BUILDER S RISK CONTRACT PROVISIONS AND COVERAGE: WHAT EVERY CONTRACTOR S ATTORNEY SHOULD KNOW

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1 BUILDER S RISK CONTRACT PROVISIONS AND COVERAGE: WHAT EVERY CONTRACTOR S ATTORNEY SHOULD KNOW ABA Construction Law Forum Division 5 Monthly Telephone Conference Presenter: Amy Iannone, DPR Construction

2 BUILDER S RISK INSURANCE OVERVIEW 1 st Party Coverage claim Occurrence promise to pay Insurer

3 BUILDER S RISK INSURANCE OVERVIEW What Is Covered? Covers damage to the work itself during the course of construction Doesn t Commercial General Liability Coverage cover the same risks? Not usually written on standard industry forms All-Risk Policy Forms Named Peril Approach

4 BUILDER S RISK INSURANCE OVERVIEW Who is Covered? Named Insured Additional Insured Loss Payee Interests May Appear

5 BUILDER S RISK INSURANCE OVERVIEW Some Common Exclusions War, nuclear hazard, and seizure or destruction of property by governmental order Dishonest acts of the insured, the insured s employees, Mysterious disappearance Wear and tear, gradual deterioration, corrosion, rust, rot, mold, inherent vice Settling, cracking, shrinking, or expansion of walls, ceilings, floors, roofs, foundations Changes or extremes of temperature and humidity Damage by rain, snow, sleet, or ice to personal property in the open Damage caused by freezing (unless proper precautions have been taken) Release of pollutants, unless resulting from specified perils Flood, mudslide, sewer backup, and seepage of water Earthquake, volcanic activity, and other earth movement Mechanical breakdown, electrical injury, boiler explosion Faulty workmanship or materials, except resulting damage Collapse, except from specified causes Design error, except resulting damage

6 Named Insured vs. Insurable Interest Unreasonable conditions When is the project complete? Renovation work No waiver of subrogation in the Owner Contract Owner owns the BR policy Deductibles and uninsured exposures No coverage for resultant damage

7 CONTRACT TERMS AIA A edition Builder s Risk/Property Coverage Provisions Article 11, Section 11.3 Observations on drafting Coverage is required to remain in place until final completion, but most policies, by their terms, end at substantial completion Required coverage does not include LEG 2 or LEG 3 coverage No discussion of procuring coverage for contractor s soft costs No requirement to add the Contractor as an insured on the policy Deductibles are addressed, but sub limits are not No discussion of Owner waiving CAT peril coverage (which often happens) No good alternative language for when the Contractor procures the builder s risk

8 CONTRACT TERMS Example #1 Risk of Loss Risk of loss of any portion of the Project shall remain with Contractor unless and until such portion of the Project passes into the exclusive possession and control of Owner as provided herein. What if an earthquake destroys the Project when we are 70% complete?

9 CONTRACT TERMS Example # 2 Risk of Loss The Contractor assumes risk of all damage to the Work that it, or a party for whom it is responsible causes through its negligence or willful misconduct, except to the extent such damage is covered by property insurance required under this Agreement or otherwise applicable to the Work and/or the Project.

10 CONTRACT TERMS: Waivers of Subrogation Subrogation means that one party has the right to "step into the shoes" of another party for the purposes of bringing a claim for damages. A waiver of subrogation is when a party waives that right on behalf of its insurance carrier. A waiver of Subrogation may be effected in a contract, provided it is executed prior to the loss.

11 PROPERTY INSURANCE TIPS Review the builder s risk policy prior to starting construction When reviewing, make sure to understand the risks at the jobsite (renovation work, need for delay in completion coverage, hot testing, etc.) Reserve rights to review the policies in the contract provisions Risks are often shifted in contracts related to property insurance Review carefully Deductibles Uninsured/Underinsured Perils Conditions of coverage Insured status and waivers of subrogation DIC coverage