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Are You at Risk for a Multi-Million Dollar ADA or FHA Lawsuit?
Published: July 15, 2008
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By Joseph Galanti, CFA, CFE, and Alexander Rey, Ernst & Young LLP
The Americans with Disabilities Act (ADA) and Fair Housing Act (FHA) still equate to significant financial and regulatory exposures for owner/operators of multi-housing units. Recently, compliance has become more important than ever. Unfortunately, these laws also remain as confusing as ever. The recent uptick in ADA/FHA lawsuits has been precipitated by management missteps and lack of clarity about accessibility standards. But clarity is critical, for the cost of redesign and retrofitting can easily reach into the millions, with legal fees, training costs and potential fines and economic damages.
Given the financial risks associated with non-compliance, property owners who fail to conduct timely assessments of compliance across their organizations may face significant unexpected future costs, operational uncertainties and reduced valuations. But few can afford to retain full-time risk management personnel who focus on these risks across an entire portfolio.
Multi-housing property owners, investors and managers can protect and increase the value of their businesses by proactively assessing ADA and FHA risks, formulating plans to address those risks and reducing uncertainties. This article briefly recaps the fundamental regulatory liabilities facing owner/operators, sketching a model for a preemptive strategy that seeks to assess facilities, improve access and monitor ongoing compliance. By undertaking such risk management strategies, companies can avoid the painful consequences of agency action—including financial losses.
Accessibility: The Landscape of Liability
FHA and ADA access requirements apply to all properties built for first occupancy after 1991 and 1992, respectively. FHA requirements apply to properties with four or more units and, if the building does not have an elevator, cover only ground-floor units. Requirements include accessible routes, such as wheelchair ramps, entrances, doors, kitchens and bathrooms, and even the proper positioning of switches, outlets and temperature controls.
Since ADA was passed in 1990, disability rights groups and the government have focused on retail, entertainment and hospitality businesses. More recently, the combined power of ADA and the 1968 U.S. Fair Housing Act (FHA), have been used to ensure that residential communities are fully accessible. Some of the largest apartment developers and owners have recently faced lawsuits. In one, Equity Residential Properties Trust was charged with violations in more than 300 apartment complexes totaling more than 80,000 apartment units. In another, AvalonBay Communities was accused of violations in more than 100 apartment complexes totaling 24,000 units. In 2005, Archstone-Smith settled with disability rights groups by agreeing to retrofit 71 properties.
ADA requirements are outlined in the ADA Accessibility Guidelines for Buildings and Facilities, but stricter local government guidelines apply in certain cases. Title III, which deals with “public-use” accommodations and commercial facilities, applies to accessibility in any areas open to the general public. In apartment communities, these include leasing offices, laundry rooms, swimming pools, basketball or tennis courts, parking lots and more.
For properties built and occupied prior to first occupancy dates, ADA/FHA requirements are less stringent. FHA requires that housing providers make “reasonable accommodations and reasonable modifications” when requested by disabled residents—a vague requirement to be considered on a case-by-case basis. In contrast, ADA puts the onus squarely on the owner to remove physical barriers when “readily achievable,” which could be thought easily accomplished without much difficulty or expense. For large, profitable businesses, however, this standard can be much stricter than for small, start-up businesses.
Compliance Enforcement: Steps to Mitigate ADA/FHA Risks
Litigation is an increasingly frequent recourse of both agencies and private parties to enforce ADA and FHA compliance. Property owners should act quickly to mitigate risk and to minimize out-of-pocket costs. Since many do not employ in-house ADA/FHA experts, one approach is to engage an in-house project manager and subject-matter specialists in access evaluation, design and compliance.
For organizations with multiple properties, this team would investigate compliance at all properties, as well as in unique unit types. Their program should include four critical steps:
1. Assessing possible non-compliance within their properties and organizations;
2. Quantifying estimated non-compliance exposure;
3. Mitigating remediation costs through insurance, other claims and negotiations or settlements with key stakeholder groups; and
4. Monitoring through training and compliance programs.
ADA consultants and legal counsel can help estimate potential exposure and determine whether insurance will cover it. Depending on the violations alleged, the age of the buildings and unit types, and numerous other factors, a multi-housing company may quantify potential exposure by analyzing a statistically significant sample of properties and extrapolating to estimate the total impact of penalties, damages, retrofitting and other costs.
Non-Compliance Risk Management: Insurance
The multi-housing property owner can also explore different insurance coverages to address and transfer certain risks. These coverages could include:
1. Employment practices liability insurance (EPLI) – With certain endorsements, typically covers some defense and liability costs associated with allegations of discrimination, generally attorney fees, expert/consulting fees, civil settlements, and costs for training, redesign and drafting of property alteration agreements. It typically does not cover property remediation (construction) costs.
2. Professional liability (PL) practice – Covers contractors, architects, designers, engineers and other parties, related to the actual design and construction of properties in question. Since owners may have legitimate legal claims against designers and builders for their ADA/FHA liability, coverage should be investigated directly with those parties prior to taking any potentially unnecessary legal action against them.
3. Project-specific professional liability (PSPL) – Covers professional parties involved in design and construction, such as contractors, architects, designers, engineers and others. Generally purchased for projects where the developer or owner requires coverage in excess of limits set by third parties’ professional liability practice policies.
4. Owner’s protective professional indemnity (OPPI) – Project-specific and written as excess coverage for professional liability practice, typically covers the property owner directly in cases where the hired professionals’ coverage limits have been exhausted. A general condition is that OPPI not be disclosed to third-party professionals, lest it impact their professionalism.
5. Directors and officers (D&O) liability – Can cover financial damages and attorneys’ fees resulting for individual directors and officers named in a discrimination complaint. Usually does not cover the corporation, or fines or penalties imposed on officers and directors.
6. Commercial general liability (CGL) – Usually excludes ADA- or FHA-related claims. All CGL policies are unique, however; some may cover certain ADA/FHA issues.
Notwithstanding this apparent abundance of alternatives, the majority of liability—the cost of property alterations—is largely uninsurable. These costs can be significant for organizations with large property portfolios, so having reliable estimates before dealing with external stakeholders, such as disability rights groups, government agencies and shareholders, is vital.
While a property owner may be able to recover ADA/FHA litigation or settlement costs under an EPLI policy, it could still face significant costs to remediate properties covered in the settlement. An owner may seek to recover costs from its architect, developer, contractors and other responsible parties, but many large property owners have strong relationships, ongoing projects or future projects planned with such constituents and cannot risk upsetting those relationships. Capturing remediation-related costs can be complex and recovery difficult, requiring experienced legal and financial counsel.
Monitoring and Compliance Programs
For large property owners seeking to minimize risk across a portfolio, self-monitoring is the best solution. Even compliant organizations benefit from preventive risk management across the portfolio. Settlements or court judgments in ADA/FHA cases often mandate a compliance program to prevent recurring problems. In many cases, the issue is not “if” a payment is appropriate, but rather “how much” it should be.
Owners developing new “first occupancy” properties can mitigate risk by obtaining representations and warranties from contractors and design professionals. Buyers can mitigate risk by engaging consultants to assess accessibility compliance prior to acquisition, or by securing indemnification in the purchase and sale agreement.
Joseph Galanti (pictured) is a Principal in Ernst & Young LLP’s Fraud Investigation and Dispute Services (FIDS) practice in Miami. He provides services related to in complex insurance claims and disputes, and regularly assists policyholders and their counsel with first party property, third-party and specialty claims, including the following: property damage, business interruption, service interruption, extra expense, employee theft, environmental, employment practices liability, and commercial general liability.
Alexander Rey is a Manager in Ernst & Young LLP’s FIDS practice in Atlanta. A former hospitality executive, Rey provides dispute services and has helped numerous property owners and their counsel with financial and economic damages claims.
(The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP.)
