INSURING DELAY IN OPENING AND ASSOCIATED COSTS

Transcription

1 Workshop T4 Tuesday, November 11 10:20 a.m. 12:10 p.m. and 2:40 4:30 p.m. INSURING DELAY IN OPENING AND ASSOCIATED COSTS Presented by Workshop T4 Mark Gadaire Senior Vice President ACE USA Jonathon Held President J. S. Held, Incorporated William (Bill) Wilson Partner Mound Cotton Wollan & Greengrass Construction delays can lead to a plethora of soft costs, additional and extended general conditions, and loss of earnings for developers and contractors including additional taxes, loan interest, attorney fees, loss of use of money, and additional costs not insured. Traditionally, insurance coverage for these risks has generally been limited to business interruption or lost rental income and agreed soft costs. This session will discuss currently available builders risk coverage options, then drive down into how project scheduling can limit some of the soft cost and business interruption losses attributed to delays. Methods of determining delay periods, and other areas of potential uncertainty, will also be discussed. To print on both sides of the page, set your printer for duplex printing. Copyright 2014 International Risk Management Institute, Inc. 1

2 This is insured. Brookfield Manhattan West Project, NYC acegroup.com/us-construction What does it mean to be ACE insured? It means one of the largest gantry cranes in the United States can be used to construct a 2.6 acre platform over an intersection of active railways in the heart of Manhattan. ACE has the financial strength and expertise to underwrite complex construction risks. Our team of experts understands and has the tools to take on the risks of high-profile construction programs, so our clients can focus on new developments and innovative projects ACE Group. Coverages underwritten by one or more companies of the ACE Group. Not all coverages available in all jurisdictions. ACE, ACE logo, and ACE insured are trademarks of ACE Limited.

3 Mark Gadaire Senior Vice President ACE USA Mr. Gadaire serves as senior vice president, Inland Marine, in ACE s Property & Specialty division. He has 30 years of experience in underwriting, working primarily with energy and construction risks. Mr. Gadaire began his insurance career as a field engineer. He holds a bachelor of science in civil engineering degree from the University of Massachusetts in Lowell. Jonathon Held President J.S. Held, Incorporated Workshop T4 Mr. Held is president of J.S. Held, Incorporated, a nationally recognized construction consulting firm for which work typically includes inspection of construction projects, determination of means and methods, estimating cost of the work, and monitoring job site progress. He is also a cofounder and managing member of the construction consulting firm of Held, Enloe & Associates, LLC. Both firms have extensive experience in construction consulting on more than 25,000 buildings and structures throughout the United States, Canada, Latin America, and Africa. Projects have included commercial and industrial structures, high-tech facilities, sports stadiums, bridges and roads, habitational structures, and residences. Mr. Held regularly speaks at educational and industry functions and has taught many continuing education classes. He has also authored a number of published papers on a variety of subjects, including valuation, dispute resolution, and delay claims. Mr. Held is a graduate of George Washington University. William (Bill) Wilson Partner Mound Cotton Wollan & Greengrass Mr. Wilson is a partner with the law firm of Mound Cotton Wollan & Greengrass. Since 1998, he has been responsible for running the firm s New Jersey office. Mr. Wilson s practice focuses primarily on the handling of first-party and third-party insurance and reinsurance coverage disputes. In addition, he regularly handles commercial contract disputes and products liability, employer liability, premises liability, and general tort claims. He has over 23 years of experience and has litigated cases in state and federal courts in New Jersey and throughout the United States. Mr. Wilson is a member of the New Jersey, New York, Florida, and Pennsylvania bars. He also is admitted to the United States Supreme Court; the United States Court of Appeals for the Second, Third, Eleventh, and Federal Circuits; the United States Court of Appeals for the Armed Forces; the United States Court of Federal Claims; the United States District Court for the District of New Jersey; and the Northern, Eastern, Southern, and Western Districts of New York. 3

4 He is a frequent lecturer and has published a number of articles on insurance issues and general litigation topics. He is a coauthor of New Jersey Insurance Coverage Litigation Treatise: A Practitioner s Guide, N.J. Institute for Continuing Legal Education, a Division of the N.J. State Bar Association (coming in December 2014). He is also the author of NJInsuranceBlog.com. 4

5 Delay Presenters Jonathon Held, President J.S. Held Mark Gadaire, Senior Vice President, ACE USA William (Bill) Wilson, Mound Cotton Wollan & Greengrass November 11, 2014 Nashville, TN Workshop T4 IRMI The material presented in this presentation is not intended to provide legal or other expert advice, or the position of any company or firm, as to any of the subjects mentioned, but rather is presented for general information and discussion only. You should consult knowledgeable legal counsel or other knowledgeable experts as to any legal or technical questions you may have. Further, the insurance discussed is a product summary only. For actual terms and conditions of any insurance product, please refer to the policy. Coverage may not be available in all states. 2 5

6 Overview Delay - what does it mean? Builders Risk basics What happens at placement Coverage basics Coverage issues Project scheduling How schedules are developed - brief review Delay issues Legal issues Hypothetical examples Questions and answers 3 Delay - What Does it Mean? Delay per the dictionary To cause to be later or slower than expected or planned. Delay per an owner, developer or contractor Point in time that is later or slower than expected or planned from any cause. We will discuss any cause - as any cause does not mean it is a covered loss. Delay per many carrier forms The period of time between the SCHEDULED OR ANTICIPATED DATE OF COMPLETION and the actual date on which commercial operations or use and occupancy can commence with the exercise of due diligence and dispatch. SCHEDULED/ANTICIPATED DATE OF COMPLETION - The later of the completion date scheduled in the construction contract and stated on the Delay Endorsement, or the date the Insured Project would have been completed for commencement of commercial operations or use and occupancy if direct physical loss or damage had not occurred. Quick tip - must have covered physical damage loss to have delay. Delay disconnect Many delays are not covered in the standard carrier form, such as labor or material shortages, weather conditions without covered loss, design changes, non-covered losses, deductibles/waiting periods to name a few. 4 6

7 The Broker/Insured/Carrier Disconnect, or Where the Challenges Begin Insurance policy definitions and owner/developer/contractor perception could be different. Two terms used in construction to describe the costs of a project: Hard Costs generally refers to the material and labor cost of construction (i.e., the contract value for the general contractor or construction manager). Workshop T4 Soft Costs everything else Insurers, brokers and carriers use different definitions as set forth in the policies Property coverage Time Element (DSU) coverage 5 Coverage Issues At placement How coverage works - Insured needs to work with broker and then with carrier to develop coverage needs and understanding of the coverage needed and exposures. The nuances between Property and Time Element (DSU) coverages: Soft Costs Where is the loss exposure? Do you need to insure 100% of the exposure values? Will all of the values reoccur? Will all of the values increase in the event of a delay? B.I. or Rental Loss Is for the most part estimated/speculative based on feasibility studies, which can change dramatically from project concept to completion. (What happens if the market takes a turn for the worse?) Loss of use of money - typically not covered Availability Payments for PPP-markets will cover need to know how the payments will work. 6 7

8 Coverage Basics Property Coverage should be written at an amount equal to 100% of exposure for all costs that would be incurred in the event of a total loss on the day prior to completion, including: Full construction contract value including overhead & profit and/or construction management fees. Architectural fees representing the cost of an architect s work for a rebuild. Other consulting fees that may be incurred for a rebuild. Developer fees, if any, that would be incurred by an insured as part of a rebuild. Other as may apply. Quick tip - report values that you expect to be paid for in a 100% total loss-if you decide to buy a limit lower (loss limit) than the 100% costs for PD or Delay - the 100% exposure values should be reported and work with broker/carrier to determine limit needed. Info/clarity-underwriters want this and in the event of a claim-it helps. 7 Coverage Basics Soft Costs Soft Costs are specifically defined in a typical DSU coverage form and do NOT include all soft costs as that term might be understood by a contractor or used in construction documents. The policy definition will control. To fully compensate an insured, Soft Costs coverage should be crafted to include existing costs that will be incurred for a longer period of time if there is a delay in completion such that additional of those same costs will be incurred. The coverage period should be the longest period of indemnity you estimate to be needed in the event of a catastrophic loss. Scheduled Soft Costs typically include: Additional loan interest. Additional design fees. Marketing expenses. Renegotiation of leases or purchase agreements Legal and other expenses Insurance premiums Project admin Real Estate taxes Other as negotiated, agreed and stated. The General Conditions conundrum. Quick Tip - remember these soft costs are additional costs, where additional is the key word. 8 8

9 Coverage Basics B.I./Rental Income Coverage should only be afforded for the owner/operator of the completed project. Contractors and subcontractors sometimes make claim for B.I., which is not covered by a typical policy Establishing limits what can be lost B.I. or rent during the period of indemnity vs. B.I. or rent for the operation post ramp up? Income is speculative at binding time. What triggers rental income loss problems with determining anticipated date of completion in the view of an insured/project manager versus carrier form. Workshop T4 9 Other Possible Coverages Extra/Expediting Expense What is it - is this Delay, Acceleration Costs? Extra Expense-many carrier forms provide the following Extra Expense shall be defined as the reasonable and necessary excess costs incurred during the period of restoration and repair that are over and above the total costs that would normally have been incurred during the same period of time had no loss or damage occurred. Extra expense shall include, but not be limited to equipment rental, emergency expenses, temporary use of property, demobilization and remobilization of equipment and facilities and expenses necessarily incurred to reduce loss excluding. However, any Additional Interest Expense, Debt Service, Business Interruption, Loss of Income, Loss or Earnings, Loss of Rents or Delay In Completion. Expediting Expense-many carrier forms provide the following The reasonable necessary extra costs to make temporary repairs and to expedite the permanent repair or replacement of the insured property, which is damaged by an insured peril, including additional wages for overtime, night work, and work on public holidays and the extra costs of express freight or other rapid means of transportation. Expediting base contract work (non loss related repairs), versus Expediting loss related repairs (no need for this coverage where DSU coverage exists) Extended General Conditions or Contractor Continuing Expenses (not directly related to covered loss) What are these? Why they generally are not covered. Let s review. 10 9

10 Typical Disputes or Questions Cost of repair labor, material, productivity, overhead, profit, and other fees What is P.D. versus non-p.d. expense? Date the project would have completed had no loss occurred - this can lead to disconnect as respects covered Delays. The period of loss related delay. Is the Period of Recovery the same as the Period of Indemnity? NO! Extended Period of Indemnity - does this make sense for a Builders Risk policy? What Period of Indemnity should I buy? Delay period when loss is caused by defect in design or workmanship and the policy includes an ensuing loss exception. What triggers loss and when is the loss incurred? (B.I. or rental income can often be incurred prior to policy expiration of date the project would have completed absent the loss). Should I build extra time ( float ) into my policy? 11 Schedule - Common Terms Project Schedule The plan for construction of the project which is typically created by the construction manager or general contractor, and which depicts the sequence and duration of construction activities, typically in a Gantt chart format. Critical Path The longest continuous chain of activities which establishes the minimum overall project duration. Float The amount of time that the commencement of an activity can be delayed before its completion causes it to become critical, thereby having the potential to cause delay. An activity which is critical has zero float. Thus, a delay in the completion of any activity on the project s critical path will result in a delay in project completion. Project Milestone A date which signifies an important event in the construction or completion of a project

11 Basics of Scheduling Contractors typically produce schedules in Primavera or other software during bid estimates and final project within 90 days of Notice to Proceed with a project; Contractors will typically update the schedule at least monthly; Contractors will revise the schedule logic as necessary to reflect actual conditions; A project schedule should represent the contractors plan to successfully achieve the project goals, i.e. complete the project on time and on budget. Workshop T4 13 Project Example and Delay Project term is 36 months. December 1, 2014 to December 1, 2017 I >12/01/2017 Good news - contractor is ahead of the schedule and plans to complete the project on September 1, 2017 I >09/01/2017 Delay Scenario One - A fire occurs on August 15, 2017 and estimated time to repair the damage is two (2) months. I >August 15, 2017 The contractor completes the work and the project is completed on November 20, still ahead of the original schedule. Is there a Delay? What costs come into play - does your Policy cover these costs? How does the Delay deductible work (Deductible-Thirty (30) days Waiting Period). Extra and Expediting Costs. First - let s review how Delay is intended to work as respects the standard carrier form - remember the Carrier definition stated on Page

12 Project Example and Delay Delay Scenario Two - A fire occurs on August 15, 2017 and estimated time to repair the damage is six (6) months. I >August 15, 2017 The contractor completes the work and the project is completed on February 15, Is there a Delay? What costs come in to play -does your policy cover these costs? How does the Delay deductible work? (Deductible-Thirty (30) days Waiting Period). Let s review extra, expediting, extended general conditions, acceleration costs - can you use the Delay limit to get back on schedule? (If you do, how does that work as respects the limit?) 15 Delay Costs as Part of Property Damage Claim Are increased costs of construction and other consequential losses resulting from the delay covered as part of the property damage claim where policies do not cover delay and soft costs or such costs are covered but sub-limited? Courts generally have held that delay driven costs, and those not directly related to the repair of damaged property, will not be covered as a Property Damage

13 Delay Costs as Part of Property Damage Claim Keating (N.J. Fed. Ct.) decision is an anomaly and was, in part, based on an analysis of proximate cause under New Jersey law which differs from the analysis in most other states. However, the decision does provide insureds with some support for an argument where insurers contend that such costs are not covered or are sublimitted. Other courts, however, have reached different conclusions. Oceanside Pier View (S.D. Cal. 2008) (Builders Risk provisions only cover physical loss or damage, not increased costs of construction materials and labor to construct never - before constructed portions of the Project.) Diamond Beach, VP., L.P. (S.D. Tex. 2010) (Distinguishing Keating and holding supplemental soft costs sought by [the insured] are by definition consequential damages or losses and are specifically excluded by the language of the policy.) Workshop T4 17 Determining Delay Period Loss Caused by An Excluded Peril Policies generally provide delay coverage when there has been direct physical loss or damage insured under this Policy. One common issue is determining the delay period when the loss is caused by faulty workmanship where the policy includes an ensuing loss provision. This policy shall not pay for loss, damage or expense caused directly or indirectly and/or contributed to, in whole or in part, by any of the following excluded perils faulty or defective workmanship or material, unless direct physical loss or damage by an insured peril ensues and then this policy will cover for such ensuing loss or damage only. There are two lines of cases for ensuing loss one requiring that the ensuing loss be the result of a separate and independent peril, while the second and minority line of cases find that there has been an ensuing loss when the excluded peril follows as a consequence of a covered peril. The question then becomes what portion of the delay was the result of the excluded peril versus a covered ensuing loss

14 Potential Areas of Uncertainty in Builders Risk Claims Although coverage may be provided for certain costs or fees, subject to certain sublimits, other provisions in Builders Risk policies may be broad enough that they also could potentially be covered under those provisions. Issues often come down to factual questions and consideration. This is a consistent issue for delay-related costs where there routinely are questions as to whether delays in the construction project are because of the loss or because of other pre-loss or non-covered issues, particularly in large cities where construction projects are closely scrutinized. There is relatively limited case law on many of these key issues as compared to other types of coverages. 19 Hypothetical Loss Delay Claims/Issues Project example - 70 story condominium/hotel, hard costs $650,000,000, $250,000,000 soft costs and $75,000,0000 BI. Covered loss causes six (6) month Delay. Let s review some of the typical soft cost/bi exposures. Additional construction loan interest issues? Lost rental income for 25 floors of hotel floors which had already been turned over to hotel operator for their fit-out prior to Policy Expiration. Lost opportunity cost (loss of use of money) on delayed condo sales - are these covered? Additional general conditions. Developers overhead, expenses and fees. Leasing commissions

15 Questions? Workshop T4 IRMI

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