can place themselves in a better position to minimize exposure for construction defect claims down the line.

Good construction document management is also the first line of defense, and it can greatly impact the ability to defend claims as well as help identify a liable party to transfer that risk. It is critical to maintain control of construction documents to navigate the claims process more efficiently and effectively defend your operations. Builders should explore the use of an electronic document management system that is suitable for the size of the operation, and that can be accessed from anywhere.

The use of experts is crucially important in dealing with claims arising from extreme climate events. Early retention of counsel can also help with the selection and supervision of experts, with obtaining detailed liability and damage analysis, and with recommendations leading to a more streamlined resolution process.

Without judging the underlying scientific issues, it nonetheless stands to reason that growth in climate-change-related events, and the extreme and changing weather patterns they cause, will likely result in increasingly challenging construction-related claims. Reimagining the way the construction industry prepares itself for these claims will put it in a better position to stand up to future extreme climate and weather events.

¹ townofsurfsidefl.gov/docs/default-source/default-document-library/town-clerk-documents/champlain-towers-south-public-records/email-records/email-related-2018-structural-field-survey-report.pdf
² “Climate Change Indicators: Weather and Climate,” U.S. Environmental Protection Agency, epa.gov/climate-indicators/weather-climate
³ Justin Worland, “The Texas Power Grid Failure Is a Climate Change Cautionary Tale,” Time, Feb. 18, 2021, time.com/5940491/texas-power-outage-climate/
⁴ Testimony of Michael Grimm, Assistant Administrator for Risk Management, Federal Insurance and Mitigation Administration, Federal Emergency Management Agency, US Department of Homeland Security, before the Committee on Science, Space and Technology, Subcommittee on Investigations and Oversight, Subcommittee on Environment, US House of Representatives, February 27, 2020. fema.gov/fact-sheet/michael-grimm-testimony-committee-science-space-and-technology
⁵ CoreLogic, 2020 Storm Surge Report (storm-surge-report-2020_final20200528.pdf [corelogic.com]). Please note: RCV is calculated based on construction materials, equipment and labor; it does not include the value of the land or lot.