Workshop D Workshop D Builder s Risk: From the Basics to the Best Practices Daniel P. King Frost Brown Todd LLC Steve Niparko Aon Risk Solutions
Builders Risk Insurance What kind of builder s risk policy was required by the contract Who bought the Builder s Risk policy? I wonder what coverages are provided by the policy. Hmmm...what about that equipment I moved into the building? 2
Types of Builders Risk Insurance 3
Looking at the Contract and Builders Risk Insurance Who Procures the Policy? Who is Insured? Location Scope of Project Risks Allocated and Types of Losses Covered 4
Builder s Risk A Cautionary Tale 5
Builder s Risk & Coverage Response Coverage Enhancements & Related Sublimits Soft Cost Coverage Property Preservation and Clean-up Acceleration & Expediting Expenses Extension of Contractor Duration Costs 6
The Culprit 7
5/16 Bolt v. 3/8 Bolt 8
Result 9
Damaged Property - $10 M 10
Soft Costs - $500K Maintenance and extended warranties for equipment Architect costs Consulting costs Temporary Fence/Security Power Water Additional Insurance Premiums Loan Note Interest Property Taxes 11
Builder s Risk Soft Cost Section of Application SECTION 6 DELAY IN COMPLETION A. Soft Costs Indemnity Period (if other than 365 days): Days Interest Expense: $ Realty Taxes & Ground Rents: $ Advertising & Promotion Expense: $ Insurance: $ Other: $ Other: $ Other: $ B. Loss of Rental Income Annual Rental Value: $ C. Loss of Gross Earnings Annual Gross Earnings: $ 12
Existing and Surrounding Property Examples of Property Exposures: Hospital addition where the building envelope of the existing structured as opened for connection to the completed construction works Road construction where interchanges, etc. are connected to existing operating roadways Electrical, Mechanical or Plumbing connections for the new structure are connected to existing systems Owner Equipment Stored on Controlled Construction Site 13
Loss to Property that is within the Care, Custody and Control of the Contractor: Losses excluded under typical endorsements of the Contractor s General Liability Policy Applies to Adjacent Property, Existing Tie-in, Stored materials and Equipment The uninsured, stranded risk Key Solution: The Stranded Risk In procuring the Builder s Risk Policy, a sublimit of coverage of insurance to fund loss or damage to adjacent or surrounding property that could be damaged or destroyed as a result of the construction works. 14
Partial and Early Occupancy Standard Builder Risk Policy coverage will cease when the project is put into its intended use. Losses may be excluded when the Owner has partially occupied and /or commenced use of the project, i.e., substantial completion. Key Solution: In procuring the Builder s Risk Policy, understand the needs of the owner for early occupancy and delete the policy terms that may limit of coverage. 15
The Impact of Aligning Contract and Insurance Terms Earthquake Or Earth Movement? 16
Are Risks and Perils Treated Equally Between the Contract and Policy? Owner s Contracts do not include both concepts Earthquake Coverage (in earthquake prone locations) is Often Absent From Policies Unless there is high premium/deductible coverage Earth Movement (not defined as an Earthquake ) is typically included Compare Treatment of Force Majeure Risks retained by the Owner 17
Waiver of Subrogation & Issues Incorporation into Insurance Contract Scope of Waiver Existing property Surrounding property 18
Subrogation A Cautionary Tale How far does subrogation language extend? What happens when not all parties can be sued? Unintended consequences of waiver of subrogation can be significant. 19
Recommendations Coordination of Contracts and Policies Named Insureds Waivers and Subrogation Recognition of Project Perils, Risks and Treatment Existing property Losses Covered 20