does your builders risk coverage pass …€¦ · 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.

DOES YOUR BUILDERS

RISK COVERAGE PASS

INSPECTION?

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

• 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

Key Builders Risk Considerations

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

10.3.1

What 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 replaced

What 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 Costs

Purely 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 PROPERTYCovered 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 2005

Locations 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.

11.3.1.4

Excluded 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

disputed11.3.1.1

Uncovered 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 damages

Faulty 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.”

10.3.1

• 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)

Ensuing Loss Provisions

Time Element Coverage

• Time Element Coverage

(Soft Costs and Business

Income) – is it included?

11.3.3

10.4

• 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 Soft Costs?

• Loss of anticipated income (such as

rental income) that an owner would

normally begin earning had the project

been completed or opened on time

What Are Business Income Losses?

Soft Costs v. Business Income

• Soft costs and lost business income are NOT mutually exclusive

– Soft costs involve added economic expensesthat 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) coverage

Sue 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”

• 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 replace

Valuation – Actual Cash Value

Subrogation 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 contributes

Subrogation - 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 altogether

Subrogation – Waiver Enforceability

• 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 ignored

Unclean Hands

Waiver 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 2005

Duration of Coverage

• Project completion?

• Final payment?

• Acceptance of project by

owner?

• Certificate of occupancy

issued?

ACE0219 (01/05)

CP 20 04

Handling 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!