Builders Risk. Above and Below Ground

Transcription

1 Builders Risk Above and Below Ground Presented Before The Inland Marine Underwriters Association May 17, 2011 Chicago, Illinois Donald S. Malecki, CPCU Malecki Deimling Nielander & Associates, LLC

2 Topics To Be Discussed Some persistent problem areas: Buildings Versus Structures Coverage Limited To External Causes Faulty Workmanship Exclusion

3 Topics To Be Discussed Actual Cases Is a launching truss for bridge building a temporary structure or contractors equipment? Is a contractors equipment floater the only way to provide coverage or is a builders risk policy also suitable?

4 Topics To Be Discussed Actual Cases Underwater tunneling using secant piles: What can happen when a builders risk policy is prescribed but a commercial property policy is used for construction instead

5 Selecting the Appropriate Coverage Form Balancing One s Priorities

6 Considering the Policy Language Intricacies

7 Buildings Versus Structures Policy references to covering buildings or structures Reasons why a potential problem: Katsoff v. Lucertini, 103 A.2d 812 (Conn. 1954) Montana Rail Link, Inc. v. The Travelers Indemnity Co., No. CV M-DWM (U.S.D.Ct. MT 2011) Seattle Monorail Servs. V. Affiliated FM Ins. Co WL (W.D. Wash.) Bergeron v. State Farm F&C Co., 766 A.2d 256

8 Impact of External Loss Wording Risk of direct physical loss or damage versus risk of direct physical loss or damage from any external cause We cover external risks of direct physical loss unless loss is limited or caused by a peril that is excluded.

9 Impact of External Loss Wording Covered causes of loss means risks of direct physical loss to covered property from any external cause except those causes of loss listed in the Exclusions This policy insures against all risks of direct physical loss of or damage to insured property from any external cause except as hereinafter excluded

10 What Is An External Loss Anyway? What is an external cause and genesis? If external means causes other than internal risks, such as inherent vice, wear and tear which are already excluded by most BR policies, why is this term necessary? Specific mention of external loss is not necessary and only gives some claims people another reason to deny coverage even though they do not even know what it means.

11 The Number One Exclusion For Denying Coverage Errors or Omissions (Faulty or Defective Workmanship Exclusion) Rationale Variations

12 Business Risks Are Not Covered! Design Error and Faulty Workmanship Exclusion Many different kinds: Some with exceptions for ensuing loss Some with no exceptions. Purpose To exclude the costs of rectifying what is faulty; a business risk

13 Here Is An Idea! If rectification is what is meant to be excluded, say so and avoid the gobbligook espoused by those courts who say that the faulty workmanship exclusion cannot be swallowed by the exception.

14 A Better Way To Say It? Suggested wording of a London Form This policy does not insure all costs rendered necessary by defects of material, workmanship, design, plan or specification and should damage occur to any Insured Property containing any said defects the cost of replacement or rectification which is hereby excluded is that cost which would have been incurred if replacement or rectification of Insured Property had been put in hand immediately prior to said damage.

15 A Better Way To Say It? Suggested wording of a London Form For purpose of this policy and not merely this exclusion, it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material, workmanship, design, plan or specification.

16 Property Covered Contractors Equipment Versus Temporary Structures

17 A Launching Truss

18 Contractors Equipment Floater Versus A Temporary Structure A launching truss was made in Italy and shipped to Puerto Rico to build an above-the-ground rail system (like the Orlando Airport). It cost $1 million. The contractor, under an OCIP, had a contractors equipment floater but did not add this piece of equipment. While being used, the truss collapsed and was destroyed. When the contractor sought coverage for its $1 million truss under the BR policy, the loss was denied. The broker maintained it was covered as materials (which might have been while in crates before being assembled).

19 A Launching Truss

20 Contractors Equipment Floater Versus A Temporary Structure The insurer maintained that coverage did not apply under the BR policy because the truss was equipment to be written by a contractors equipment floater. A temporary structure can be a broad term, particularly when not defined. The fact that the truss had wheels and moved did not preclude it from being considered a temporary structure. The loss was covered by the BR policy.

21 Contractors Equipment Floater Versus A Temporary Structure Moral of this story: Underwriters need to be careful to inquire about what equipment is intended to be utilized in construction when the policy does not define temporary structure or the description is openended.

22 Including Contractors Equipment In Builders Risk Policies

23 Potential Problem Why do some underwriters include coverage for contractors equipment in a builders risk policy instead of a floater for that purpose? Sometimes it is necessary or more convenient because of the nature of the job. For competitive reasons.

24 Including Contractors Equipment In Builders Risk Policies An insurer s standard BR policy was modified to cover contractors equipment when the value is included in the total project value and the underwriter is apprised of their inclusion. While work was in progress at utility in Connecticut, a large tank collapsed and destroyed some contractors equipment which was not covered by a contractors equipment floater. The contractor sought coverage for this rented equipment valued at $1 million.

25 Including Contractors Equipment In Builders Risk Policies The BR insurer denied coverage because the underwriter was said not to have had any knowledge of the equipment s existence. The contractor stated that if there is no coverage under the BR policy, it was the broker s fault. The broker maintained that he informed the underwriter of this equipment and included its value in the total completed value. It was one person s word against another.

26 Including Contractors Equipment In Builders Risk Policies Moral of this story: If underwriters are going to accommodate others by covering contractors equipment under a BR policy, the underwriter needs to obtain a completed statement of values or other written proof and, for an extra-added measure, the issuance of an endorsement reflecting the covered equipment, or be held responsible for any loss, as did the insurer in this case.

27 If A Builders Risk Policy Is Prescribed Don t Substitute It For A Property Policy Project Owner contracted with a GC to build a utility tunnel under a waterway. The GC hired a SC to build an access shaft at the end of the end of the tunnel. The SC used a secant pile system comprised of 34 interlocking piles.

28 Secant Pilings Secant Wall Piles Alternate female piles are formed using a slow-gain (soft) concrete mix. The installation sequence is normally to install 1 pile every other 3 piles. After a sufficient curing period (2-4 days) and once each alternate pile is formed, the reinforced 'male' piles are installed using a standard (hard) concrete mix. The male and female piles overlap by approximately mm. The secant between male and female piles ensures that water ingress is minimized and fines wash-out is prevented. The interlocking secant wall is not watertight; however water flow is greatly reduced. Similar pile sizes and retained heights to contiguous piling can be offered.

29 Secant Pilings

30 Secant Pilings

31 If A Builders Risk Policy Is Prescribed Don t Substitute It For A Property Policy While the shaft was being dewatered, there was a blow-in about 70 feet from the surface, filling the shaft with water, sand and debris. After three failed repair attempts, the SC had to freeze the ground around the shaft with liquid nitrogen so repairs could be made. The project was delayed by two months. Project Owner was supposed to have obtained a BR policy but relied on its own property policy instead. The loss was denied as being not covered and litigation ensued.

32 If A Builders Risk Policy Is Prescribed Don t Substitute It For A Property Policy The court held that when a party agrees to obtain BR insurance and fails to do so, the breaching party assumes all risks. The contractor had to prove fortuity, which it did. Also the faulty workmanship exclusion did not withstand the court s test. The project owner was held in bad faith.

33 Finis And so, another day in the life of an inland marine underwriter