DOES YOUR BUILDERS RISK COVERAGE PASS INSPECTION?
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DOES YOUR BUILDERS
RISK COVERAGE PASS
INSPECTION?
Presented By:
Craig F. Stanovich
Principal & Consultant
Austin & Stanovich Risk Managers LLC
&
Jeffrey J. Vita
Partner
Saxe Doernberger & Vita, P.C.
Why Builders Risk? • Purpose: To protect insureds against damage and resulting loss to work in the course of construction, before it is accepted and delivered to the owner
Key Builders Risk Considerations
• Who is Covered and for How Long?
• What is Covered?
• Uncovered Losses/Exclusions
• Limits/Sublimits
• Valuation
• Other Relevant Issues
– Policy Period
– Subrogation
• General Advice and Tips
Who is Covered?
• Owners, Contractors, Subcontractors, Others
– The Owner is typically the named insured,
while others such as contractors,
subcontractors, and financial lenders can
be added as additional insureds
11.3
10.3
Who Purchases Builders Risk?
• Owner?
• Contractor?
• Subcontractor?
In most cases coverage is
purchased by the Owner
11.3
10.3.1
“Named Insured”
• Builders risk policy wording usually, but not
always, indicates that the “Named Insured”
is responsible for the payment of
deductibles
– Policy may define “you” and “your” as the
“Named Insured” and thereafter provide that
“you” are responsible for payment of the
deductible
– When policy language is silent, it is possible
that an additional insured may be held
accountable for a deductible related to a claim
submitted by the additional insured 11.3.1.3
10.3.1What is Covered? Three Key Elements: 1) Loss from Direct Physical Loss 2) To Covered Property 3) Caused by a Covered Cause of Loss
What is Covered ? – Direct Physical Loss
• Policies often require
“direct physical” loss
– Sticks and bricks
• Most common:
property that must be
repaired or replacedWhat is Covered? – Direct Physical Loss
Other Losses Sometimes Covered:
• Boiler & Machinery – losses from mechanical
breakdown
• Ordinance or Law – losses when changes are
required by a government entity
• Hot and Cold Testing
• Expediting Expenses – overtime and other costs
incurred
• Sue and Labor Coverage – costs incurred to
mitigate damages or prevent future damages
• Debris Removal
• Soft CostsPurely Economic Losses Not Covered Example: The installation of building materials that are not in compliance with contract specs • Exception – higher building costs resulting from direct physical loss should be covered • Compare Keating with Oceanside
What is Covered? - Covered Property
Sample policy provision:
1. COVERED PROPERTY
Covered Property, as used in this Coverage Part, means the
following types of property. This property may be your
property or the property of others.
a. Property which will or has become a permanent part of the
project described in the Declarations, while such property is
at the job site described in the Declarations;
b. Temporary structures, meaning scaffolding, construction
forms, falsework, cribbing and other temporary structures at
the job site described in the Declarations, when a Value of
Temporary Structures is shown in the Declarations.
CNA LEGACY BUILDERS RISK 2005Locations of property to be covered
• Policies cover property located “on-site”
• Policies often provide additional limited
coverage (i.e. subject to policy sublimits)
for (a) off-site materials and equipment,
and (b) property materials and equipment
in transit.
11.3.1.4Excluded Property
• Damage to existing property
– Exception needed where project includes renovation
of existing structure
• Damage to property outside of the coverage
territory
• Land
• Tools, equipment not to become a permanent
part of the project
• Money, securities
• Lawns, sod, trees, shrubs, etc.
• Auto, vehicles LEX-PBR 2005
ACE 0219 (01/05)Covered Cause of Loss
Two Key Policy Types:
1) “All-risk” coverage insures against all
risks of loss except for those specifically
excluded
2) “Specified peril” covers only those risks
specifically enumerated within the
policy
-- The type of coverage acquired determines
the burden of proof when coverage is
disputed
11.3.1.1Uncovered Losses/Exclusions
• Builders risk coverage is not standardized
• Excluded losses vary from policy to policy
• Common and critical exclusions include:
A. Faulty Workmanship
B. Subsidence – Earth Movement
C. Design/specifications
D. Consequential damagesFaulty Workmanship • Typically not defined • Can be considered “Faulty Product” or “Faulty Process” or both
Faulty Workmanship • Some courts consider “Faulty Workmanship” ambiguous and construe the exclusion in favor of the insured, limiting the term to product or process, whichever is advantageous to the policyholder • Some Courts alternatively find “Faulty Workmanship” to be unambiguous, finding that it precludes losses associated with faulty product or process • Review language of exclusion to see if other words infer a product or a process
Subsidence – Earth Movement • Rapid v. gradual • Man made v. naturally occurring event
Design • Distinguish damage due to design work from damage due to improper implementation of design • Importance of corresponding Professional Liability insurance
Consequential Damages • Delay, loss of use, loss of market – Direct v. Indirect damages – Physical v. Non-physical
Scope of Exclusion • Some exclusions contain anti- concurrent/anti-sequential language which preclude coverage even when the exclusion is not the proximate cause of loss • Other exclusions contain exceptions for covered causes of loss that ensue from the excluded cause of loss (i.e. an “ensuing loss”)
Anti-Concurrent/Anti-Sequential (“ACC”) Provisions
• May act to preclude coverage where
particular cause of loss contributes to
damage, whether or not such cause is a
proximate, or dominant cause
• Sample Language:
“We do not cover loss to any property resulting
directly or indirectly from any of the following.
Such a loss is excluded even if another peril or
event contributed concurrently or in any
sequence to cause the loss….”Ensuing Loss Provisions
• Generally requires covered cause to be
separate and distinct from the excluded
loss
• Ensuing Loss Language:
“We will not pay for loss caused by or resulting
from any of the following…But if loss from a
covered cause of loss ensues, we will pay for
that ensuing loss.”
10.3.1Ensuing Loss Provisions • Example of Covered claim – Faulty construction (excluded) leads to infiltration of rain water (covered) which then causes damage (covered) • Example of Excluded claim – Defectively poured concrete resulting in damage because inspector did not properly test the concrete (No intervening covered cause of loss)
Time Element Coverage
• Time Element Coverage
(Soft Costs and Business
Income) – is it included?
11.3.3
10.4What Are Soft Costs? • Additional costs made necessary due to delay in opening or delay in completion due to damage by an insured cause of loss • Soft costs include additional interest expense, property taxes, and advertising expense • In comparison, hard costs represent the amount it would take to physically repair or replace damaged or destroyed covered property
What Are Business Income Losses? • Loss of anticipated income (such as rental income) that an owner would normally begin earning had the project been completed or opened on time
Soft Costs v. Business Income
• Soft costs and lost business income are
NOT mutually exclusive
– Soft costs involve added economic expenses
that result from property damage, while
business income involves lost profits or
revenues due to the delay in completion
– When property damage occurs, the owner
often experiences both added soft costs and
loss of business income
– Owner may have a need for both Soft Cost
and Business Income (delay in completion)
coverageSue and Labor • Both an Obligation and a Right – Covers cost associated with mitigation of damages • Provision sometimes called “Expense to Reduce Amount of Loss” or “Preservation and Protection of Property”
Sue and Labor
• General Conditions:
– Must protect against a potential future
insurable loss – benefit to the insurer
– Actual damage required (in certain
jurisdictions)
• Focus is upon “In case of loss or damage, it shall
be lawful and necessary for the INSURED…to sue,
labor and travel for, in and about the defense” for
determination that actual damage is necessary
– Reasonably imminent threat of damage
required (in other jurisdictions)
– Reasonable in Scope (preventative measures
must not be excessive)Specified Peril Deductibles and Sublimits • Commonly applied to high risk and/or high cost causes of loss including: – Hurricane – Earth Movement – Collapse – Wind – Flood – Soft Costs • High deductibles and low sublimits can significantly marginalize coverage
% Based Deductibles
Often ambiguous
• % of loss
• % of total project value (at time of
completion, or at time of loss)
• % of segment of project being worked on
(such as in a multi-phased project)Valuation – Replacement Cost
• Replacement cost – affords compensation
for the damaged property without
deduction for depreciation
– Usually requires damaged or destroyed
property to be replaced with property of
“comparable material and quality”Valuation – Actual Cash Value
• Compensation for damaged property which
includes deduction for depreciation
– In builders risk context, such deduction is
usually of minimal consequence given that
there is little depreciation with respect to new
construction
– Most relevant when damaged property is
irreplaceable or difficult to replaceSubrogation Issues • Subrogation allows an insurer to “stand in the shoes” of its insured and seek recovery against a third-party for losses paid to its insured under the builders risk policy • Project owners and contractors typically wish to avoid subrogation claims, as they can be the targets of an insurer’s subrogation action • Subrogation causes distraction and strife between project team members
Subrogation - “ATIMA”
• Certain builders risk policies only provide coverage
to additional insureds “as their interests may appear”
(“ATIMA”)
• Insurers may rely upon this language in order to
subrogate against an additional insured on the basis
that the additional insured does not have an
“interest” covered by the Builders Risk policy in the
property that was damaged
A. No coverage for liability claims, because AI’s
“interest” concerns first party losses
B. Insurable interest limited to property/work
which AI contributesSubrogation - Circumventing ATIMA
• Release of liability of contractors and
subcontractors in construction contract
– Contractual provision utilized to preclude an insurer’s
right of subrogation, including ATIMA defense
• Release of Rights of Recovery (when adequate
insurance exists)
• Waiver of Subrogation in Insurance policies
• Listing parties as Named Insureds instead of
Additional Insureds
• Removing ATIMA language altogetherSubrogation – Waiver Enforceability
Unclean Hands
• Insurer may argue that
subcontractor cannot
rely upon contractual
subrogation waiver
when it has breached
its contract by causing
the property damage
• Minority perspective,
but cannot be ignoredWaiver of Subrogation
• Waiver of subrogation can be included in
insurance policy, as opposed to (or in
addition to) release of rights of recovery
found in construction agreement
• Objective is to have insurer waive any
rights of subrogation against a project
owner, contractor, or subcontractor, without
any exceptions or loopholes
No Rights
LEX-PBR 2005Duration of Coverage
• Project completion?
• Final payment?
• Acceptance of project by
owner?
• Certificate of occupancy
issued?
ACE0219 (01/05)
CP 20 04Handling Builders Risk Claims • Give prompt notice • Comply with policy’s conditions (proof of loss, examination under oath, appraisal) • Beware of contractual limitation of action provisions (typically 1 or 2 years from date of loss)
Tips • Understand the project, your company’s role, and exposure • Carefully review the construction contract • Carefully review the Builders Risk policy • Ask questions!
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