BUILDERS RISK COVERAGE Not Simply A Matter OfSticks & Bricks
BUILDERS RISK COVERAGE Not Simply A Matter of Sticks & Bricks Speakers: Stephen Truono Vice President, Global Risk Management & Insurance Starwood Hotels & Resorts Worldwide Harvey Goodman, SPPA President & CEO Goodman-Gable-Gould/Adjusters International
DISCLAIMERThe analyses and opinions in this presentation are based on terms and conditions of certain insurance policies used for illustrative purposes only. Each policy may contain different language and provisions. As a result, nothing herein should be relied on to apply to any given scenario not specifically addressed. Nor should the contents of this presentation be deemed to constitute legal advice.
Builders Risk Coverage is an extremely complex coverage and our presentation is intended to be a general overview and does not cover every possible scenario or issue that may be encountered bythe Risk Manager.
WHAT TO EXPECT • A greater understanding of Builders Risk coverage, including common pitfalls to avoid • Confidence your Builders Risk program will be better targeted to fully indemnify the insured for damages after an insured event • In the event of damage, knowledge of how best to navigate a very complex claim process
THE INTENT OF BUILDERS RISK COVERAGE • To indemnify for damage to a project in the course of construction • To insure against financial / economic losses arising in the course of construction
INTERESTS OF COVERED PARTIES • Project Owner / Developer • General Contractor • Sub-Contractors
PURCHASING SUFFICIENT COVERAGE • Does it correspond to the interests of the parties and the exposure? • Is the policy consistent with the construction contract? • Are there sub-limits, exclusions or other limitations which are inconsistent with the exposure?
KNOW THE PROJECT • Pre-Existing Structures at the Site • Project Duration • Type of Structure Under Construction • Any Other Entities with Interests in the Property
Understand your exposure: if a project takes 3 years to construct, 1 year of soft cost coverage is not sufficient
KNOW THE PROJECT (cont.) • Machinery & Equipment • Underground Works • Sheeting & Shoring • Excavation Work • Landscaping • Off-Site Storage of Materials
The type of property covered under a Builders Risk Policy can vary significantly from policy to policy
COVERED PROPERTY We will cover the building(s) or structure(s) described in the Declarations while in the course of construction, reconstruction or renovation provided a Limit of Insurance is shown in the Declarations. Covered property includes: a. Property of every kind and description that you own or are liable for that is intended to become a permanent part of the building or structure described in the Declarations. This includes building excavations. b. If not covered by other insurance, temporary structures on site, including cribbing, scaffolding and construction forms. c. Property in transit that is intended to become a permanent part of the building or structure described in the Declarations, providing a separate Limit of Insurance is shown for such coverage in the Declarations.
EXAMPLES OF PROPERTY OFTEN NOT COVERED UNLESS ENDORSED • Existing Structures • Machinery, Tools or Contractors’ Equipment Not Intended to Become a Permanent Part of the Building or Structure • Scaffolding, Fences • Temporary Structures, Office Trailers
EXAMPLES OF PROPERTY OFTEN NOT COVERED UNLESS ENDORSED (CONTINUED) • Can contractor’s equipment be insured under the Builders Risk policy? • If so, how? • Endorsement • Reporting Values
WHAT IS SHEETING & SHORING? • Does it become a permanent part of the structure? • Does it need to be specifically reported? • Is there a limitation for the value in the policy?
EXAMPLES OF PROPERTY OFTEN NOT COVERED UNLESS ENDORSED (cont.) • Underground Works • Sidewalks & Paving • Maps, Plans, Blueprints • Trees, Shrubs & Plants • Overhead & Profit Percentage • Property of Others
WHEN DOES BUILDERS COVERAGE BEGIN & END? • When Construction is “Complete” • Punch List • Warranty Work • Partial Sales / Owner Occupancy • Expiration of the Policy
WHEN DOES BUILDERS COVERAGE BEGIN & END? (continued) • Certificate of Occupancy • Acceptance of Project by Owner • Unless Amended or Endorsed With “Permission To Occupy”
2. Permission is granted to occupy the covered building(s) or structure(s) for its intended purpose(s) during the course of construction except as indicated below:
FREQUENT CAUSES OF LOSS • Fire • Collapse • Water Damage • Wind • Flood • Earthquake
INSURING AGREEMENT: This Policy, subject to the terms, exclusions, limitations and conditions contained herein or endorsed hereto, insures against all risks of direct physical loss of or damage to property insured while at the location of the INSURED PROJECT*, while in offsite storage or while in transit, all within the Policy territory and occurring during the term of this Policy.
One of the most frequently cited exclusions is the Defective Design & Workmanship Exclusion
Defective Design & Workmanship Exclusion • Defective, deficient or flawed workmanship or materials, or for expenses to redesign or revise flawed or defective plans or architectural designs. • But we will pay for “loss” to other Covered Property that results from such defective workmanship, materials or design provided such loss or damage is not otherwise excluded in this policy.
Defective Design & Workmanship Exclusion Cost of making good 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;
The courts have been inconsistent in drawing the line on ensuing losses
DEFINITION OF ENSUING* *Dictionary.com
TWO PRIMARY CATEGORIESOF COVERAGE • Hard Costs / Contract Works • Soft Costs / Income Loss
Hard Costs Definition of Contract Works PROPERTY INSURED: A. Permanent Works – All materials supplies, equipment, machinery, and other property of a similar nature being property of the insured or of others for which the Insured may be contractually responsible the value of which has been included in the estimated TOTAL CONTRACT VALUE* of the INSURED PROJECT* declared by the Named Insured, all when used or to be used in or incidental to the demolition of existing structures, site preparation, fabrication or assembly, installation or erection, alternation, renovation or construction of the INSURED PROJECT*. B. Temporary works – All scaffolding, form work, fences, shoring, hoarding, falsework and temporary buildings all incidental to the project, the value of which has been included in the estimated TOTAL CONTRACT VALUE* of the INSURED PROJECT* declared by the Named Insured.
EXTENSIONS OF COVERAGE C. EXPEDITING EXPENSE Subject to the sublimit entered in 6B(5) of the Declarations, this policy shall pay reasonable wages for overtime, night work, and work on public holidays and costs of express freight or other rapid means of transportation which are necessary to make temporary repairs, to expedite the permanent repair, or to replace the property insured when damaged by an peril insured, but only to the extent such is necessary to continue as nearly as practicable the normal operation of the work in progress.
REPLACEMENT COST • What is it? • How is it measured within the context of a builders risk exposure?
KEY CONSIDERATIONSIN THE MEASUREMENT OF REPLACEMENT VALUE • State of Completion / Installed Costs • Increased Costs to Complete the Project • Material Price Escalation • Availability of Labor • Re-sequencing of Contractors • Extended General Conditions • Seasonal Issues
KEY CONSIDERATIONSIN THE MEASUREMENT OF REPLACEMENT VALUE (cont.) • Code Compliance • Overhead & Profit • Expediting Expense • Zurich American Insurance Company v. Keating Building Corporation 513 F. Supp. 2d 55NJ
KEY CONSIDERATIONS IN THE MEASUREMENT OF REPLACEMENT VALUE (cont.) • Oceanside Pier View LP v Travelers Property Casualty Co. of America • 2008 Decision – Conflicts with Keating • Following Keating, AAIS (American Association of Insurance Services), Revised the BR Coverage Forms • New Exclusion: “Delay in Completion & Increased Insurance Construction Costs” was Added, Precluding Coverage for Increased Construction Costs Due to Delay
EXCLUSION –INCREASED CONSTRUCTION COSTS • d. Delay in Completion And Increased Construction Costs- • “We” do not pay for loss or damage caused directly or indirectly by a: • a) delay in the completion of construction, erection, or fabrication of a “building or structure” or any portion of a “building or structure”; or • b) a change in the sequence of construction, erection, or fabrication of a “building or structure” or any portion of a “building or structure” • regardless of the cause of the delay in completion or change in sequence.
CODE, LAW & ORDINANCE COVERAGE • Frequent Changes & Upgrades to Municipal & State Codes • Renovation / Restoration of Existing Building(s) • Post-Loss Code Compliance • Fire Protection & Life Safety • Loss to Damaged & to Undamaged Property
TYPICAL EXCLUSIONARY LANGUAGE FOR ORDINANCE OR LAW
TYPICAL LAW AND ORDINANCE COVERAGE ENDORSEMENT
TYPICAL EXPEDITING/ADDITIONAL COSTS • Overtime Labor – Weekends & Holidays • Slotting Charges for Material Purchases • Express Freight & Transportation
TYPICAL EXPEDITING/ ADDITIONAL COSTS (cont.) • General Conditions • Temporary Heat & Utilities • Temporary Structures & Enclosures • Equipment Rental • Expediting Costs Coverage • Policies Typically are Written with Nominal Sub-Limits