DOES YOUR BUILDERS RISK COVERAGE PASS …€¦ · DOES YOUR BUILDERS RISK COVERAGE PASS INSPECTION?...
Transcript of 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!