DOES YOUR BUILDERS RISK COVERAGE PASS INSPECTION?

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1 WORKSHOP M5 Monday, November 9 10:30 a.m. 11:45 a.m. DOES YOUR BUILDERS RISK COVERAGE PASS INSPECTION? Presented by Workshop M5 Steven A. Coombs President Risk Resources, Inc. Although construction contracts generally require the purchase of builders risk insurance with a specified minimum scope of coverage, these provisions do not adequately address all of the elements of a properly structured builders risk program. This workshop will examine key elements of builders risk insurance, including who is insured, covered and excluded property, covered and excluded causes of loss, and where and when coverage applies. A variety of issues that have a tendency to result in disputes, such as responsibility for deductibles, subrogation, and damage to existing property, will also be addressed. Attendees will leave the workshop with a better understanding of important considerations for arranging this crucial coverage. To print on both sides of the page, set your printer for duplex printing. Copyright 2015 International Risk Management Institute, Inc. 1

2 AXIS Insurance Design, Construction, Environmental & Surety AXIS Insurance provides professional liability, pollution liability and other customized coverage solutions for the design, construction and environmental services industries. Our underwriters are skilled at structuring insurance protection for contractors, construction managers, project managers, architects, engineers, surveyors, designers, planners, project owners, lenders, developers, and consultants to the building and construction industry. We offer an array of specialized products, including Contractors Professional & Pollution Liability, Contractors Pollution Liability, Surety and our Specialty Package Policy (General Liability & Contractors Pollution Liability with Professional Liability). AXIS also offers Property Insurance, Terrorism, Builders Risk, Casualty, Professional Lines, Cyber Insurance and other niche coverages. All of our policies are backed by the exceptional financial strength and solid claims-paying ability of the AXIS insurance companies, rated A+ (Superior) XV by A.M. Best and A+ (Strong) by Standard & Poor s. You can count on us for expert underwriting, excellent service and skilled claims management. To learn more about AXIS and our coverage capabilities, please contact Richard Zarandona at Coverage is underwritten by a member company of the AXIS group of insurance companies. Coverage may not be available in all states and jurisdictions.

3 Steven A. Coombs President Risk Resources, Inc. Mr. Coombs has 35 years of industry experience, with the last 28 years in a consulting environment. Prior to that, he was a national accounts underwriter for a large international insurance group. Mr. Coombs has been involved in scores of construction projects insured by traditional practice programs and wrap-ups, while representing owners, developers, design teams, construction managers, and general contractors. He has extensive knowledge and experience in various aspects of construction insurance. He is a coauthor of The Builders Risk Book (published by IRMI) and Workers Compensation Guide Coverage and Financing (published by National Underwriter Company). He is also a former president of the Society of Risk Management Consultants. Mr. Coombs holds a BBA from Western Michigan University and an MA from DePaul University with a concentration in risk management and insurance. He has earned the Associate in Risk Management (ARM) certificate and Chartered Property Casualty Underwriter (CPCU) designation. Workshop M5 3

4 Notes 4

5 Does Your Builders Risk Pass Inspection? Presented By: Steve Coombs President Risk Resources Workshop M5 Areas of Focus 1. Contract requirements 2. Physical damage: 3. Delay coverages: Soft Costs and Loss of Revenue 2 5

6 My Philosophy 1. BR is the backbone of construction insurance 2. BR policy must comply minimally with contract documents 3. BR is first stop after accidental project damage 4. BR insulates other types of insurance (i.e. CIPs) 5. Broad is beautiful! 3 Common Misconceptions 1. BR insurance is generic 2. Lower limits/reduced coverage benefits the sponsor 3. BR policies are designed to work hand-in-hand with contract documents 4. Fault based vs. no fault 4 6

7 Contract Requirements 1. Sources of BR Insurance Requirements AIA ConsensusDOCS DBIA EJCDC Custom Workshop M Comparison of Provisions Contract Requirements See handout Highlights Can all requirements be met? Key areas to consider: Who, what, where, when and how? 6 7

8 3. BR Policy vs. Property Policy BR vs. Property Insurance Is property insurance the equivalent of BR insurance? Common areas where property insurance falls short: Naming of insureds Inadequate automatic limits Foundations and underground property Land improvements Property off-site/in transit Scope of exclusions (i.e. testing) Large deductibles Troublesome conditions (i.e. vacancy/unoccupancy, increases in hazard, concealment) Unintended coverage for contractors (i.e. time element) 7 Physical Damage: 1. Insureds Not Named Properly (Who?) Named insureds vs. additional insureds As Their Interest May Appear Loss payees Issues with: architects, engineers and surveyors Issues with: material suppliers Issues with: lenders Issues with CIPs 8 8

9 Physical Damage: 2. Covered Property (What?) Description of insured project in policy Covered Property definition Foundations and underground property Land improvements Contractors equipment Existing buildings Workshop M5 9 Physical Damage: 3. Where Coverage Applies (Where?) How site specific is it? Policy Territory definition Limitations (i.e. airborne, waterborne, transit, off-site) Overseas suppliers Suppliers: Tie in with soft costs and delay 10 9

10 Physical Damage: 4. When Coverage Begins and Ends (When?) Definitions vary by policy (especially ending). Examples: Policy expiration Upon occupancy Acceptance When insurable interest ends Commonly don t match contract requirements When occupied in whole or part Transitioning to a permanent property policy 11 Physical Damage: 5. Policy Provisions and Extensions (How?) Coverage extensions and sublimits. Examples: Design fees Earth movement and flood Expediting expenses Other extra expenses Ordinance or law Testing Transit/offsite storage Site improvements Agreed amount Property valuation 12 10

11 Physical Damage: 6. Policy Exclusions (How?) Three general types Broad- Concurrent causation language Medium- Caused by or resulting from Narrower- Ensuing loss exceptions (specified peril or all perils) Current industry trend is to broader exclusions Workshop M5 13 Physical Damage: 7. Exclusion: Faulty design, workmanship, materials U.S. underwriters: Ranges from outright exclusion to resultant damage wordings European underwriters: DE clauses: 5 variations (DE1-5) LEG clauses: 3 variations (LEG 1-3) 14 11

12 Physical Damage: 8. Exclusion: Rain/Snow/Sleet/Hail Exclusions range from outright to limited buy back Often backstopped with concurrent causation language Underwriters may be receptive to resultant damage exception (typically with a sub-limit) State statutes usurp policy language 15 Physical Damage: 9. Catastrophe Perils: Wind, Flood, Earthquake Limits may be aggregated (issue for multi-year projects) Earthquake vs. earth movement Deductible wordings (flat vs. percentages) 16 12

13 Physical Damage: 10. Condition: Occupancy Clauses Projects often include some element of occupancy The majority of policies void coverage in the event of occupancy Clauses are wide ranging: In whole or part A certain % of square footage Limited permission for a short time Underwriters freely permit occupancy once exposure to underwritten Workshop M5 17 Physical Damage: 11. Condition: Subrogation Continues to be a major source of litigation for many reasons Recent trend: Some insurers will not honor waivers involving architects/engineers Work vs Non-Work As their Interests May Appear Post-construction issues 18 13

14 Physical Damage: 12. Rehabilitation/Renovation Projects Differences between these projects Existing Property exclusion/limitation Property policy vs. project specific BR policy Underwriters perceptions and attitudes 19 Delay Coverage 1. Soft Costs Moving target : Each insurer defines soft costs differently Industry spokesman: Soft costs may be another term that obscures more than it clarifies I wish we could get rid of the term Generally thought of as indirect costs: Expenditures for items other than hard costs, that are necessary for construction, but not typically part of the construction contract Examples: Advertising, professional fees, loan interest, property taxes, insurance premiums, development fees, leasing costs, permits 20 14

15 2. Soft Costs Coverage Prerequisites Delay Coverage Specifically described Actually expended Deemed necessary (or alternately reasonable) Would not have been incurred without the delay Workshop M5 21 Delay Coverage 3. Loss of Revenue Loss of earnings Loss of rental income More readily understood compared to soft costs Actual loss sustained in nature; valued forms are unusual but effective Imagine proving a loss on a facility that has not commenced operations and has no track record 22 15

16 4. Delay Coverage Requirements Delay Coverage Subject to terms/conditions of delay coverage forms and BR policy Must have underlying insured physical damage loss Underlying physical damage loss must be at a scheduled location Loss must take place during the period of indemnity 23 Delay Coverage 5. Period of Indemnity Starts on the anticipated completion date and ends as set forth in the policy (ignoring deductibles) Source of debate between insurers and insureds Anticipated completion date generally means the date the project would be put in normal operation 24 Source: The Builders Risk Book, Copyright International Risk Management Institute, Inc.,

17 Delay Coverage 5. Period of Indemnity (cont.) The anticipated completion date moves + or - throughout a project With most BR policies the delay coverage automatically tracks with the revisions to the anticipated completion date Workshop M5 25 Delay Coverage 5. Period of Indemnity (cont.) 26 Source: The Builders Risk Book, Copyright International Risk Management Institute, Inc.,

18 Delay Coverage 5. Period of Indemnity (cont.) Impact of an insured loss 27 Source: The Builders Risk Book, Copyright International Risk Management Institute, Inc., 2010 Delay Coverage 5. Period of Indemnity (cont.) Potential Coverage Gap Illustration 28 Source: The Builders Risk Book, Copyright International Risk Management Institute, Inc.,

19 Delay Coverage 5. Period of Indemnity (cont.) The period of indemnity ends as stated in the policy Can be stated in a number of ways: Number of days 12 months Most common approach incorporates some variation of phrases such as: that date the project should be completed or the date when the project is completed ; with reasonable dispatch or with due diligence; with similar materials or similar quality Conflicts are common due to vagueness of terms Workshop M Period of Indemnity- Ramp Up Effect BI: Permanent Property Policy Delay Coverage 30 Source: The Builders Risk Book, Copyright International Risk Management Institute, Inc.,

20 Delay Coverage 6. Period of Indemnity- Ramp Up Effect (cont.) BR Policy 31 Source: The Builders Risk Book, Copyright International Risk Management Institute, Inc., 2010 Questions? Does Your BR Pass Inspection? 32 20

21 To enter the drawing for $500, affix your personal bar code label here or complete this evaluation online. M5. Does Your Builders Risk Coverage Pass Inspection? Rating scale for all questions: 4 = Excellent 3 = Very Good 2 = Average 1 = Somewhat Disappointing 0 = Very Disappointing Overall rating for this workshop? Steven A. Coombs Preparation and quality of information Energy and enthusiasm of delivery Educational focus (not a sales pitch) Comments: