Builders Risk. David G. Jordan November 20, 2009

Builders Risk David G. Jordan November 20, 2009

What is Insured? In general Covers property damage that occurs during the period of construction. Potentially covers other losses stemming from or associated with property damage (discussed later).

Builders Risk is First Party Insurance Covers the insured for its own losses. In contrast, third party coverage protects the insured from liability for damage and injury cause to others.

Illustrative Example Covers Owners and Contractors for damage from a collapse. Would not cover liability for person injured during the collapse.

Direct Physical Loss Usually requires damage from direct physical loss.

Sample Language This Policy, subject to the terms, exclusions, limitations and conditions, insures against all risk of direct physical loss or damage to property insured We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.

Term From the Project Commencement to Project Completion.

Sample Language

Sample Language 3. ATTACHMENT/TERMINATION Applicable to the Master Policy in effect from 12:01 AM, September 1, 2008 until 12:01 AM, September 1, 2011, Insured Project coverage will apply at the Project start date noted in the Project Certificate issued and continuing in full force and effect as specified by the estimated Completion Date in the Project Certificate and/or the contract. NOTIFICATION OF COVERAGE/TERMINATION: If construction is not completed on time and coverage beyond the estimated project completion date is required, prior notification must be given by the University Representative to Aon Insurance Services West, Inc.

Evolving Risk

Evolving Risk Covered Property is in a constant state of change Project from Patch of Dirt to Standing Structure. (Thus unlike a completed structure, the risk is constantly changing.) Often written on Inland Marine forms. Policies vary as to what is covered/excluded.

Risks/Losses of Note These particular risks are sometimes covered, and sometimes not, depending upon the particular builders risk policy. If covered, they are often subject to a specified peril deductible or sublimit (explained later).

Loss in Transit Debris Removal Expediting Expenses Off-site Storage Damage to Trees and Shrubs Loss of Valuable Papers and Records Damage to Existing Property Tools and Machinery of Builder Software Loss Pollution Clean-up Increased Construction Costs (caused by law or ordinance) Soft Costs/Additional Expenses Consequential Damages Extra Expenses

Consequential Damages Typically defined as delay, loss of use and loss of market. Delay Loss of Use Usually corresponds to lost profits. (Ex. Can t collect $ for hotel room rentals, if hotel isn t open.) Loss of Market Market disappears as a result of the property damage.

Delay See e.g. Gemma Constr. Co. v. City of New York, 246 A.D.2d 451, 453 (N.Y. App. Div. 1st Dep't 1998) ("delay damage claims seek compensation for increased costs whether the costs result because it takes longer to complete the project or because overtime or additional costs are expended in an effort to complete the work on time. (Arguably Distinguishable from situation where property damage is the cause.)

Key Question Key question is whether it insured more than physical loss, such as higher construction costs due to direct physical loss (even for those portions of the project where construction has yet to commence).

Seminal Case Zurich Amer. Ins. Co. v. Keating Bldg. Corp. et al. Builders risk coverage dispute over damages related to the collapse of a parking garage under construction at the Tropicana Hotel and Casino in Atlantic City. Relevant issue was whether the builders risk policy covered the increased cost of construction for the un-built portion of the parking garage. The insurer, Zurich, argued that the increased costs were not covered because they did not concern the repair of damaged property, but rather were directly attributable to the project delay caused by the collapse. The court disagreed: Zurich's argument that the Policy's Valuation Clause limits coverage to only repair costs, and not increased costs to complete construction of undamaged property, are unpersuasive. The Policy's Valuation Clause states that the Policy covers only costs to "repair or replace the property lost or damaged at the time and place of loss with materials of like kind and quality less betterment...." However, the Court finds that from the perspective of an ordinary insured reading the Policy -- the perspective from which this Court must view the language of the Policy,...the term "property lost or damaged" as a result of the collapse refers to the entire structure, not simply to the location of the collapse.

Oceanside Pier View, LP v. Travelers Prop. & Cas. Co. of Amer. Oceanside involved higher construction costs resulting from a shoring wall that gave way; the necessary redesign and repair of the shoring wall delayed the project and caused the price to increase. The court, determined that that (1) such costs did not involve physical injury to covered property and (2) that such costs were governed by the policy s separate coverage for Expediting Costs and Additional Costs of Construction Materials and Labor. [T]he plain language of the "Builders' Risk" provisions protect only those buildings, structures, or portions of buildings and structures under construction at the Project, and do not protect against the unforeseen costs to construct never-before constructed buildings or structures which may arise as a result of delays. Accordingly,... the "Builders' Risk" provisions did not and do not cover the increased costs of construction materials and labor which Plaintiff alleges it incurred to complete portions of the Project which were not yet under construction at the time that the shoring wall failure caused the delay.... [Additionally] the Policy specifically includes a provision for the increased costs of construction materials and labor under "Additional Coverages"....

Critical Exclusion Faulty Workmanship Typically not defined in policy. Can be considered Faulty Product or Faulty Process or both.

Faulty product generally involves a physical object. E.g. a faulty roof. Faulty process, generally concerns problems during the construction of the object. E.g. damage caused during the construction of the roof. 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 policy holder. See Allstate v. Smith 929 F.2d. 447 (9th Cir. 1991): Failing to put a temporary cover over the exposed premises would not be faulty workmanship under the flawed product interpretation as that interpretation necessarily requires the presence of an object to evaluate....under the flawed process interpretation, however, failing to put a temporary cover on while replacing a roof may constitute faulty workmanship. Interpreting the clause, faulty workmanship, as the flawed quality of the product worked upon makes sense in the context of the policy as a whole.... [I]n light of the circumstances of this case, we find the term faulty workmanship ambiguous, and consequently apply the construction most favorable to the insured.

Some Courts alternatively find Faulty Workmanship to be unambiguous, finding that it precludes losses associated with faulty product or process. See: Wider v. Heritage Maintenance, Inc., 2007 NY Slip Op 27005, 9 (N.Y. Sup. Ct. 2007): Webster s Third New International Dictionary defines workmanship as 1: the art or skill of a workman: the execution or manner of making or doing something. There is no reasonable conflict in finding that workmanship can refer to the quality of both the process by which the work is done and of the finished product. Finding that the term workmanship is ambiguous because it can mean either would strain the contract language beyond its reasonable and ordinary meaning. Look to language of exclusion to see if other words infer a product or a process, and whether other provisions elsewhere more clearly indicate a product or a process, thus suggesting that the insurer could have been more explicit if it wanted to.

Key Provisions of Note All Risk v. Specified Peril. Replacement Cost Coverage v. Actual Cash Value. Sue and Labor. Specified Peril Deductibles and Sublimits. Subrogation/Transfer of Rights of Recovery.

All Risk v. Specified Peril All Risk coverage insures against all risks of loss except those that are specifically excluded by the policy.

Sample Language All Risk

Specified Peril Specified Peril coverage insures those risks that are enumerated in the policy. Sometimes called Broad Causes of Loss insurance.

Sample Language Specified Peril/Broad Form ''Loss must be caused by or result from any of the Covered Causes of Loss and occur within the Coverage Territory.

Replacement Cost Coverage v. Actual Cash Value ACV is current market value, taking into account depreciation i.e. what damaged property was worth. Replacement Cost is the cost of actually replacing damaged property, without deduction for depreciation, with property Comparable Material and Quality or Like Kind and Quality. (Similar but not the same).

Sue and Labor Both an Obligation and a Right Covers cost associated with mitigation of damages.

Sample Language Sue and Labor In case of any loss or damage, it shall be lawful and necessary for the insured, their factors, servants and assigns, to sue, labor and travel for, in and about the defense, safeguard and recovery of the said property, or any part thereof, without prejudice to this insurance; the charges whereof we will contribute according to the rate and quantity of the sum herein insured. Expense to Reduce Amount of Loss This policy covers such expenses as are necessarily incurred for the purpose of reducing any loss under this policy, though such expense may not exceed the amount which the loss under this policy is thereby reduced. Preservation and Protection of Property In case of actual or imminent physical loss or damage of the type Insured against by this policy, the expenses incurred by the insured in taking reasonable and necessary actions for the temporary protection and preservation of property insured hereunder shall be added to the total physical loss or damage otherwise recoverable under this policy.

General Conditions of Sue and Labor 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 necessary (e.g. threat must be likley as opposed to remote). 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 Percentage Based Deductibles (ambiguity). % 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 multiphased project) Ambiguity of Sublimits (is it in fact a sublimit or an additional grant of coverage?)

Percentage Based Deductibles Illustrative Case: Terra-ADI Int l Dadeland, LLC v. Zurich Am. Ins. Co., No.: 06-22380-CIV, 2007 U.S. Dist. LEXIS 14620 (S.D. Fla. 2007). Involved a windstorm deductible in the amount of 5% of the total insured values at risk at the time and place of a loss subject to a minimum of $250,000. Insured argued total value at risk was capped by policy sublimit for windstorm and insurer argued that total value was value of the entire construction project. Court construed the ambiguity in the insured s favor: The term "total insured values", as used in this case, is modified by the term, "as respects the peril of WINDSTORM." Therein lies the ambiguity that compels this Court's holding that section 7(D) of the policies at issue here is reasonably susceptible to differing interpretations and must therefore be resolved in favor of Plaintiffs

Ambiguity of Sublimits Illustrative Case -- E.g. RLI Ins. Co. v. Highlands On Ponce, LLC, 635 S.E.2d 168 (Ga. Ct. App. 2006). Builder s risk case involving a fire and causing damage attributable to soft costs, including additional interest expense, property taxes, and advertising expense. --The policy contained a provision entitled additional limits of insurance for soft costs in the amount of $100,000.00. --The insurer believed that the $100,000.00 limit was the sole amount of coverage for soft costs. --The policyholder countered that soft costs were covered under the general coverage limits of approximately $29 Million, and that the $100,000.00 was an additional amount specifically earmarked for soft costs.

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....

Anti-Concurrent/ACC Provisions Most courts have broadly applied this exclusion. See e.g. Arctic Slope Reg l Corp. v. Affiliated FM Ins. Co., 564 F.3d 707, 712 (5 th Cir. La. 2009).

Anti-Concurrent/ACC Provisions The ACC clause is unequivocal and unyielding. It excludes insurance against loss or damage caused by or resulting from any of the listed causes, including flood (as defined by the policy). It then repeats that loss or damage is excluded "regardless of any other cause or event whether or not insured under this policy that contributes concurrently or in any sequence to the loss or damage."

Restrictive Interpretation Mississippi State Court, Corban v. United Services Automobile Association 2009 Miss. LEXIS 481 (Miss. Oct. 8, 2009), has held that the clause has limited application. (does not apply to certain sequential causes, because provision cannot nullify a loss caused by a covered cause of loss. Holds that excluded cause of loss must be completely simultaneous with covered cause in order for exclusion to apply.) Other Courts such as California and West Virginia consider the provision to be contrary to public policy or State statutes.

Ensuing Loss Provisions Creates an exception to the application of an exclusion, if a covered cause of loss ensues from the excluded loss.

Sample Language We will not pay for loss caused by or resulting from the following, except as provided under coverage extensions. But if loss from a Covered cause of Loss Results, we will pay for the resulting loss.

Ensuring Loss Provisions Generally require that the covered cause be separate and distinct from the excluded loss. i.e. Courts will not allow the exception to swallow up the rule.

Narob Dev. Corp. v. Insurance Co. of N. Am., 219 A.D.2d 454 (N.Y. App. Div. 1st Dep't 1995): Where a property insurance policy contains an exclusion with an exception for ensuing loss, courts have sought to assure that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded risk.

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 was not an ensuing loss.

Acme Galvanizing Co. v. Fireman's Fund Ins. Co., 221 Cal. App. 3d 170, 179-180 (1990): We interpret the ensuing loss provision to apply to the situation where there is a "peril," i.e., a hazard or occurrence which causes a loss or injury, separate and independent but resulting from the original excluded peril, and this new peril is not an excluded one, from which loss ensues.

Subrogation and Waiver of Subrogation Subrogation allows Insurer to pursue recovery against third parties allegedly responsible for the loss. Owners and Contractors generally seek to have losses paid for by insurers rather than themselves.

Avoid dilemma by waiver provision in construction contract and corresponding waiver provision in insurance policy. (Insurer stands in the shoes of the insured)

Subrogation and Waiver of Subrogation Dilemma may also be avoided by naming subcontractors as additional insureds. Watch out for as there interests may appear language, which may permit Insurer to subrogate against insured re: liability claims, if there is no waiver of subrogation clause.

See OPI Int'l, Inc, v. Gan Minster Ins. Co., 1996 U.S. Dist. LEXIS 22959, 20-21 (S.D. Tex. Mar. 11, 1996) wherein the court stated: An insurer retains the right to subrogate against a subcontractor even where a subcontractor is an insured for a limited purpose, to the limited extent of his own property in the project or "as his interests may appear" in the project. The subcontractor is not protected [from his negligence which causes loss to other property beyond his interest and covered by the policy....