Anatomy of a Defect Claim

A side-by-side comparison of the Millennium Tower and typical defect claims

December 13, 2021 Photo

Construction-defect claims can range from the mundane to the outlandish. It doesn’t matter whether the focus of a defect claim is a skyscraper, commercial building, or single-family home, the cases really are not that much different at their core in getting to the root cause of the defect.

There is no doubt that, in terms of monetary exposure, there most definitely is a difference between a claim for a few thousand dollars versus $100 million in damages. However, in terms of how you break down these claims and determine causation and damage, the differences are more nuanced. 

Consider CLM’s Claims College, for example, where an entire school is dedicated to construction claims. The breadth of information shared with students within their first three hours alone at Level 1 is focused on understanding construction defects from the ground-up. The course is a pseudo speed round on construction methods and resulting defects, while examples of construction done right and done wrong are presented. In many ways, the “done wrong” examples define the existence of construction defects in our industry.

Born from these discussions, this article explores the anatomy of a construction defect, using a highly publicized construction-defect case as an example: the Millennium Tower in San Francisco, California, which has had a recent return to the spotlight due to less-than-ideal circumstances. 

The Leaning Tower of San Francisco

Plenty of stories have been written about the Millennium Tower since the building was found to be sinking downward and tilting outward in 2015, only six years after the building opened to residents. The 58-story, 645-foot-tall building, which is the tallest residential tower in San Francisco, was thrown into the national spotlight when the public was alerted in 2016.

There were immediate parallels to another historic leaning tower located halfway around the world. Evaluations at that time determined the building had sunk 16 inches with an outward tilt of six inches at the top of the tower. Two years later, it was determined the building had sunk an additional two inches with the outward tilting increasing to 14 inches.

Allegations of adjacent construction activities, deficient design, and improper construction were presented to all those involved with the building’s design, construction, maintenance, and more. Anyone involved with the building was brought into the mix of claims and litigation. Forensic architects, engineers, and scientists surveyed, inspected, and analyzed the building, confirming the existence of the tower’s displacement and the identification of multiple suspected design and construction deficiencies. Forensic analyses and studies were completed, resulting in recommendations to stabilize and repair the leaning building. 

Fast forward a couple of years, with the settlement of claims completed and the repairs nearly complete, the story was over. The leaning tower of San Francisco was a story of the past, right? Not so fast.

The Fix Failed

In September 2021, well over halfway through the repairs to the tower’s foundation, which included the installation of deep piles fortifying the existing foundation, monitoring determined the building was once again on the move. This time the building was sinking and tilting at a faster rate than before, having dropped one inch over a period of approximately nine months while repairs were underway. Although only an inch, the additional foundation settlement translated to an additional five-inch tilt at the top of the tower.

To many, the discovery was met with confusion and caution, which was understandable given the extensive previous investigation and the recent event of a condominium collapse earlier in the year in Surfside, Florida. 

After being under the watchful eye of some of the world’s top experts and engineers, through thousands of hours of analyses, how could the same issues that were first identified in 2015 be repeating themselves this far along into the repair process? What are all the experts, engineers, claims, and litigation professionals to do now?

The answer is really the same whether considering defects associated with the Millennium Tower or for any other arbitrary construction-defect case: Start from scratch. Once again, all those involved need to determine what is happening, where it is happening, why it is happening, and how to repair it.

The Anatomy of a Defect Case

Although details of the most recently discovered sinking and tilting of the Millennium Tower have yet to be released, the evaluation into the recent allegations will largely be carried out in the same order as what was done previously: Evaluate the allegations and attempt to determine what actually happened. The typical methodology for any construction-defect case generally remains the same, whether evaluating a sinking skyscraper or a settling single-family home.  
To simplify for our discussion, defect cases are conducted similarly in terms of methodology each time:

  1. Define the allegations.
  2. Analyze the merit of the allegations.
  3. Determine the cause and extent of alleged defects.
  4. Determine who is responsible.
  5. Develop a repair protocol.

For discussion purposes we’ll loosely use the Millennium Tower as the exemplar, even though your average single-family home or commercial building could easily be replaced in this example. As can be seen, there are numerous parallels within the anatomy of any defect claim, large or small.

Define the Allegations. Allegations of construction defects are required for any case to get going. Whether filing an insurance claim or entering litigation, one party must alert another party of alleged damage or improper construction to initiate the process. As an industry, we acknowledge that a construction defect exists when a component experiences a failure as a result of improper design, deficient construction, the use of improper or substandard materials, and/or incorrect means and methods of installation, such that the end result is that the building does not perform in accordance with a client/buyer’s reasonable expectation.

The concept is simple, really, and with the Millennium Tower case, the initial allegations were known shortly after construction was completed: The building was sinking and tilting.

Do the Allegations Have Merit? It is the claims team’s job to determine if the allegations have merit in any case. Each member of the claims team has his or her own role to play in the determination of merit. To be clear, an in-depth discussion of the roles and responsibilities of each member of the claims team is far more complex and detailed than presented herein. However, the examples below are presented to highlight commonalities that exist with defect claims.

The tip of the spear in any construction-defect claim against a construction or design professional starts with the claims professional. First, the claims professional has to review existing policies and determine if there is potential exposure, answering questions such as, “Was my insured involved with the construction of the building?” and, “Is there coverage for the alleged loss within the policy?”

When potential exposure is determined, claims professionals will often retain legal counsel and/or forensic experts to assist in the evaluation of the claim. Forensic experts must evaluate the technical aspects of the allegations to determine if such conditions exist and whether the alleged problems are the result of any improper work performed by the insured.

Questions that forensic experts likely investigated at the Millennium Tower project include: Are the measurements that indicated that the building is leaning and tilting accurate? Did the insured’s work cause or exacerbate the conditions? And, ultimately, what is the appropriate repair to remediate these problems?

Concurrently, litigators work to evaluate the legal questions involved with such claims, including answering questions such as: What are the contractual rights and obligations of the insured? And, has the statute of limitations passed? This phase of an investigation is akin to the initial investigation and evaluation phase and ties in directly to the following phase.

The Cause and Extent of Alleged Defects. We have confirmed the allegations of damage: The building is leaning and tilting. Now, the forensic experts go to work, determining the extent of the alleged problems. This is generally done through in-depth analysis of the original design of a building, as well as performing additional independent investigations.

Such investigations often include performing additional analyses to determine the validity of the assumptions the original design was based on and evaluating the actual construction of the building. This work is primarily the responsibility of the forensic engineers, architects, and scientists. However, claims professionals and legal counsel also have a vital role: It is necessary for them to continue to evaluate coverage and legal issues to protect the interests of the insured.

Allocation of Responsibility. The question of who is responsible for a defect or a construction failure can be much more complex given that construction and design defects are not always black and white. This concept is truly all about allocation of damages. A full agreement across experts is rare, as allocation of responsibility often is filled with shades of gray. Fingers are pointed in many directions, including at the original designers, developers, and contractors; and at other parties such as those completing adjacent construction, and local governmental agencies and entities.

In any claim, the list of allegations and potential responsible parties is fluid and ever-changing, and in the case of the Millennium Tower, this rang true after the initial movement was discovered, and also after the most recent identification of additional movement. At the onset of a claim, if allocation of responsibility for a defect was a multiple-choice question, the answer of, “Who’s responsible for the defect?” would be, “D. All of the above.” Everyone is involved until it is proven they should not be.

Repairs of a Defect

Ultimately, the resolution of any construction-defect claim is based on the estimated costs to perform the required repairs. Are repairs to correct construction defects to a sinking skyscraper and a settling single-family home much different? No. The originally proposed Millennium Tower repair, which included installation of 52 deep piles embedded into the bedrock below the bay mud and sand that the existing foundation was bedded on, was considered the appropriate repair by the forensic experts and engineers. Consider when single-family homes are constructed on deficient foundation systems—say, a shallow foundation rather than a deep foundation—what is the repair? Very similar to the repair that was being performed at the Millennium Tower, the answer is often to fortify the existing foundation systems. Just like the Millennium Tower, repairs often aren’t as successful as hoped or anticipated. However, the monetary and media exposure is widely different. 

The Same, but Different

When you step back and look at your next construction-defect case, will you find yourself evaluating the case similarly to the one you completed the day, week, or month before? You’ll likely find that your approach is very similar.
The anatomy of a defect is generally the same. The claims professionals and attorneys must evaluate the same questions that were evaluated the first time, whether the claim is brand new or an old claim came back to life. Similarly, forensic experts will follow the same pattern, following the principles of the scientific method to determine what happened, why it happened, and how to fix the problem—and hopefully with a successful outcome the second time around.

About The Authors
Multiple Contributors
Terence Kadlec

Terence Kadlec, P.E., is vice president, engineering & specialty services, at MC Consultants.

Andy Guerra

Andy Guerra is a senior structural engineer at Envista Forensics.

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