builder's risk and cgl insurance for construction projects...

Builder's Risk and CGL Insurance for Construction Projects: Mitigating Developer and Contractor Risks Evaluating Scope of Coverage, Covered Losses, Policy Exclusions, Additional Insured Endorsements and More

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TUESDAY, MARCH 4, 2014

Presenting a live 90-minute webinar with interactive Q&A

Melissa C. Lesmes, Partner, Pillsbury Winthrop Shaw Pittman, Washington, D.C.

Michael S. McNamara, Partner, Pillsbury Winthrop Shaw Pittman, Washington, D.C.

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Pillsbury Winthrop Shaw Pittman LLP

CGL and Builder's Risk Insurance for Construction Projects

Melissa C. Lesmes [email protected] Michael S. McNamara [email protected]

ARCHITECT

SUBCONTRACTOR SUBCONTRACTOR

SUBCONTRACTOR

OWNER

CONTRACTOR

The Context: A Typical Construction Project

Credit: quietaction; Creative Commons Attribution 2.0 Generic License

6 | CGL and Builders Risk Insurance for Construction Projects

Types of Insurance for Construction Projects

“First party” Loss to the insured’s own property Commercial Property insurance Builders Risk insurance Contractor’s equipment insurance

“Third party” Third parties’ claims and suits against the insured Commercial General Liability Pollution Legal Liability Professional Liability/Errors and Omissions Workers Compensation


How to read “insurance”

Which is easier to read?

Photo © Horia Varlan, All Rights Reserved – Creative Commons.


Why Builders Risk?

To protect insureds against damage and resulting loss to work in the course of construction, before it is accepted and delivered to the owner; To insure against financial/economic losses

arising in the course of construction.


What Is Builders Risk Insurance?

Two basic types of Builders Risk insurance: All-risk - insures against all risks of loss except for those

specifically excluded. Named peril - covers only those risks specifically enumerated

within the policy.

Builders Risk almost always on “manuscript” forms – ISO form exists but rarely used In contrast to typical commercial general liability forms


Basic Insuring Agreement


Navigating a Property Insurance Policy

The three P’s Parties

Property

Perils – a/k/a “Causes of Loss”


Parties Property Perils

Sample from a Builders Risk Policy

ABC Corp.



Contractor



Who should be insured?



Should include owner, general contractor and all subcontractors

Best practice: name all of the above as named insureds On Builders Risk policy declarations page; or On a Named Insured Endorsement to the Policy. Can be identified by position: “contractor and subcontractors of

every tier.


Sample from a Property Policy




(1) Completed additions;

(3) Fixtures, including outdoor fixtures;

(10) Foundations of buildings, structures, machinery or boilers;

(11) Bulkheads, pilings, piers, wharves or docks;

(12) Underground pipes, flues or drains; and

(13) Retaining walls.




(1) Furniture and fixtures;

(2) Machinery and equipment;

* * *

(4) All other personal property owned by you and used in your business . . .


20 | Presentaion Title


Continued (7) Leased personal property which you have a contractual responsibility to insure;

(8) Personal Property, which will become part of your installation, erection or fabrication project, while:

(a) At the site of installation, erection or fabrication; (b) In temporary storage pending installation, erection or fabrication.

Coverage under this provision is not restricted to building or structures at your “covered location” or within 1,000 fee of a “covered location’;

* * *

(10) Personal property of others in your care, custody or control including property sold under and installation agreement by which your responsibility continues until the buyer has accepted the property.

However, our payment for loss of or damage to personal property of others will only be for the account of the owner of the property




a. Accounts, bills, currency, etc.

d. Automobiles, motorcycles, motortrucks, motorhomes, tractors, and similar vehicles, held for sale, lease, loan or rent;

f. Bridges, roadways, walks, patios or other paved surfaces;

m. Land . . . water, growing crops or lawns.



Two basic types of property insurance: All-risk - insures against all perils except for those

specifically excluded. Named peril - covers only those perils specifically

enumerated within the policy.



From “Insurance to English Dictionary” “Covered Cause of Loss” – A cause of loss which results in coverage under a first

party insurance policy. Syn., Peril.

All risk policy



Remember the Basic Insuring Agreement?




Typically excluded perils Delays Pollution Mechanical Breakdown Defective design or workmanship Settling, cracking, shrinking or expanding Flood and Earth Movement


The peril that started chain of events that lead to your loss is excluded, so you can never have coverage.

True or False?



Earthquake =

Excluded Peril



Fire =

Covered Peril



What if the earthquake causes a fire?


Broad Exclusion

Excluded Peril Covered peril Damage =


Medium Exclusion

Excluded Peril Specified peril Damage =

Narrow Exclusion

Excluded Peril Covered peril Damage =



Example of

broad exclusion



Example of medium exclusion



Example of narrow exclusion


Soft Costs – Policies Differ Dramatically


Business Income

Difference between Soft Costs and Business Income: Business income covers only those earnings that would have

been generated had the loss not occurred

Soft costs cover the additional cost irrespective of anticipated earnings


Common Myths

Negligence is required

Negligence bars coverage

No coverage for force majeure events

Only force majeure events are covered

No coverage where faulty design or workmanship are at issue


Commercial General Liability Insurance

Approaches to Managing Risk and Procuring Insurance

Traditional Insurance – General Practice Policy

Ongoing operations coverage for policy period

Completed operations coverage for policy period

Project-Specific Policy/ Controlled Insurance Program (“CIP”/ “Wrap”)

Ongoing operations coverage for term of project

Extended completed operations coverage


The CGL Policy Form

The Policy Form Matters CGL policies are generally NOT manuscripted

Form policies drafted and issued by the Insurance Services Office (ISO)

The Endorsements Matter

Coverage expanded or limited by endorsements


CGL Insurance: What is it good for?

Defense

Indemnity

“Duty to defend” broader than “duty to indemnify” “Duty to defend” any one claim triggers duty to defend all

“Duty to defend” triggered by any mere allegation of a potentially covered claim – not by truth or merit of the allegations Four corners rule


Coverage A – Triggering Coverage

This insurance applies to “damages because of ‘bodily injury’ or ‘property damage’” caused by an “occurrence” … during the policy period.

Property Damage = “physical injury to tangible property” and “loss of use of tangible property not physically injured”

Bodily Injury = “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time” Emotional Distress?

During the policy period “Triggers of coverage” -- manifestation vs. continuous trigger


Caused by an Occurrence

Caused by an Occurrence = “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The majority of states recognize that construction defects can give rise to an Occurrence

The trend is in favor of coverage Supported by language and history of ISO Form Policy: The Subcontractor Exception to the Your Work Exclusion:

“This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

Number of Occurrences can make a difference


During the Policy Period

Occurs during the policy period

“Triggers of coverage” – manifestation vs. continuous trigger Progressive Losses – what policies are triggered

Key Exclusions Under Coverage A

Exclusion “a” – “Expected or Intended Injury” Exclusion “b”—“Contractual Liability” “Bodily injury” or “property damage” for which the insured is

obligated to pay damages by reason of the assumption of liability in a contract or agreement.

Exceptions:

(1) Liability for damages that the insured would have in

the absence of the contract; and (2) Liability for damages assumed in a contract that is

an “Insured Contract”


What is an Insured Contract? – Contractual Liability Exclusion

Generally defined to include a contract pertaining to your business under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization.

Works in conjunction with defense and indemnity provisions in most

subcontracts

The Contractual Liability exclusion is trying to avoid providing insurance coverage where the insured has assumed the contractual obligations of another



Exclusion “f”—“Pollution” “Bodily injury” or “property damage” arising out of the actual, alleged

or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.

Exclusion “j” – “Damage to Property” (1) Property you own, rent or occupy (2) Property you sell (except “your work”) (5) That particular part of real property on which the insured or its

subcontractors are performing operations if the damage arises out of those operations

(6) ---”That particular part of any property that must be . . . repaired or replaced because ‘your work’ was incorrectly performed on it.”



Exclusion “l”—“Damage to Your Work” “Property damage” to “your work” arising out of it or any part of it

and included in the “products-completed operations hazard.” This exclusion does not apply if the damaged work or the work out

of which the damage arises was performed on your behalf by a subcontractor. “Broad form property damage” coverage Intent is to exclude only damages caused by the named

insured to his own work Circular, Broad Form Property Damage Coverage Explained (January 29,

1979)



Professional Services Exclusions – By Endorsement CG 22 43


Additional Insured Endorsement

Additional Insured: generally entitled to defense and indemnity

Advantages: named insured’s policy limits are depleted; loss history; increased total limits potentially available; application of work exclusions; primary to additional insured’s own coverage

Which ISO endorsements? Ongoing vs. completed operations Prefer CG 20 10 85 not CG 20 10 93; or CG 20 33 07 and 20 37 07 (together) Use of the wrong endorsements undercuts the utility of AI status

Endorsements are better than Accord forms


51 | Insurance and Risk Transfer for Construction Projects

CGL Policy “Myths”

Economic Losses Are Never Covered

Liquidated Damages Are Never Covered

Punitive Damages Are Never Insurable

Breach of Contract Claims Are Never Covered

Damage to “Your Work” Can Never Arise from An Occurrence

The Carrier is Always Entitled to Select Counsel

Questions?


Feedback and Discussion

Credit: Greene Connection; Creative Commons Attribution 2.0 Generic License

Credit: bulliver; Creative Connections Attribution 2.0 Generic License

Credit: Christopher Hsia; Creative Commons Attribution 2.0 Generic License

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