Apartment Holdings - January 2013

 

JANUARY 2013 FEATURED STORY

Liability Insurance Coverage for Superstorm Sandy Litigation

 

By: Jared Zola and Jeffrey L. Schulman*

Homeowners, businesses, and municipalities in the tri-state area continue to rebuild and rebound from Superstorm Sandy.(1) Often, large-scale devastation and destruction are followed by lawsuits against individuals and entities allegedly responsible for protecting, managing and maintaining the damaged buildings. A handful of such lawsuits have been recently filed in New York City on behalf of residents of large residential buildings.(2) If these suits are predictive of future legal actions, individuals and entities charged with protecting and managing damaged buildings can anticipate lawsuits claiming monetary damages caused by inadequate preventative measures before Sandy, and insufficient recovery measures thereafter. Additional allegations pled in these initial suits include negligence, permitting unlawful entry into residential buildings and failing to mitigate damages.

These recent lawsuits and expected future lawsuits are reminders of the significant alleged liabilities that building owners, real estate development and management companies and volunteer condominium and cooperative board members face in Sandy’s aftermath. Even if Sandy-related lawsuits are ultimately unmeritorious, potential defendants likely will incur significant legal fees disproving their liability. For those businesses facing potential liability from negligence and breached duties claims, liability insurance may be an important asset to help offset defense costs and settlement or judgment payments. Read More.

 

 

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LEGAL STORIES OF INTEREST
New Cell

Washington, D.C., Passes New Green Building Code
Three days after joining 57 other cities in a worldwide anti-climate change association, Washington, D.C., has taken a major step in reducing its environmental footprint by releasing eco-friendly new building codes. According to a news release from Mayor Vince Gray’s office, the city's first Green Construction Code will apply to all multifamily residential buildings four stories or taller and all commercial projects larger than 10,000 square feet. The city has also proposed to adopt the 2012 International Code Council (ICC) recommendations, a group of several codes with energy-saving requirements. The city currently follows the 2006 ICC codes, but will "leap frog" over the 2009 codes to adopt the new editions. Read More.

Mountain View, Calif., City Council Passes Rental Housing Impact Fee
The Mountain View, Calif., City Council voted 4-3 to impose an impact fee of $10 per square foot on rental housing projects. The ordinance will go into effect in February for developers planning new apartment construction.  Mountain View Mayor Mike Kasperzak opposed the rental housing impact fee because he felt it was not high enough. The fee is meant to help fund affordable housing programs in the city. Read More.

Local Owners and Managers Consider Lawsuit Over City’s Disruptive Tenant Ordinance
On Nov. 13, the Harrisburg, Pa., City Council approved an ordinance that immediately revokes residential rental permits for properties where a resident receives two disruptive conduct violations within a 12-month period. Effective on Dec. 4, the ordinance has angered local owners who are considering legal action. Read More.

 

What Landlords Need to Know About the Legalization of Marijuana (Colorado Amendment 64)

By: Mark N. Tschetter*

The election results are final. Colorado and Washington became the first two states to legalize the recreational use of marijuana. Although, Amendment 64 has been widely publicized and will have some impact on the rental industry, the legal impact on property owners rights is minimal.  However, property owners should review rental criteria, lease documents and marijuana policies to ensure policies are clear.  They should also educate and train employees about the company marijuana policy to ensure effective implementation of those policies. 
 
Amendment 64, which does not go into effect until the election results are certified by the Governor, has two major components.  First, the legalization of the recreational use of marijuana.  Second, the creation of a regulated marijuana industry in Colorado regulating  marijuana like alcohol.  For example, similar to alcohol, a person has to be over age 21 to purchase marijuana and driving under the influence of marijuana is illegal.  Because the regulation of a marijuana industry has little effect on residential property owners in the short run, they are primarily affected by the use and possession component of Amendment 64.
 
Amendment 64 also legalizes the growing of no more than six marijuana plants with three or fewer being mature.  Persons who grow their own marijuana are also legally entitled to possess the marijuana produced by the plants on the premises where the plants were grown.  However, all marijuana growing must take place in an enclosed, locked space and cannot be conducted publicly.  Individuals who grow their own marijuana may not make any grown marijuana available for public sale. 
 
Given Amendment 64, can a property owner still prohibit tenants from using marijuana on leased property?  Yes.  Regardless of Colorado law, marijuana is still illegal under federal law.  Specifically, marijuana is a banned Class I controlled substance under the Controlled Substances Act (CSA).  Federal law supersedes Colorado law and enforced by the United States Department of Justice (DOJ), headed by the U.S. Attorney General.  U.S. Attorney General Eric Holder said back in 2009 that federal officials were committed to enforcing the CSA.  The U.S. Attorney for Colorado has prosecuted Coloradans for growing, selling and possessing marijuana, even if they claimed protection under the state’s medical marijuana laws.
 
However, what the federal government says, and what it does, are two different things. Specifically, even though the federal government says the CSA will be enforced, the federal government has only prosecuted the most blatant marijuana offenders, those individuals growing or selling significant quantities of marijuana.  The federal government has never enforced federal forfeiture laws against an apartment community because a tenant was smoking marijuana.  It is not clear whether the federal government’s lack of enforcement is by choice.  However, the reality is that it simply lacks the resources to enforce the CSA on a significant scale against individual tenants smoking marijuana.  Thus, the probability of a property owner being prosecuted for a tenant’s marijuana use is slim. Amendment 64 specifically repeals the right of Colorado to confiscate a a property owner’s property through drug forfeiture laws. Read More.

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Koontz v. St. Johns River Water Management District

 

By: Scot Haislip, AVP National Lease Program and Counsel

In December 2012, NAA partnered with several real estate trade associations in filing an amicus brief with the U.S. Supreme Court in the case of Koontz v. St. Johns River Water Management District. At issue is the question of when do exactions, which are required by a regulatory body as part of a land-use permitting process, become a “taking” under the Fifth Amendment to the U.S. Constitution. The outcome of the Koontz case could have important ramifications for multifamily housing property owners and developers, as they are forced to comply with additional stipulations from regulatory bodies to obtain development permits. 

In Koontz, Coy Koontz, a Florida landowner, was denied a permit to develop his commercial property because he would not agree to use his funds and labor to improve 50 acres of government-owned land miles away from his property. Exacting such exchanges are a common local government practice in the land use and development field. However, the Supreme Court has ruled that when a government requires such an extra expenditure as a condition for developing property, there must be some connection between the extra expenditure and the proposed project. If this connection is too tenuous, the government requirement violates the essential nexus and rough proportionality tests set out in Nollan v. California Coastal Commission (1987) and Dolan v. City of Tigard (1994).

If a court determines that a government condition does not have an essential connection to the permit sought by the landowner, then the exaction is a taking under the Fifth Amendment for which just compensation must be paid. Koontz never agreed to the government’s conditions, thus he was denied his permit. He then filed suit claiming the denial of the permit was a taking itself. He won at the trial and appellate levels but the Florida Supreme Court ruled in favor of the government agency, holding that U.S. Supreme Court precedent applied only to land and not to personal property (i.e. Koontz’s money and labor).

In the Koontz case, the Supreme Court will consider whether the off-site wetlands mitigation demanded by the water district was proportionate to the impacts of Koontz’s proposed commercial project –or whether the government’s demands were “closer to an unconstitutional form of extortion.” The court’s decision, expected in summer 2013, will have a significant effect on the land-use approval process whenever zoning and environmental regulators seek concessions from developers.

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Informz for iMIS

 

Liability Insurance Coverage for Superstorm Sandy Litigation Continued.

I. CGL Coverage for Defense and Indemnification of Businesses and Municipalities

Businesses and boards facing even completely groundless allegations made in suits seeking damages for acts or inaction relating to Sandy should look for protection to their liability insurance policies. Businesses frequently purchase Comprehensive General Liability (“CGL”) policies, which often are referred to as “litigation insurance.”  CGL policies cover businesses for the costs incurred defending and reasonably resolving suits seeking to hold them liable for alleged bodily injuries or property damage.

The insurer’s “duty to defend” policyholders under CGL policies is a valuable aspect of the coverage. A CGL policy’s insuring agreement typically provides that the insurer “will have the right and duty to defend any ‘suit’ seeking damages [covered by the indemnity provisions of the policy].”  A court determines the duty to defend by comparing the allegations of the underlying complaint with the terms of the policy; a duty to defend arises if the underlying complaint alleges facts within, or potentially within, policy coverage. The duty extends to groundless, false or fraudulent allegations in the underlying action, provided those allegations, if later proven true, would fall within coverage. For the purposes of a duty to defend analysis, any doubt about the underlying allegations being covered is resolved in favor of the policyholder. Consistent with this principle, in most jurisdictions, the insurer has a duty to defend the entire underlying action provided that any allegation in the underlying action falls within coverage.

Insurers often argue that the damages sought in the underlying action are for non-covered economic loss as opposed to the requisite “bodily injury” or “property damage.”  However, no exclusion exists in CGL policies for economic loss. The only question is whether the damages sought are “because of” bodily injury or property damage. Whether damages are “because of” bodily injury or property damage is a question of causation, traditionally a question of fact, which should be resolved by the jury or the finder of fact at trial. Moreover, courts have held that economic losses that flow from bodily injury or property damage can be covered under a standard form CGL policy. Accordingly, businesses with CGL coverage should demand and expect, at the very least, to be afforded a full and complete defense of lawsuits alleging a negligent failure to prudently act in preparation for and/or following Sandy.

Whether an insurer has a duty to indemnify its policyholder depends on whether the policyholder is legally obligated to pay damages because of bodily injury or property damage to which the insurance applies. A coverage action should not require the policyholder to conclusively establish its own liability in the interests of promoting settlement. Rather, the proper inquiry is whether the claims were not even potentially covered by the insurance policy. Thus, when a policyholder settles a potential liability in anticipation of covered claims, the burden is often placed on the insured to prove coverage of the settlement in the first place but then on the insurer to prove the existence of exclusions barring coverage. Accordingly, coverage should exist so long as a policyholder settles in reasonable anticipation of insured exposures and the insurer cannot show a readily apparent or objectively reasonable basis for attributing any portion of the settlement to uncovered claims.

Disputes often arise under CGL policy language barring coverage for injury or damage that is expected or intended from the policyholder’s standpoint. Insurers frequently argue that this language excludes any harm that was reasonably foreseeable to the policyholder—a standard that, if applied literally, would eviscerate almost all coverage because most of the tort liability theories under which a policyholder could be held liable require a showing that the harm was reasonably foreseeable. Most jurisdictions instead apply a subjective test that bars coverage only if the policyholder actually intended the harm or knew that it was substantially certain to take place.

II. D&O Coverage for the Defense and Indemnification of Condominium and Cooperative Board Members

Management companies, board members and officers or directors allegedly responsible for disaster preparation or building security may be named as individual defendants in Sandy-related liability suits. The individuals and the corporate entities responsible for indemnifying these individuals may call on their Directors and Officers (“D&O”) policy for coverage. D&O policies are often purchased to protect an entity’s directors and officers, as well as the entity itself in some situations, from alleged wrongful conduct.

D&O policies typically contain several coverage grants. Under Side A coverage, the insurer agrees to indemnify the individual directors and officers for all “Loss” that those individuals become legally obligated to pay arising out of a “Wrongful Act” committed in their capacity as a director or officer. However, Side A coverage only responds where the policy provides insurance to pay the directors’ and officers’ personal liabilities for which the corporation either cannot or will not provide indemnification. Side B coverage reimburses the corporation for all payments for which the company is required to indemnify, or has legally indemnified, the directors or officers for “Loss” resulting from a claim alleging a Wrongful Act. The scope of coverage a D&O policy affords may be dependent on the definition of, and case law of the applicable jurisdiction construing, the terms “Loss,” “Claim,” “Wrongful Act” and “Capacity.” 

D&O insurance generally does not impose a duty to defend on the insurer. Rather, D&O insurers generally have a duty to pay defense costs incurred in defending claims. This feature of D&O coverage provides policyholders with substantial control over the defense of claims and generally allows them to choose their own defense counsel and handle their own settlement negotiations. However, even though policyholders and their defense counsel may be able to control many aspects of the defense, D&O policies typically mandate that policyholders obtain the insurers’ consent before incurring any defense costs or settling any claims. As with the duty to defend under a CGL policy, the D&O insurer’s duty to pay defense costs generally should extend to all claims that are potentially covered under the policy.

III. E&O Coverage for the Defense and Indemnification of Management Companies and Condominium and Cooperative Boards

Building tenants may allege that management companies’ and condominium/cooperative boards’ acts, errors or omissions leading up to and after Sandy constituted a failure to provide professional services such as disaster preparation or building security. These entities may call on their Errors & Omissions (“E&O”) policy for coverage. E&O policies are often purchased to insure against liability arising out of an act, error, or omission of the named insured in rendering or failing to render services.

Professional Liability Insurance is a form of E&O insurance designed to protect the professional activities of those who possess specialized knowledge and skills through special education and experience in a particular field. The professionals that typically fall within this category are accountants, architects, attorneys, engineers, physicians, and veterinarians. This type of insurance often is referred to as malpractice insurance. However, E&O policies are not limited to those specialized professions. They can apply to “nonprofessionals” who require coverage for their wrongful acts that cause harm to others. Building managers and board members are examples of individuals in less-specialized fields who may purchase E&O insurance.

E&O insurers frequently agree to pay on the insured’s behalf:  “Damages and Claims Expenses which the Insured Shall become legally obligated to pay because of any Claim or Claims first made against the Insured . . . and reported to the Underwriters during the Period of Insurance or Extended Reporting Period arising out of any act, error or omission of the Insured in rendering or failing to render Professional Services.”  E&O coverage is sold on a claims-made basis. The Claim must be made against the insured and reported to the insurance company during the policy period. An issue of frequent dispute is whether and when certain allegations or demands constitute a Claim.(3)  Some policies define what constitutes a Claim, but others do not.

It is also critical to check the E&O policy’s Professional Services definition. This definition often will be found in an endorsement tailored to the policyholder’s specific business. The policyholder must be careful to make sure that the definition is sufficient to cover the conduct that could give rise to a claim. Another issue of frequent dispute is whether the conduct “arises out of” acts of rendering or failing to render Professional Services.

IV. Conclusion

CGL, D&O and E&O coverages are valuable assets that are available to fund the defense and settlement of Sandy-related lawsuits alleging a failure to promptly and sufficiently act prior to and following the storm. However, a policyholder must act in a timely fashion when seeking coverage under any insurance policy. Doing so prevents an insurer from denying the claim as untimely. Individuals and entities facing these potential liabilities as a result of Sandy should consult with experienced policyholder counsel, who can help navigate the coverage issues discussed above, as well as others, and then determine if insurance assets can help defray the losses.

*Jared Zola is a New York-based partner and deputy practice leader in Dickstein Shapiro’s Insurance Coverage Practice. Zola is also the national co-leader of the firm’s Environmental and Production Liabilities Insurance Initiative. His practice focuses on representing corporate policyholders in insurance coverage litigation, as well as negotiating settlements with prominent property and casualty insurers.

*Jeffrey L. Schulman is a New York-based partner in Dickstein Shapiro’s Insurance Coverage Practice. Schulman is also the national co-leader of the firm’s Transactional and Private Equity Insurance Initiative and the Construction Defect Insurance Initiative. His practice focuses on representing policyholders in disputes with their insurers.

(1) We are referencing the storm that recently devastated the Northeast by its popular description. However, the popular description ought not confuse questions of coverage including causation, application of deductibles or sub-limits, or even whether more than one storm was involved. Specific losses occurring as a result of the storm may have been caused by a number of different perils.
(2) See Stark, as Member of Greenwich Club Residences v. Greenwich Club Residences Bd. of Directors and Cooper Square Realty, Inc., Index No. 158110/2012; Cashwell v. 2 Gold, LLC, 201 Pearl, LLC, TF Cornerstone, Inc. et al., Index No. 158155/2012.
(3) Compare Minuteman Int’l, Inc. v. Great Am. Ins. Co., No. 03 C 6067, 2004 WL 603482, at *7 (N.D. Ill. Mar. 22, 2004) (SEC order and subpoenas constituted “claim”), with St. Paul Mercury Ins. Co. v. Foster, 268 F. Supp. 2d 1035, 1047-48 (C.D. Ill. 2003) (attorney’s letter requesting information and documents pursuant to ERISA was not a “claim”).

 

 

What Landlords Need to Know About the Legalization of Marijuana (Colorado Amendment 64) Continued.

Similar to federal law, Amendment 64 recognizes the right of a property owner to restrict marijuana use on leased property, specifically stating that nothing shall prohibit any person who owns or controls a property from prohibiting or otherwise regulating the possession, consumption, use or growing of marijuana on that property.  Thus, a tenant’s right to legally possess, use and grow marijuana under Amendment 64 doesn’t grant the tenant the right to possess, use or grow marijuana on your property if you decide to prohibit it.
 
Additionally, Amendment 64 doesn’t give a property owner’s employees or management company’s employees the right to use marijuana if the employer decides to prohibit or restrict such use.  Amendment 64 specifically states that nothing in the law is intended to require an employer to permit or accommodate the use of marijuana in the workplace or to affect the ability of employers to have policies restricting the use of marijuana by employees.  Accordingly, property owners may still require drug testing as a condition of employment.
 
Most property owners who currently prohibit the use of marijuana will not need to change any lease documents.  They primarily prohibit the use of marijuana through Crime and Drug Free Lease Addendums and clauses.  These addendums typically define crime or drug-related crime by referring to state or federal law.  For example, drug-related criminal activity means the manufacture, sale, distribution, use or possession of a controlled substance, as defined by law.  If your crime and drug-free addendum refers to federal law, you do not need to make any changes.  If your crime and drug-free addendum refers to Colorado law, your addendum will need to be modified to refer to federal law taking into account the forms of marijuana use and possession are no longer considered criminal acts under Colorado law.
 
Under Colorado law, a property owner has the right to terminate a tenant’s right to possession for non-monetary lease violations if the right to terminate is set forth in the lease.  Despite the law, some judges are reluctant to kick a tenant out of their home for some non-monetary lease violations if the tenant has not been given an opportunity to cure.  For example, many leases contain the right to terminate for unauthorized pets with no opportunity to cure.  Over time, courts have become more and more reluctant to enforce pet violation termination clauses without giving the tenant an opportunity to get rid of the non-complying pet.  Currently, marijuana use is a termination issue, meaning upon violation the tenant is not given an opportunity to cure.  Given the conflict between federal and Colorado law, and if marijuana becomes more widely used and accepted in Colorado society because of Amendment 64, use of marijuana, even on a prohibited property, could become an issue of compliance rather than termination. 
 
As a practical matter, marijuana termination cases will become more difficult to prove.  Currently, a strong marijuana termination case consists of a violation and a police report or an arrest.  Because marijuana use is now legal, police won’t be making any arrests, issuing any reports or testifying in the majority of cases.  This new law has also eliminated the leverage of property owners against tenants who were growing marijuana.  Before Amendment 64 a property manager could often get rid of a marijuana-growing tenant by threatening police intervention.  If you allow marijuana use, your lease documents should clearly state that use does not including growing marijuana.  Allowing tenants to grow marijuana can result in significant problems, including mold.  If you are going to allow marijuana use, your lease documents should clearly state that a tenant’s marijuana use will not be allowed to disturb other residents.  For example, tenant’s marijuana use shall not disturb the rights, comforts, and quiet enjoyment of other tenants. 
 
You should consider publishing the community’s marijuana policies to prospective tenants as part of your rental criteria if the community does not allow marijuana use.  Your policy could state that under Colorado law, some marijuana use is legal but that under Colorado law the property owner has elected to prohibit marijuana use on the property, and that violation will result in eviction.  By addressing the marijuana issue up front, applicants and tenants will be clear on your policies resulting in fewer tenant confrontations down the road.
 
Amendment 64 did not change Colorado’s medical marijuana laws.  However, because recreational use is now legal, Amendment 64 will expand the universe of persons who will openly admit to using marijuana thus likely increasing the number of tenants who claim to be using marijuana for disability related needs.  Accordingly, you should anticipate a significant increase of marijuana related reasonable accommodation requests.  Similar to medical marijuana related disability reasonable accommodation requests, your onsite teams should be informed about company policy and properly trained on how to handle such requests.
 
Property owners can adopt three policies with regard to medical or recreational use of marijuana.  One, prohibit the use of marijuana, even if the tenant makes a request for reasonable accommodations under fair housing laws, based on marijuana being a felony under the CSA.  Two, deny recreational use of marijuana, based on the CSA but engage in an ongoing dialogue and evaluation if anyone makes a disability request to use marijuana as a reasonable accommodation under fair housing laws.  Three, allow the use of marijuana but prohibit marijuana growing.
 
Property owners should adopt both a medical marijuana policy and a recreational marijuana policy.  For example, you could prohibit the use of recreational marijuana (Policy 1), but allow the use of medical marijuana as a reasonable accommodation (Policy 2).  A property owner’s medical marijuana and recreational marijuana policies don’t necessarily need to match but matching policies will cause less confusion with onsite management.   If your property or tenants receive federal subsidies and are subject to federal regulations banning the use of marijuana you should adopt a prohibition policy to avoid being in violation of federal regulations and potentially losing subsidies. 
 
While the establishment and the regulation of a marijuana industry has little legal effect on Colorado property owners in the short term, the practical effect over time may be more significant.  While there are no precise statistics, studies show that 12 to 14 percent of the population regularly uses marijuana.  Nearly, 55 percent of Coloradoans voted to legalize marijuana, including the establishment of marijuana retail stores.  Whether marijuana retail stores become a reality remains uncertain given the conflict between federal and Colorado law.  However, if marijuana retail stores become a reality in 2014, marijuana use may or could become widely accepted in Colorado society.  Thus, similar to smokers (20 percent of the population), marijuana users could constitute a significant percentage of the rental population.  Thus, in the long term Amendment 64 may result in property owners having to decide whether they want to forego renting to a significant percentage of potential tenants.

* Mark N. Tschetter is the Senior Managing Partner of Tschetter Hamrick in Sulzer, Colorado.  For a complete discussion of medical marijuana policies, see the February 2010 and May 2011 issues of Landlord News, available to clients at our website.

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