Builders Risk - Sticks & Stones CAN Hurt You! sponsored by

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1 Builders Risk - Sticks & Stones CAN Hurt You! sponsored by

2 BUILDER S RISK - Sticks & Stones CAN Hurt You! Robin Federici, CPCU, AAI, ARM, AINS, AIS, CPIW PO BOX 781 NORTH KINGSTOWN, RI Phone: Fax: Fred s Cell: Robin s Cell: EFEDERICI@IETA.BIZ ROBINF@IETA.BIZ Web site:

3 This material has been designed for use in training programs for insurance industry personnel. It is not intended to be used as a complete reference resource on the programs and coverages outlined herein. The program uses standard policy forms and endorsements for the purposes of discussing the exposures to loss that may exist, some of the coverage options available to treat them, and to provide a framework for discussions with carriers you represent concerning the programs they have available. Coverages, rules and materials presented during this program may differ from those used by individual insurance companies. Contact individual carriers for details about interpretations of their eligibility requirements, particular insurance contracts and rates. Copyright 2014 by Insurance Education & Training Associates, LLC. All rights reserved. This document or any part thereof may not be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information retrieval system, without the express written consent of Insurance Education & Training Associates, LLC. Inquires should be addressed to: PO Box 781, North Kingstown, RI robinf@ieta.biz. 2

4 INTRODUCTION - BACKGROUND The construction contract will stipulate who is responsible for purchasing the builders risk insurance. Once the coverage is purchased the policy typically provides coverage for all parties with an insurable interest in the project: project owner general contractor, and subcontractors When the project owner is required to purchase coverage for property under construction there are significant benefits for purchasing builders risk coverage rather than relying on their own standard property coverage. BUILDER S RISK COVERAGE COVERED PROPERTY The description of covered property normally includes all fixtures, materials, supplies, machinery, and equipment Some forms specify that coverage applies to all such property that is "used in, or incidental to" the construction project Many forms specify that temporary structures, such as scaffolding, construction forms, and temporary fencing used in the construction project, are covered. However, the extent of coverage for these types of property varies. 3

5 COVERED PROPERTY Property in Transit or Off-Site Coverage: Most builders risk forms include coverage Some policies specifically include these categories of property in the definition of covered property Many current forms provide slightly broader coverage for property off site than the coverage afforded for property in transit Property of Others: Most builders risk forms include coverage Coverage is usually provided based on the insured being liable Coverage is usually provided based on the same basis that they cover property of the insured Property Reported in Values: Some forms tie the definition of covered property to the insurable values reported to the insurer Office Trailers: If the definition of covered property is limited to property that will become a part of the completed structures, office and utility trailers would not qualify. If coverage applies to all property used in or incidental to the construction, office and utility trailers probably would qualify, unless there is an exclusion of motor vehicles that specifically applies to trailers. Other Property: Several categories of property are expressly covered in some forms but expressly excluded from coverage in others. It is important to examine the language of the covered and excluded property provisions 4

6 BUILDER S RISK COVERAGE EXCLUDED PROPERTY: Contractors Tools and Equipment: Most coverage forms specifically exclude this type of property If coverage is afforded the items would only be covered if they are included in the "total project value," "contract price," "values reported to the insurer for premium purposes," or some similar phrase. Signs: Signs may be excluded from coverage under a few builders risk forms. Since signs are conspicuously present at most commercial construction sites, consideration might be given to asking for the deletion of this exclusion, depending on the value of the signs and the size of the deductible. COVERED LOCATION: Coverage for property in transit and property temporarily at an offsite storage location is very important because contractors and project owners often are responsible for loss to construction materials prior to their delivery to the job site. 5

7 BUILDER S RISK COVERAGE ADDITIONAL COVERAGES: The most common builders risk additional coverage is debris removal coverage. Virtually all builders risk policies include a provision stating that coverage applies to the cost to remove debris of covered property resulting from a covered loss. Coverage for pollutant cleanup and fire department service charges is also frequently provided, perhaps because they are included in standard commercial property policies. Valuable papers coverage is fairly common BUT the term "valuable papers" may be more narrowly defined than in commercial property policies to mean blueprints, drawings, and maps while at the construction site. Coverage for trees, shrubs, and plants is sometimes addressed in the covered property section of the form, but many policies address this category of property as an additional coverage. Ordinance or law coverage is frequently structured as an endorsement or a coverage option. In some builders risk forms, coverage for loss due to collapse and/or soft costs coverage are included in the additional coverages section of the policy 6

8 SAMPLE CAUSES OF LOSS COMMON Builders Risk EXCLUDED PERILS: War, nuclear hazard, and seizure or destruction of property by governmental order Dishonest acts of the insured, the insured's employees, and those entrusted with property (except carriers for hire) Mysterious disappearance or shortage found when taking inventory Wear and tear, gradual deterioration, corrosion, rust, rot, mold, inherent vice, latent defect, insects, rodents, birds and other animals, except resulting in an unexcluded loss Settling, cracking, shrinking, or expansion of walls, ceilings, floors, roofs, foundations, etc. (except ensuing unexcluded loss) 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) Fungus, wet or dry rot, and bacteria Asbestos removal or other loss arising out of the presence of asbestos Release of pollutants, unless resulting from specified perils Delay, loss of use, loss of market, fines, penalties, and other consequential losses Operation of building ordinances or laws Flood, mudslide, sewer backup, and seepage of water Earthquake, volcanic activity, and other earth movement Mechanical breakdown, electrical injury, boiler explosion Testing Design error, except resulting damage Faulty workmanship or materials, except resulting damage Collapse, except from specified causes Loss covered under guarantee, warranty, or obligation of manufacturer or supplier 7

9 BUILDER S RISK COVERAGE TERMINATION: The following termination triggers are found in nearly all forms. Upon expiration or cancellation of the policy Upon acceptance of the completed building by the purchaser When the insured's insurable interest ends 90 (or some other specified number of) days after the project is complete SUBROGATION: Construction contracts routinely include a provision that the parties waive their rights of recovery against one another to the extent the loss is covered by the builders risk policy Most policies allow pre-loss waivers of subrogation, either affirmatively or impliedly. PROTECTIVE SAFEGUARD: The most commonly required builders risk protective safeguards are as follows: Watchguard service Job site fencing and lighting In most endorsements, the requirement that the identified safeguards be maintained is stated, as a warranty on the part of the insured. 8

10 BUILDER S RISK COVERAGE VALUATION: Can be either replacement cost or ACV Coverage for Overhead and Profit COMPLETED VALUE FORM vs. REPORTING FORM COMPLETED VALUE FORM This is the most popular method because there is no need for further reporting of values after the policy is purchased, provided that the original projected value proves to be accurate. REPORTING FORM Usually show the anticipated completed value as the limit of insurance, but the policy premium is generally calculated and paid, not at policy inception, but periodically throughout the policy term, based on the periodic (usually monthly) reports of values. The advantage of a reporting form is cash flow. However, reporting forms also have serious disadvantages: o It is essential that the reports be both timely and accurate. o Also, most reporting forms have a full value reporting requirement equivalent to a 100% coinsurance clause. 9

11 BUILDER S RISK COVERAGE LIMITS: Policies typically have several limits of liability Probably the most common arrangement is to have one limit applicable to: o property at the construction site o property in transit o property at off-site storage locations. If the policy includes other coverage options, such as delayed opening coverage, there will usually be separate limits applicable to each. There may also be sublimits applicable to certain insured perils/property, such as: o Perils - earthquake, flood, named storm, and testing, or o Certain types of property - scaffolding, fences, and temporary structures Builders risk insurance can be purchased on either a project-specific or a blanket basis: DEDUCTIBLE: Builders risk coverage is almost always written subject to a per occurrence deductible. Often there are several deductibles: o One deductible that applies to all losses o Separate, higher deductibles applicable to loss from flood, earthquake, "named storm," testing, and sometimes other perils such as vandalism and theft. o If the policy includes other coverage options, such as delayed opening coverage, separate time-based deductibles will usually apply to these as well. 10