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This quote comes from Deane Gardenhome Assn. v. Dentkas, a 1993 California case: “All too often attorney fees become the tail that wags the dog in litigation.”

It may also be said that attorney fees may be the tail that wags the dog in rising insurance costs. Natural catastrophic events are not the only causes of increased insurance costs.

The American Property Casualty Insurance Association and Reinsurance Association of American reported in their joint study of the origins and causes of increasing instability in the insurance markets that the “crisis in property insurance markets today frequently have little to do with Mother Nature.

Instead, man-made crises in the form of legal system abuse, claims fraud, and regulatory interference are the root causes of most market instability … [L]itigious environments combine with rampant lawsuit inflation … create a windfall for bad actors.”

The Insurance Information Institute (also known as Triple-I) has also expressed their growing concern with “legal system abuse,” which they define as “policyholder or plaintiff attorney practices which increase costs and time to settle insurance claims.

While litigation is considered a policyholder’s last resort, legal system abuse exploits litigation when a disputed claim could have been resolved without judicial intervention. Legal system abuse contributes to higher costs for insurance operations and policyholder pricing.”

Gov. Josh Green’s recent that alleges to help Hawaii’s condominium associations and their owners access additional insurance coverages and cope with increased costs, is only a Band-Aid sheathing the underlying problems and fails to address the causes which catalyzed increases in insurance costs.

These underlying problems were addressed in a 2016 letter entitled, “Portending the Next Crisis/Bailout – Condo Associations,” that I wrote to the State’s Real Estate Commission, DCCA, RICO, legislators, media, various condominium coalitions, and the Honolulu Board of Realtors, that focused on systemic problems that needed to be resolved to reduce risks and increase protection for condo owners.

These resolutions would then have the additional and consequential effect of enabling insurance and lending industries to provide affordable products. In the mental backdrop of that letter were news of unwieldy assessments at Kahala Tower, Pearlridge Gardens and Tower, and other condos, the financial distress of those owners, and the citizens of the city of Aspen’s financial bailout of a Colorado condominium complex to repair deferred maintenance due to insufficient reserves.

The letter addressed a need for reliable expertise including the education of community association managers and the licensure of that industry to encourage accountability because most association directors are volunteers, not experts in association management or property integrity, and depend on management for guidance.

Without knowledgeable or expert management, many boards unwittingly failed to fulfill their fiduciary duties to the owners in their associations, resulting in deferred maintenance and underfunded reserves.

The letter suggested that the failure of government oversight over the association trade industry would culminate in the next real estate collapse as more and more owners have no option but to sell and may exacerbate the irresolvable homeless crisis.

Legal “System Abuse”

Also sought in that letter was the prevention of “the exploitation of justice,” or as the insurance industry calls it, “legal system abuse,” an unfortunate and recurring practice in too many condominium associations, a few of which were reported in Civil Beat.

Earlier this year, Triple-I submitted their research to the New York Supreme Court and County Court asserting legal system abuse “siphons value from the claims and risk management ecosystem — away from policyholders, claimants, and insurers — and transfers it to attorneys” and impacts the cost of insurance.

States like Florida, Illinois, Indiana, Montana, and New Jersey have passed legislation to address and discourage legal system abuses such as lengthier litigation to the detriment of all involved except for the attorneys. The proponents of these consumer protective measures sought to prohibit incentivizing litigants to initiate and prolong lawsuits as more and higher claims drive up insurance premium costs, reduce the availability of coverage, and lead to higher uninsured risks.

Swiss Re Institutes expressed their concern that legal system abuse “is an opaque bottom-up wealth transfer from consumers to sophisticated investors and law firms” and adds “there are also major concerns about predatory lending, especially in the lightly regulated consumer segment.”

Condo owners should not be overly optimistic about the governor’s emergency proclamation and Band-Aid solution but should demand robust regulatory reform implementation against legal system abuse and other systemic problems that we have identified in our many conversations with lawmakers.

The concerns addressed in that 2016 letter still exist today. They include creating a less costly alternative dispute resolution mechanism to mediation, arbitration, and litigation; caps on excessive legal fees; and prohibiting lawfare to quell owners’ right to participate in their associations’ governance, so that condominium associations and their owners survive this debacle and can thrive.

Addressing and resolving these concerns would lessen the human and preventable causes of increased insurance costs and stabilize the insurance market for all.