Multi-Family Residential Developments

Developer Hines sues insurance companies in dispute over condemned apartments

These luxury apartments in Disney's Celebration community were condemned by Oscoela County building inspectors a year after they were finished.

Texas-based developer Hines, which is being sued over the alleged shoddy construction of an apartment complex in Disney's Celebration community, has now sued its subcontractors and insurers for denying claims related to the ill-fated project.

Hines was the original developer and general contractor, through its subsidiary Urban Oaks Builders, for the 306-unit complex that was completed in 2016. It sold the asset later that year to Southstar Capital Group for $67 million, and within months Osceola County condemned all buildings in the community and forced tenants to evacuate.


Southstar filed suit in February, accusing the company and its affiliates of knowingly withholding, concealing and misrepresenting defective conditions at the apartment complex.

The counter suit, filed June 6, details the three insurance policies Hines carried for construction of the apartment complex, and claims that all three insurers have denied claims related to the project and refused to pay for the company's legal defense in the Southstar suit.


In the complaint, Hines attorney Mark Boyle wrote that Southstar has estimated the cost of repairs and damages at $45 million -- a figure that is escalating every month by $451,000 due to the lost rent claim alone.

The forced evacuation of the property by Osceola County, the staggering amount of damages, as well as Hines' reputation as a leading global developer, make the case exceptional and has local multifamily developers paying attention.

"I was so flabbergasted when I read about it because Hines is such a good company," Investors Realty CEO John Marling told GrowthSpotter.

Hines and Urban Oaks required all subcontractors to enter into a controlled insurance plan (CIP), which is standard in the industry for projects of this size, according to the complaint.

"The purpose of the CIP was to drive costs down as to defense obligations and streamline indemnity and risk transfer as to the Project," Boyle wrote in the complaint.

The CIP consisted of a $4 million general liability policy from Gemini Insurance Co. and excess policies for $10 million and $25 million, respectively. The excess policies only become effective when the Gemini policy coverage is exhausted.

At one point, the policy covered eight different Hines multifamily projects in four states.

Michael Gibbons, a shareholder with Lowndes, Drosdick, Doster, Kantor & Reed, P.A., said it's highly unusual for an insurance company to refuse to pay for a client's defense, especially because Florida law favors the policy holder.


"It does surprise me because the duty to defend is so broad," he said. "The action of denying a defense is a very aggressive coverage position and will expose the insurer to litigation and potential for damages."

He said that because Southstar accused Hines and Urban Oaks of fraudulent nondisclosure of the construction defects, those claims would not be covered by insurance.

"Fraud is not covered by general obligation insurance -- those are intentional torts," he said. "The insurance company has a duty to defend, but not to indemnify."

Allegations of negligence and violations of Florida building code, however, would typically be covered under a CIP. Gibbons said the fact that Southstar hired a public relations firm to publicize the lawsuit indicates the company was looking to shame Hines into settling.

"Part of this is a full-court press on Hines' carefully manicured business reputation," Gibbons said.

Billy Wilson, vice president of HUB International, said key to the case is knowing why Gemini is denying the claim. Those questions will be answered when Gemini files its answer to the complaint.


Wilson noted that the policy has exclusions that deny coverage -- or legal defense -- for projects that utilize certain types of synthetic stucco. Those type of exclusions are called endorsements.

It also has an endorsement that eliminates the liability coverage for anyone other than the general contractor, Urban Oaks, once the work has been completed. That means the owner, lessee and subcontractor were only covered by the policy while the apartments were being constructed.

"This is an endorsement Hines may not have understood when they bought the policy," Gibbons said. "The whole reason you buy liability insurance is to have coverage after the work is completed. For that to be an exclusion, I have to believe it fell through the cracks."

But it could also explain why the insurance premium for the Celebration apartments was only $96,658 for a project with estimated construction costs of nearly $30 million, he said.

Hines has been in business for 60 years and developed more than 13,000 multifamily units across 39 communities. Known primarily as a developer of office towers, the company operates in 24 countries and claims assets of more than $111 billion.

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