anatomy of a builders’ risk claim willis construction risk management conference the ritz carlton...

Anatomy of a Builders’ Risk

ClaimWillis Construction Risk Management Conference

The Ritz Carlton – New Orleans, Louisiana

September 11-12, 2013

Proprietary to The Claro Group, LLC. Not for distribution. For internal Client purposes only.

OverviewOverview

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► Introductions► Introduction to Builders’ Risk Insurance► Builders’ Risk Insurance Coverage – Illustrative Policy

Language● Physical Damage

● Soft Costs

● Business Income

► Claim Submission and Adjustment Process► Real Life Examples – Builders’ Risk Claim Issues


IntroductionsIntroductions

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► Mike Kennedy

► John Cadarette

► Ron Van Epps


Who is The Claro Group?Who is The Claro Group?

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► The Claro Group is a strategic and financial consulting firm focused on providing clear, value-added professional services in the areas of insurance claims and other complex disputes

● Founded by former senior executives of major accounting and consulting firms

● Senior Partners each have over 25 years of experience

● Approximately 150 professionals and growing, including over 40 insurance claim recovery experts

● National presence – offices in Chicago, Houston, Los Angeles and Washington, D.C.

● Members include MBAs, CPAs, JDs and Engineers

● We have worked with many of the largest and most respected corporations in the US and Canada


Who is The Claro Group?Who is The Claro Group?

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► Dedicated team focused on optimizing insurance recovery strategies for clients

● Key members of teams who have recovered over $9.0 billion in transactions negotiated to date

► “Soup to nuts” – we provide coverage analysis, loss quantification, claim strategy, claim presentation, rebuttal and assistance with negotiations

● We work closely with the client during settlement negotiations

● Achieved settlements with all major insurance markets

► Service Offerings

● Coverage analysis and claims preparation for all lines of coverage Asbestos, environmental, toxic torts, E&O, etc. Property damage, business interruption and extra expense claims

● Proprietary allocation and scenario modeling

● Assistance with insurance archeology

► Extensive relationships throughout risk management network

● Risk Managers

● Brokers

● Law firms


Introduction to Builders’ Risk Insurance

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Introduction to Builders’ Risk InsuranceIntroduction to Builders’ Risk Insurance

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► Builders’ Risk insurance provides first-party coverage for structures undergoing construction or major renovation(1) as well as certain types of time element coverages

► Who is responsible for purchasing the policy?● Owner/Developer

● General Contractor

● Subcontractor

► Key considerations in placing Builders’ Risk coverage● Does the policy – including limits, sub-limits, exclusions or other

limitations - correspond to the risks of the project and interested parties?

● Is the policy consistent with the construction contract?

1 – Construction Insurance, A Guide for Attorneys and Other Professionals, published by the American Bar Association



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► Concepts of Covered Property and Covered Cause of Loss are critical in understanding nature and breadth of Builders’ Risk Insurance – a typical policy addresses the following:

● Covered Property – Permanent, Temporary (should the policy address Pre-existing Structures, Property In-transit or Property Stored offsite?)

● Property Not Covered

● Time Element Business Income, Contractual Penalties and Extra Expense

Civil Authority/Ingress-Egress

Service Interruption

Soft Costs

● Covered Causes of Loss – All Risk v. Named Peril

● Additional Coverages

● Coverage Extensions

● Exclusions (including the “defective design and workmanship exclusion” and “consequential loss exclusion”)

● Limits of Insurance, Deductibles and Sub-limits



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► Concepts of Covered Property and Covered Cause of Loss are critical in understanding nature and breadth of Builders’ Risk Insurance

● To determine coverage, must start with two-step analysis Is there damage to Covered Property? Was the damage the result of a Covered Cause of Loss?

► If “yes” to both questions, then proceed to review Additional Coverages, Coverage Extensions, exclusions and potentially applicable sublimits

► There are several categories of potential Time Element losses that may be triggered other than by typical property damage

● Civil Authority

● Service Interruption


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Builders’ Risk Insurance Coverage – Illustrative Policy Language


Builders’ Risk Insurance Coverage – Illustrative Policy LanguageBuilders’ Risk Insurance Coverage – Illustrative Policy Language

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A. Coverage

We will pay for the direct physical loss of or damage to Covered Property from any of the Covered Causes of Loss.

1. Covered Property

Covered Property, as used in this Coverage Part, means “Builders’ Risk”.

2. Covered Causes of Loss

Covered Causes of Loss means RISKS OF DIRECT PHYSICAL LOSS OR DAMAGE except those causes of loss listed in the Exclusions or for which “No Coverage” is shown as the applicable Limit of Insurance in the Declarations.

3. “Soft Costs” and Special Time Element



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► “Builders’ Risk” means property described in the Declarations that is:

a. Owned by you or for which you are legally liable; and

b. Included in the “completed value” for the applicable “job site”;

Consisting of:

a. Buildings or structures, including roads, parking lots, sidewalks, containment ponds, and other permanent or temporary structures while being:

1. Constructed, installed, erected or fabricated at the “job site”; or

2. Renovated, repaired, rebuilt or refurbished at the “job site”, but only if coverage for an existing building or structure is

shown in the Declarations; and

b. Property that will become a permanent part of the buildings or structures at the “job site”:

1. While in transit to the “job site” or a temporary storage location;

2. While at the “job site” or at a temporary storage location



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► “Soft Costs”

We will pay your “soft costs” during the “period of delay in completion”. Such “soft costs” must result from loss of or damage to Covered Property from any of the Covered Causes of Loss which delays the completion of the “project” beyond the “planned completion date”.

► “Soft costs” means your actual and necessary costs in excess of your budgeted amount for the “project” consisting only of the type shown in the Declarations.



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► “Business Income”

We will pay the amount by which your “business income” is actually reduced during the “period of delay in completion”. Such reduction in “business income” must result from loss of or damage to Covered Property from any of the Covered Causes of Loss which delays the completion of the “project” beyond the “planned completion date”.

If the building or structure was occupied for its intended purpose at the time of loss or damage, we will pay the amount by which your “business income” is actually reduced during the “post loss period of construction”.



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► “Period of delay in completion” means the period of time that:

(a) Begins with the “planned completion date”; and

(b) Ends on the date when the “project” should be completed using reasonable speed and similar materials and workmanship and accounting for the time necessary to achieve the budgeted level of “green” certification, if the time for such certification was included in the pre-loss “planned completion date”

► “Planned completion date” means the date the “project” would be put into operation or use in the normal course of construction if loss of or damage to Covered Property from any of the Covered Causes of Loss had not occurred.

► “Post loss period of construction” means the period of time that:

(a) Begins with the date of the loss of or damage to Covered Property from any Covered Cause of Loss; and

(b) Ends on the date the “project” should be completed using reasonable speed and similar materials and workmanship.

► “Project” means the total construction of all Covered Property.



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► “Business Income” means the sum of:

a. The net profit or loss (before income taxes) from the operation or use of the “project”; this includes the operation of “alternative power generating equipment” that feeds surplus power into a public utility power grid and for which that public utility credits, reimburses or provides utility credits, reimburses or provides rebates to you for that power; and

b. The continuing normal operating expenses, including payroll, of the operation or use of the “project”. This includes the expenses you incur to purchase replacement power or water from a public utility until such time as your “alternative power generating equipment” or “alternative water system” is repaired or replaced and is fully operational to manufacturer’s specifications.


Builders Risk Insurance Claims and IssuesBuilders Risk Insurance Claims and Issues

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Claim Submission and Adjustment Process


So You Have a Claim, Now What? Critical Steps for Successful Claim ResolutionSo You Have a Claim, Now What? Critical Steps for Successful Claim Resolution

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► Timely and Strategic Communication

● Internal – key to have main point of contact to maintain control

May want to direct through in-house counsel to establish privileges

● External – should coordinate with corporate communications department

Sometimes internal/external messages are at “odds” with each other

Caution: Every analysis, email, memo and press release eventually may be viewed in a litigation context so be accurate, don’t speculate and think “would I enjoy being cross examined about this” before hitting “send” on any email!

► Realistic Claim Philosophy

● Establish early on that you are carefully and fully preparing a fair, credible claim for all losses to which you may be entitled under relevant policies

Do not be shy about including potentially covered aspects of claim

Similarly, do not include obviously non-covered claims as it will impair credibility


So You Have a Claim, Now What? Critical Steps for Successful Claim ResolutionSo You Have a Claim, Now What? Critical Steps for Successful Claim Resolution

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► Establish Core Team as Soon As Possible

● Risk Management, Legal, Business Unit Reps of affected operations, Accounting

Clarify roles to avoid overlap and turf fights

● Outside consultants: Claim Preparation Experts, Brokers, Attorneys, Technical Experts

May need some, none, all or some at different times in the claims process


Initial Claim Preparation Initial Claim Preparation

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► Designate single person in charge of the claim

► Review all available coverages

● Obtain all forms and correspondence from brokers “As issued” policies may differ from binders

● Consider outside assistance for coverage interpretation

► Promptly provide notice to all potentially affected carriers

● Brokers will be critical to providing initial notice and updating carriers on a regular basis

● Review drafts before sending – precise wording is important

● Calendar deadline for filing proof of loss

► Establish internal cost code to track all time and expenses

● Many policies have “claim preparation” or “loss adjustment expense” coverage


Initial Claim Preparation Initial Claim Preparation

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► Undertake (and document) all reasonable mitigation measures

● Important from operations perspective

● Critical from coverage perspective

► Involve in-house counsel early in process

● May provide valuable advice and access to outside counsel if needed

● Certain communications may be privileged from later discovery

► If material to company, work with PR team on external message

● Assume your carriers (or their counsel) will be reading releases

► Establish project calendar for key dates to keep process moving

► Develop early and continuous flow of information to carriers’ adjusters and experts

● Surprises in the claim process are never welcome

● Speeds overall resolution when carriers are regularly informed


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Real Life Examples – Builders Risk Claim Issues


Real Life Examples - Builders Risk Claim IssuesReal Life Examples - Builders Risk Claim Issues

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► Owner didn’t purchase Business Income or Delay in Start-up Coverage ● Policyholder’s claim included direct labor, benefits, indirect

project costs such as scaffolding, trailer rental, project management salaries and other “indirect” costs

● Insurer initially argued that only “direct costs” such as labor and materials used in repair were insured and “general conditions” – i.e., project management and infrastructure (e.g., scaffolding, etc.) – were “time element” costs and not compensable because the Owner didn’t purchase time element coverage

● Insurer also argued that such “ costs were “consequential” losses and specifically excluded



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► Measurement of business interruption loss● Length of Compensable Interruption

● Projection of “But For” Revenues

● Difference in “ramp up” subsequent to commissioning as initially planned and post-event?

● Measured at “capacity” or at reduced levels experienced during “extended ramp up” and “extended commissioning”?



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► Covered loss under “standard” policy language:● “Period of delay in completion”

Begins with the “planned completion date”; and Ends on the date when the “project” should be completed using reasonable

speed and similar materials and workmanship

● “Post-loss period of construction” Begins with the date of the loss of or damage to Covered Property from any

Covered Cause of Loss; and Ends on the date the “project” should be completed using the reasonable

speed and similar materials and workmanship

● “Amount of Loss” Your likely “business income” during the “period of delay in completion” had

loss of or damage to Covered Property from any of the Covered Causes of Loss not occurred

► Based on “standard” policy language, the policy factors in two ramp up periods and does not cover the lost days the facility would have been fully operational


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Proforma Results "Amount of Loss"/Covered LossActual Results Actual Loss

Full Operations

"Period of delay in completion"

"Post-loss period of construction"

Time

Rev

enu

es

0.00Insured Event

Planned Completion Date

Reasonable Completion



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► The actual economic loss sustained is equal to the lost days of full operations plus or minus the difference in the results during the pro-forma and actual “ramp up” periods.

[A] [B] [C]=[B]-[A]

Pro-forma Actual Difference

Ramp Up Days 50 90 40 Operated "Full" Days 100 - (100)

Economic LossRamp Up Period 10,000$ 16,000$ 6,000$ Operated "Full" Period 90,000 - (90,000)

Total Economic Loss 100,000$ 16,000$ (84,000)$

"Actual Loss"/Covered LossRamp Up Period 10,000$ -$ (10,000)$ Operated "Full" Period 10,000 - (10,000)

Total "Actual Loss" 20,000$ -$ (20,000)$

► Consideration during negotiation of the policy is required to protect against unintended consequences post-loss.



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► Soft Costs ● Have “soft costs” been adequately defined?

● Do the “Declared Values” include interest costs, profit, real estate taxes, insurance and other similar costs?

● Are allocations of corporate overhead “soft costs”?



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► Soft Costs Exposures to be Considered● Real Estate Taxes

● Interest

● Consulting Fees

● Legal & Accounting

● Equipment Rental

● Overhead/Extended General Conditions Often Claimed as a Hard Cost General Contractor vs. Developer

● Insurance

● Refinance Charges

● Architectural & Engineering



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► Soft Costs Exposures to be Considered, continued● Historic Tax Credits

● Direct Costs – Non-Operational

● Developer Overhead / Extended General Conditions

● Leasing Fees/Re-Negotiation

● Refinance Charges Letter of Credit Remarketing of Bonds

● Advertising & Promotional

● Holdover Indemnity

● Others as Accepted by the Company



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► Liquidated Damages ● Interaction between liquidated damages, time element losses

and deductibles

► Are claimed costs repair costs or costs to “make good” a faulty plan or faulty workmanship?


Builders’ Risk Insurance ClaimsBuilders’ Risk Insurance Claims

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Appendix to Presentation


Claim Preparation ChecklistClaim Preparation Checklist

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Do you have an overall game plan for managing the situation?

Do the crisis management team members have defined roles (including a control person or persons in charge of the management exercise, and a designated spokesperson) and chains of command?

Have you analyzed your potential legal exposures relating to the loss?

Have you obtained all your polices and analyzed potentially applicable coverages?

Have you given prompt notice to your carriers?


Claim Preparation Checklist Claim Preparation Checklist

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Do you have a handle on your public message?

Are there protocols in place to make sure that the legal, risk management and crisis management teams work in a strategic, coordinated fashion?

Have you set up an internal cost code to track all time and expenditures incurred in relation to the insured event?

Have you considered what outside expert services you may need?


A Thoughtful and Proven ApproachA Thoughtful and Proven Approach

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Review Internal System for Capturing Costs• Creates baseline for claim values

Initial Review of Policy and Underwriting File• Consider legal review to understand how courts have interpreted

Initial Assessment of Damages and Cause• Make sure to keep any “cause” communications privileged

Understanding of Operational Impact• Financial statement disclosure issues?

• When are operations expected to be resumed?

Phase I – Initial AssessmentPhase I – Initial Assessment


A Thoughtful and Proven Approach, continued A Thoughtful and Proven Approach, continued

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Review Business Interruption Issues• Deductible; trigger; likely duration; extra expenses

Property Damage issues• Multiple causes – which covered?

Identify Key Strategic Issues• Interplay of business, risk management and legal concerns

Establish Open, but Careful Dialog with Carrier• Consider non-prejudice agreement

If Justified, Prepare and Present Request for Advance

Phase I – Initial AssessmentPhase I – Initial Assessment



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Property Damage

• Prepare support – obtain estimates• Reconcile to accounting records• Review testing results

Contractual Penalties and Extra Expense

• Prepare supporting rationale and business case • Summarize invoices• Look at salvage value• Prepare estimate of ongoing costs• Analyze saved expenses

Business Interruption

• Analyze extent of business operations impacted• Submit information requests to impacted business units• Prepare baseline data• Meet with representatives from business units to obtain buy-in• Develop actual and projected future loss projections

Phase II – Claim DevelopmentPhase II – Claim Development



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Present Proof of Loss• May be done in phases with “interim proofs”

Provide Detailed Supporting Documentation• Anticipate carriers’ needs – what would you want to see to prove up this

claim if in carriers’ shoes?

Fully and Fairly Respond to Carrier Requests• Cat and mouse games lead to delay, bickering and loss of credibility• However, at some point don’t be afraid to say “Enough!”

Request Payment for Undisputed Elements of the Claim• Many policies have express provisions requiring such payment• Some states also have statutes that require interim payments

Phase III – NegotiationsPhase III – Negotiations


A Thoughtful and Proven Approach, continuedA Thoughtful and Proven Approach, continued

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► Develop Internal Analysis of Claim Value and Settlement Target Range

● One of most common mistakes in negotiations is to go into settlement discussions only with hope to get “as much as we can!”

● Need to take into consideration all relevant factors, not just coverage, legal, technical, but also relationships, market factors, renewal, etc.

► Conduct Negotiations on Principal-to-Principal Basis With True “Decision Makers” present from all Parties

● Cuts through the usual “filtering” done by both sides’ advocates● Important that claim is mature enough before such meeting takes place

► Be Flexible – Expect the Unexpected● In any complex claim, there are inevitably new, unexpected issues that arise or

your perspective on things changes as more information about claim is developed

● Be prepared to walk away and come back to table at later time

Phase III – NegotiationsPhase III – Negotiations


Parallel Recovery ProcessesParallel Recovery Processes

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Operational RecoveryOperational Recovery

Insurance RecoveryInsurance Recovery

Loss Mitigation and InvestigationLoss Mitigation

and InvestigationRebuild PlanningRebuild Planning RebuildRebuild RestartRestart

Full Recovery

Full Recovery

Early Communi-

cation with

Insurers/ Protocol

with Adjuster

Early Communi-

cation with

Insurers/ Protocol

with Adjuster

Accumulate and

Document Hard

Costs for PD claim

Accumulate and

Document Hard

Costs for PD claim

Analyze BI and EE Losses/

Coordinate with PD Adjustmen

t

Analyze BI and EE Losses/

Coordinate with PD Adjustmen

t

Diligent Updates

to Adjuster/ Foundatio

n for Prompt

Resolution

Diligent Updates

to Adjuster/ Foundatio

n for Prompt

Resolution

Prepare Detailed Proof of Loss and Supportin

g Materials

Prepare Detailed Proof of Loss and Supportin

g Materials

Negotiate and

Respond to Additional

Request for Information

Negotiate and

Respond to Additional

Request for Information

Settle or Arbitrate/ Litigate

Settle or Arbitrate/ Litigate

Interim Payment?Interim Payment?Early

Settlement of PD and EE

Claims?

Early Settlement of

PD and EE Claims?

anatomy of a builders’ risk claim willis construction risk management conference the ritz carlton...

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