Builders Risk

David G. Jordan

November 20, 2009

What is Insured?

• In general

– Covers property damage that occurs during the period of construction.

– Potentially covers other losses stemming from or associated with property damage (discussed later).

Builders Risk is “First Party” Insurance

• In contrast, third party coverage protects

the insured from liability for damage and

injury cause to others.

• Covers the insured for

its own losses.

Illustrative Example

• Covers Owners and Contractors for

damage from a collapse.

• Would not cover liability for person injured

during the collapse.

“Direct Physical Loss”

• Usually requires damage from “direct

physical loss.”

Sample Language

• This Policy, subject to the terms,

exclusions, limitations and conditions,

insures against all risk of direct physical

loss or damage to property insured…

• We will pay for direct physical loss of or

damage to Covered Property at the

premises described in the Declarations

caused by or resulting from any Covered

Cause of Loss.

Term

• From the Project Commencement to

Project Completion.

Sample Language

Sample Language

• 3. ATTACHMENT/TERMINATION

Applicable to the Master Policy in effect from 12:01 AM, September 1, 2008 until 12:01 AM, September 1, 2011, Insured Project coverage will apply at the Project start date noted in the Project Certificate issued and continuing in full force and effect as specified by the estimated Completion Date in the Project Certificate and/or the contract.

• NOTIFICATION OF COVERAGE/TERMINATION: If construction is not completed on time and coverage beyond the estimated project completion date is required, prior notification must be given by the University Representative to Aon Insurance Services West, Inc.

Evolving Risk

Evolving Risk

• Covered Property is in a constant state of

change Project from Patch of Dirt to

Standing Structure. (Thus unlike a

completed structure, the risk is constantly

changing.)

• Often written on Inland Marine forms.

• Policies vary as to what is

covered/excluded.

Risks/Losses of Note

• These particular risks are sometimes

covered, and sometimes not, depending

upon the particular builders risk policy.

• If covered, they are often subject to a

specified peril deductible or sublimit

(explained later).

• Loss in Transit

• Debris Removal

• Expediting Expenses

• Off-site Storage

• Damage to Trees and Shrubs

• Loss of Valuable Papers and Records

• Damage to Existing Property

• Tools and Machinery of Builder

• Software Loss

• Pollution Clean-up

• Increased

Construction Costs

(caused by law or

ordinance)

• Soft Costs/Additional

Expenses

• Consequential

Damages

• Extra Expenses

Consequential Damages

• Typically defined as delay, loss of use and loss of market.– Delay

– Loss of Use• Usually corresponds to lost profits. (Ex. Can’t collect $ for

hotel room rentals, if hotel isn’t open.)

– Loss of Market• Market disappears as a result of the property damage.

Delay

• See e.g. Gemma Constr. Co. v. City of New York,

246 A.D.2d 451, 453 (N.Y. App. Div. 1st Dep't

1998) ("delay damage claims seek compensation

for increased costs … whether the costs result

because it takes longer to complete the project or

because overtime or additional costs are expended

in an effort to complete the work on time.

(Arguably Distinguishable from situation where

property damage is the cause.)

Key Question

• Key question is whether it insured more

than physical loss, such as higher

construction costs due to direct physical

loss (even for those portions of the project

where construction has yet to commence).

Seminal Case

• Zurich Amer. Ins. Co. v. Keating Bldg. Corp. et al.

Builders risk coverage dispute over damages related to the collapse of a parking garage under construction at the Tropicana Hotel and Casino in Atlantic City.

Relevant issue was whether the builders risk policy covered the increased cost of construction for the un-built portion of the parking garage.

The insurer, Zurich, argued that the increased costs were not covered because they did not concern the repair of damaged property, but rather were directly attributable to the project delay caused by the collapse. The court disagreed:

Zurich's argument that the Policy's Valuation Clause limits coverage to only repair costs, and not increased costs to complete construction of undamaged property, are unpersuasive. The Policy's Valuation Clause states that the Policy covers only costs to "repair or replace the property lost or damaged at the time and place of loss with materials of like kind and quality less betterment . . . ." However, the Court finds that from the perspective of an ordinary insured reading the Policy -- the perspective from which this Court must view the language of the Policy, . . .the term "property lost or damaged" as a result of the collapse refers to the entire structure, not simply to the location of the collapse.

Oceanside Pier View, LP v. Travelers Prop. & Cas. Co. of Amer.

• Oceanside involved higher construction costs resulting from a shoring wall that gave way; the necessary redesign and repair of the shoring wall delayed the project and caused the price to increase.

The court, determined that that (1) such costs did not involve physical injury to covered property and (2) that such costs were governed by the policy’s separate coverage for “Expediting Costs and Additional Costs of Construction Materials and Labor.”

[T]he plain language of the "Builders' Risk" provisions protect only those buildings, structures, or portions of buildings and structures under construction at the Project, and do not protect against the unforeseen costs to construct never-before constructed buildings or structures which may arise as a result of delays. Accordingly, . . . the "Builders' Risk" provisions did not and do not cover the increased costs of construction materials and labor which Plaintiff alleges it incurred to complete portions of the Project which were not yet under construction at the time that the shoring wall failure caused the delay. . . .

[Additionally] the Policy specifically includes a provision for the increased costs of construction materials and labor under "Additional Coverages". . . .

Critical Exclusion – Faulty Workmanship

• Can be considered “Faulty Product” or

“Faulty Process” or both.

• Typically not defined in policy.

• Faulty product generally involves a physical object. E.g. a faulty roof.

• Faulty process, generally concerns problems during the construction of the object. E.g. damage caused during the construction of the roof.

• 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 policy holder. See Allstate v. Smith 929 F.2d. 447 (9th Cir. 1991):

Failing to put a temporary cover over the exposed premises would not be “faulty workmanship” under the flawed product interpretation as that interpretation necessarily requires the presence of an object to evaluate. . . .Under the flawed process interpretation, however, failing to put a temporary cover on while replacing a roof may constitute “faulty workmanship.” Interpreting the clause, “faulty workmanship,” as the flawed quality of the product worked upon makes sense in the context of the policy as a whole. . . . [I]n light of the circumstances of this case, we find the term “faulty workmanship” ambiguous, and consequently apply the construction most favorable to the insured.

• Some Courts alternatively find “Faulty Workmanship” to be unambiguous, finding that it precludes losses associated with faulty product or process. See: Wider v. Heritage Maintenance, Inc., 2007 NY Slip Op 27005, 9 (N.Y. Sup. Ct. 2007):

Webster’s Third New International Dictionary defines “workmanship” as “1: the art or skill of a workman: the execution or manner of making or doing something.” There is no reasonable conflict in finding that “workmanship” can refer to the quality of both the process by which the work is done and of the finished product. Finding that the term “workmanship” is ambiguous because it can mean either would “strain the contract language beyond its reasonable and ordinary meaning.”

• Look to language of exclusion to see if other words infer a product or a process, and whether other provisions elsewhere more clearly indicate a product or a process, thus suggesting that the insurer could have been more explicit if it wanted to.

Key Provisions of Note

• “All Risk” v. Specified Peril.

• Replacement Cost Coverage v. Actual

Cash Value.

• Sue and Labor.

• Specified Peril Deductibles and Sublimits.

• Subrogation/Transfer of Rights of

Recovery.

“All Risk” v. Specified Peril

• All Risk coverage insures against all risks

of loss except those that are specifically

excluded by the policy.

Sample Language – All Risk

Specified Peril

• Specified Peril coverage insures those

risks that are enumerated in the policy.

• Sometimes called “Broad Causes of Loss”

insurance.

Sample Language – Specified Peril/Broad Form

• ''Loss” must be caused by or result from

any of the Covered Causes of Loss and

occur within the Coverage Territory.

Replacement Cost Coverage v. Actual Cash Value

• ACV is current market value, taking into

account depreciation – i.e. what damaged

property was worth.

• Replacement Cost is the cost of actually

replacing damaged property, without

deduction for depreciation, with property

Comparable Material and Quality or Like

Kind and Quality. (Similar but not the

same).

Sue and Labor

• Both an Obligation and a Right – Covers

cost associated with mitigation of

damages.

Sample Language• “Sue and Labor “

In case of any loss or damage, it shall be lawful and necessary for the insured, their factors, servants and assigns, to sue, labor and travel for, in and about the defense, safeguard and recovery of the said property, or any part thereof, without prejudice to this insurance; the charges whereof we will contribute according to the rate and quantity of the sum herein insured.

• “Expense to Reduce Amount of Loss”

This policy covers such expenses as are necessarily incurred for the purpose of reducing any loss under this policy, though such expense may not exceed the amount which the loss under this policy is thereby reduced.

• “Preservation and Protection of Property”

In case of actual or imminent physical loss or damage of the type Insured against by this policy, the expenses incurred by the insured in taking reasonable and necessary actions for the temporary protection and preservation of property insured hereunder shall be added to the total physical loss or damage otherwise recoverable under this policy.

General Conditions of Sue and Labor

• 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 necessary (e.g. threat must be likley

as opposed to remote).

• 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

• Percentage Based Deductibles (ambiguity).– % 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)

• Ambiguity of Sublimits (is it in fact a sublimit or an additional grant of coverage?)

Percentage Based Deductibles

• Illustrative Case:– Terra-ADI Int’l Dadeland, LLC v. Zurich Am. Ins. Co., No.: 06-

22380-CIV, 2007 U.S. Dist. LEXIS 14620 (S.D. Fla. 2007). Involved a “windstorm deductible” in the amount of “5% of the total insured values at risk at the time and place of a loss subject to a minimum of $250,000.”

– Insured argued total value at risk was capped by policy sublimit for windstorm and insurer argued that total value was value of the entire construction project. Court construed the ambiguity in the insured’s favor:

The term "total insured values", as used in this case, is modified by the term, "as respects the peril of WINDSTORM." Therein lies the ambiguity that compels this Court's holding that section 7(D) of the policies at issue here is reasonably susceptible to differing interpretations and must therefore be resolved in favor of Plaintiffs

Ambiguity of Sublimits

• Illustrative Case-- E.g. RLI Ins. Co. v. Highlands On Ponce, LLC, 635 S.E.2d

168 (Ga. Ct. App. 2006). Builder’s risk case involving a fire and causing damage attributable to “soft costs”, including additional interest expense, property taxes, and advertising expense.

--The policy contained a provision entitled “additional limits of insurance” for “soft costs” in the amount of $100,000.00.

--The insurer believed that the $100,000.00 limit was the sole amount of coverage for soft costs.

--The policyholder countered that soft costs were covered under the general coverage limits of approximately $29 Million, and that the $100,000.00 was an additional amount specifically earmarked for soft costs.

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. . . .

Anti-Concurrent/ACC Provisions

• Most courts have broadly applied this

exclusion. See e.g. Arctic Slope Reg’l

Corp. v. Affiliated FM Ins. Co., 564 F.3d

707, 712 (5th Cir. La. 2009).

Anti-Concurrent/ACC Provisions

“The ACC clause is unequivocal and unyielding. It excludes insurance against loss or damage caused by or resulting from any of the listed causes, including flood (as defined by the policy). It then repeats that loss or damage is excluded "regardless of any other cause or event whether or not insured under this policy that contributes concurrently or in any sequence to the loss or damage."

Restrictive Interpretation

• Mississippi State Court, Corban v. United

Services Automobile Association 2009 Miss.

LEXIS 481 (Miss. Oct. 8, 2009), has held that the

clause has limited application.

– (does not apply to certain “sequential” causes,

because provision cannot nullify a loss caused by a

covered cause of loss.

– Holds that excluded cause of loss must be completely

simultaneous with covered cause in order for

exclusion to apply.)

• Other Courts such as California and West

Virginia consider the provision to be contrary to

public policy or State statutes.

Ensuing Loss Provisions

• Creates an exception to the application of

an exclusion, if a covered cause of loss

ensues from the excluded loss.

Sample Language

• We will not pay for loss caused by or

resulting from the following, except as

provided under coverage extensions. But

if loss from a Covered cause of Loss

Results, we will pay for the resulting loss.

Ensuring Loss Provisions

• Generally require that the covered cause

be separate and distinct from the excluded

loss. i.e. Courts will not allow the

exception to swallow up the rule.

• Narob Dev. Corp. v. Insurance Co. of N.

Am., 219 A.D.2d 454 (N.Y. App. Div. 1st

Dep't 1995):

“Where a property insurance policy contains

an exclusion with an exception for ensuing

loss, courts have sought to assure that the

exception does not supersede the exclusion

by disallowing coverage for ensuing loss

directly related to the original excluded risk.”

• 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 was not an ensuing loss.

• Acme Galvanizing Co. v. Fireman's Fund

Ins. Co., 221 Cal. App. 3d 170, 179-180

(1990):

“We interpret the ensuing loss provision to

apply to the situation where there is a "peril,"

i.e., a hazard or occurrence which causes a

loss or injury, separate and independent but

resulting from the original excluded peril, and

this new peril is not an excluded one, from

which loss ensues.”

Subrogation and Waiver of Subrogation

• Subrogation allows Insurer to pursue

recovery against third parties allegedly

responsible for the loss.

• Owners and Contractors generally seek to

have losses paid for by insurers rather than

themselves.

– Avoid dilemma by waiver provision in construction contract and corresponding waiver provision in insurance policy. (Insurer stands in the shoes of the insured)

• Dilemma may also be avoided by naming

subcontractors as additional insureds.

• Watch out for “as there interests may

appear language”, which may permit

Insurer to subrogate against insured re:

liability claims, if there is no waiver of

subrogation clause.

Subrogation and Waiver of Subrogation

• See OPI Int'l, Inc, v. Gan Minster Ins. Co., 1996 U.S. Dist. LEXIS 22959, 20-21 (S.D. Tex. Mar. 11, 1996) wherein the court stated:

“An insurer retains the right to subrogate against a subcontractor even where a subcontractor is an insured for a limited purpose, to the limited extent of his own property in the project or "as his interests may appear" in the project. The subcontractor is not protected [from his negligence which causes loss to other property beyond his interest and covered by the policy. . . .”