An Overview of Builder s Risk Insurance. builder s risk policies (form numbers CP 10 10, 10 20, and 10 30), most insurance companies

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1 An Overview of Builder s Risk Insurance Builder s risk insurance, often referred to as course of construction insurance, is a type of first-party property insurance providing coverage for buildings or other structures while under construction. Although the Insurance Services Office ( ISO ) 1 has drafted standard-form builder s risk policies (form numbers CP 10 10, 10 20, and 10 30), most insurance companies issue builder s risk insurance on their own manuscript 2 form. As such, there can be significant variation from policy to policy when it comes to terms and conditions, although it is true that some general principles apply to most builder s risk policies. For this reason, anyone wishing to procure builder s risk insurance must not only have a functional understanding of the common features of builder s risk insurance, but must also understand the risks the policy is intended to insure on a given project and must review the policy to ensure it matches their expectations. Builder s risk policies are a key feature of any risk management plan for large-scale construction, whether it be new construction or renovation of an existing building. Ideally, appropriate builder s risk coverage responds relatively quickly to a loss, thereby avoiding project slow-downs or work stoppages. When builder s risk policies function as anticipated, they also avoid the need for litigation between project participants concerning who is at fault for an incident. There are a myriad of issues when it comes to builder s risk policies. This paper is intended as a primer on several important issues, which will in turn serve as a basis for discussion of builder s risk issues relative to the power and energy industry. 1 ISO is an organization that collects statistical data, promulgates rating information, develops standard policy forms, and files information with state regulators on behalf of insurance companies that purchase its services. IRMI Online, Glossary of Insurance & Risk Management Terms, available at (hereinafter, IRMI Glossary ). 2 The term manuscript is defined by IRMI as [a]n insurance policy form that is custom-designed for a particular insured. IRMI Glossary. However, the term has also been more liberally used to encompass any non-standard or insurer-proprietary coverage form.

2 I. Overview of Builder s Risk Coverage Terms A. Covered Property & Project Description Builder s risk coverage is a sub-set of first-party commercial property insurance. This means that, in contrast to liability policies (e.g., commercial general liability insurance), builder s risk coverage does not require that a claim or suit be brought against the insured in order to trigger coverage. Rather, builder s risk insurance provides coverage for the insured s own property while it is being constructed or renovated, typically along with any materials or fixtures that are intended to be incorporated into the finished product. Materials that are being moved to the site and that will ultimately be used in construction, along with temporary structures such as scaffolding, may also be covered by the policy. Not all property is covered by builder s risk insurance, however; policies commonly exclude coverage for the land on which a project is being built, existing buildings or structures, and any tools or equipment used by contractors during their work. Given the variation in policy forms, there will be many nuances to what constitutes covered property from insurer to insurer and from project to project. 3 Builder s risk policies are usually project-specific, meaning they commonly cover only one project, although some larger construction industry policyholders implement rolling builder s risk coverage which provides coverage for all of the insured s projects under construction. 4 Regardless of whether the policy insures one or multiple projects, the manner in which the project is described in the policy is of critical importance. The project description is 3 See STEVEN A. COOMBS ET AL., INTERNATIONAL RISK MANAGEMENT INSTITUTE, INC., THE BUILDERS RISK BOOK (2010); JAMES P. BOBOTEK ET AL., 5-50 NEW APPLEMAN ON INSURANCE LAW LIBRARY EDITION Rolling builders risk programs are typically implemented by larger general contractors or construction managers, as opposed to project owners. Because these policyholders are insuring multiple projects, they often have greater negotiating power and, as such, are able to obtain objectively better coverage than a project owner looking to insure a single project. See Steven A. Coombs, Builders Risk: Don t Overlook Contractors Policies (Dec. 2010), available at

3 usually inserted in the declarations or via endorsement, and may reference the street address of the project site, a contract number or value, or a general description of the end result (e.g., two story shopping center ). 5 Depending on the specific language used to describe the project, this identification of the covered project may have an unanticipated limiting effect. It is critical to ensure that all areas related to construction, including staging or lay down areas, are encompassed within the project description in order to meet the expectations of the insured. B. Coverage Period Unlike many policies which continue uninterrupted from year to year as long as business persists, builder s risk insurance is temporary in nature. Coverage begins, predictably, with the inception date of the policy. This may be specified by contract and/or tailored to meet the particular needs of a project, such as in cases when coverage is intended to apply to materials and equipment as they are in transit to the site before any actual work begins. 6 When coverage ends, however, is a much more complicated and critical issue. 7 Typically, coverage ceases when the project is considered completed, although this may occur at any number of dates such as, for example, when the owner accepts the structure as complete, when a certificate of occupancy is issued by the local building authority, or when the structure is put to its intended use. Issues may arise where a project owner occupies a portion of the project before the remainder is completed, or when a large project will be rolled out in phases. It is therefore critical that policyholders work hand-in-hand with their insurer and broker to ensure that the project completion date accurately reflects when and how they expect coverage to terminate. C. All-Risk and Named Peril Policies 5 See COOMBS, supra note 3, at See id. at 121; BOBOTEK, supra note 3, at See COOMBS, supra note 3, at

4 In general, builder s risk policies are written on two bases: (1) all-risk (also referred to in the industry as special form policies); and (2) named peril. All-risk policies 8 provide insureds with the broadest available coverage. Such policies do not provide a list of all causes of loss that are covered, but rather provide coverage for all causes of loss except those that are specifically excluded or limited by the policy s terms. 9 Courts which have analyzed all-risk policy language often hold that such policies cover all fortuitous losses which cause some form of physical alteration to the covered property. 10 In general, courts agree that under all-risk policies, the insured has the initial burden of showing that coverage is triggered, although satisfying this burden is relatively light in comparison to other insurance policies. Once the insured satisfies its initial burden, the burden then shifts to the insurer to prove that an exclusion unambiguously applies. 11 Conversely, named peril policies insure against losses caused by any specifically listed cause of loss. The ISO basic form or short form named perils coverage form (form number CP 10 10) identifies eleven covered perils: fire; lightning; explosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; sprinkler leakage; sinkhole collapse; and volcanic action. 12 The ISO broad form for named perils (form number CP 10 20) provides coverage for the same eleven perils as the basic form, but also adds the perils of falling objects; weight of snow, ice, or sleet; and water damage. 13 In order to obtain coverage for a loss under a named perils policy, the insured must prove that one of the listed perils caused the 8 ISO form CP provides all-risk coverage; however, as noted above, the ISO form is not in as wide use as other ISO products such as the CGL form. 9 COOMBS, supra note 3, at 141. It is important to note that although the term all-risk implies that all losses are covered, that is not the case policies always include a list of exclusions for certain risks. Id. at See, e.g., Zurich Am. Ins. Co. v. Keating Bldg. Corp., 513 F. Supp. 2d 55 (D. N.J. 2007). Note that some courts have gone a step further, holding that no actual physical damage or alteration of property is required in order to trigger coverage. See BARRY R. OSTRAGER, ET AL., HANDBOOK ON INSURANCE COVERAGE DISPUTES 1307 (13 th ed.). 11 See, e.g., Keating Bldg. Corp., 513 F. Supp. 2d at See BOBOTEK, supra note 3, at See id.

5 loss. 14 This burden is more stringent than the burden faced by an all-risk policyholder, which generally need only show that a fortuitous loss occurred. As such, all-risk coverage is usually preferable for construction industry policyholders and, indeed, is the most prevalent form of builder s risk coverage found in the market. 15 D. Typical Policy Exclusions All builder s risk policies exclude certain losses from coverage. These exclusions bar coverage for losses which can be grouped generally into three categories: (a) losses that are generally not insurable; (b) losses that may be covered via endorsement, at an additional premium cost; or (c) losses that are more appropriately covered under other insurance policies. 16 For example, flood losses are almost universally excluded from builders risk policies because such losses should be covered by a separate flood policy. Mechanical breakdown and exposures arising from testing of machinery or equipment are also often excluded, but may be purchased by the insured if appropriate for the particular project. A number of exclusions which appear in most builder s risk policies exclude coverage for so-called uninsurable risks, e.g., asbestos. Most litigation concerning builder s risk policies stems from the application of exclusions and their exceptions. General principles of insurance policy interpretation apply to these disputes in other words, exclusions will be narrowly construed, with any ambiguities construed against the insurer which drafted the policy. 17 Given the abundance of manuscript builder s risk forms in the market, finding case law precedent interpreting the scope of a given exclusion may be challenging; practitioners often must draw from treatises and expert/industry commentary, or must analogize similar language to the provision at issue. The underwriter s intent may or may 14 See Northwestern Mut. Life Ins. Co. v. Linard, 498 F.2d 556, 561 (2d Cir. 1974). 15 See COOMBS, supra note 3, at 141 (noting that nearly all builders risk policies provide all risks coverage ). 16 See id. 17 State law controls the interpretation of policy disputes, and may vary. However, these principles are largely followed from jurisdiction to jurisdiction.

6 not be considered, depending on whether a reviewing court determines that such extrinsic evidence is necessary. II. Insuring the Right Interests One of the critical issues relating to procurement of builder s risk insurance is making sure that all of the right parties are covered under the policy. One of the great benefits of builder s risk coverage is comprehensive insurance covering all project participants thus, the policy should not be limited to insuring only the party who purchases the insurance, but all contractors and subcontractors of every tier. This structure helps ensure that there are minimal disputes amongst project participants, because the policy covers the interests of all parties in the event of a covered loss. 18 In order to protect the interests of all project participants, the party procuring the coverage must name them in the policy. How this should be achieved is typically outlined in the construction contract. For example, the AIA form contract very simply states that the insurance must include the interests of the owner, contractor, and subcontractors of all tiers. Other forms are more specific the ConsensusDocs contract requires named insured status, whereas the DBIA contract requires additional insured status. 19 There are many misconceptions surrounding the extent of an insured s interest in the project vis-à-vis their coverage under the builder s risk policy. Specifically, construction industry insureds may be under the mistaken impression that by simply being listed on the policy as a named insured or additional named insured, or by removing the commonly added phrase as their interests may appear ( ATIMA ), 20 that they are protected from a subrogation claim by the 18 See COOMBS, supra note 3, at 81; BOBOTEK, supra note 3, at See COOMBS, supra note 3, at ATIMA language is commonly found in builder s risk policies, although there is little consensus on its meaning or application. In general, the phrase is meant to restrict the recovery rights of the... insured to only the proceeds in

7 insurer in the event of a loss caused by their work. However, whether or not an insurer may bring a subrogation action against a project participant that is insured on the builder s risk policy is intimately connected to state law defining insurable interest. Courts will not find coverage for an insured unless they have an insurable interest in the property. 21 An insurable interest is often referred to as the insured s financial interest in the subject of the insurance; specifically, many state statutes define an insurable interest as any lawful and substantial economic interest in the safety or preservation of the subject of the insurance against loss, destruction, or pecuniary damage or impairment to the property. 22 Some states have interpreted this statutory language as meaning that an insurable interest includes an interest in being held free from liability arising out of an insured s involvement in a construction project, 23 although others have limited a party s insurable interest to that party s property interest in the building under construction only. 24 Thus, in those states where the insured s insurable interest is limited to its property interest, the builder s risk insurer may be able to bring a subrogation action against it for any consequential losses stemming from its work. This issue highlights the need for careful attention to detail at both the contracting stage and the insurance procurement stage. Unexpected subrogation actions can, at best, lead to hard feelings amongst business partners and, at worst, lead to a breach of contract action for failure to procure coverage with the proper terms. Parties should consider whether and to what extent they want to pursue each other for course of construction claims and insert appropriate waivers into connection with the covered property in which the... insured has an insurable interest. DONALD S. MALECKI, ET AL. THE ADDITIONAL INSURED BOOK, Ch. 18 (7th ed. 2015). According to IRMI, [t]he phrase is arguably unnecessary in builders risk policies as it can lead to unintended consequences and unnecessary litigation. IRMI Glossary. 21 BOBOTEK, supra note 3, at See N.Y. INS. LAW 3401; MD. CODE, INS ; FLA. STAT ; ME. REV. STAT. TIT. 24-A, See Gen. Elec. v. Zurich-Am. Ins. Co., 952 F. Supp. 18, 21 (D. Me. 1996); Selective Way Ins. Co. v. Nat l Fire Ins. Co. of Hartford, 988 F. Supp. 530, 530 (D. Md. 2013). 24 See Paul Tishman Co., Inc. v. Carney & Del Guidice, Inc., 316 N.E.2d 875, 875 (N.Y. 1974); St. Paul Fire & Marine Ins. Co. v. FD Sprinkler Inc., 908 N.Y.S. 2d 637, 639 (N.Y. App. Div. 2010).

8 their contracts. In addition, parties should discuss the issue with their insurer and seek out a blanket waiver of subrogation if appropriate. III. Coverage Add-Ons As noted above, there is wide variation amongst builder s risk insurance policies, largely because insurers choose not to rely on the standard ISO forms. Despite this, there are a number of common supplementary or additional coverages which are usually available to insureds for additional cost. These coverages are often provided to the insured subject to a sublimit. It is important to keep in mind that the precise terms of these extensions may vary and, as such, it is important to carefully review the policy to be sure that the parameters of coverage are understood by all. 25 The following is a brief summary of two coverage extensions which may be of particular importance to policyholders engaged in construction in the power and energy industry. A. Hot Testing Hot testing refers to the testing of equipment to determine whether it functions correctly and meets the applicable requirements for that equipment. 26 In the power and energy industry, a hot test might include the actual powering up of energy-producing turbines to see if they meet manufacturer specifications. This sort of activity is considered extremely hazardous by insurers because if a piece of equipment has not been properly assembled or installed, it can cause extensive damage to itself, other property, or project workers. Insurers offer a coverage extension for hot testing, often subject to a fairly low sublimit. Such coverage may also be subject to its own set of conditions or exclusions. For example, one insurer offers coverage for hot testing, but excludes coverage for loss or damage to catalysts or to 25 See COOMBS, supra note 3, at 127; BOBOTEK, supra note 3, at See COOMBS, supra note 3, at 138. Cold testing, alternatively, is any functional testing other than hot testing, such as the testing of building systems. See id.

9 refractory linings and brickwork. The insurer may also mandate that certain minimum safety protocols be followed or, at minimum, that safety systems not be deliberately circumvented during any hot test. B. Delay in Completion Coverage A key objective for any project is to complete the project on time. When projects are delayed, overall project costs increase. Project owners may be negatively impacted in a number of ways, from loss of an anticipated revenue stream to increased costs of financing the project. Thus, insurance coverage for delay in completion can be critical to ensuring that any loss or damage occurring during construction does not negatively impact overall profitability. Delay in completion coverage comes in two general types: extra expense coverage, or coverage for soft costs, and loss of revenue coverage. What constitutes a soft cost may be explicitly defined by the policy, or may be left somewhat vague, but generally should include such things as additional interest charges, advertising expenses, additional fees of professionals (architects, engineers, and accountants), and more. 27 Loss of revenue usually extends to either lost rental income or lost business income, depending on the intended use of the project once completed. Usually, it is a prerequisite to delay in completion coverage that direct physical loss or damage occur at the project. 28 In other words, the delay may not stem from an error in construction sequencing or scheduling alone. Whether delay stems from a covered loss or is, in whole or in part, related to other, uninsured risks is a commonly disputed issue amongst insurers and insureds. In addition, the amount of coverage (e.g., the length of time for which the insured is entitled to lost revenues) is another area which sparks significant coverage litigation. 27 Id. at ; IRMI GLOSSARY. 28 Id. at 276.

10 IV. Conclusion Understanding builder s risk coverage is critical to the success of any construction project. Given the wide variation in builder s risk coverage forms, parties must carefully review their construction risks and communicate the same to their insurer to ensure adequate and appropriate coverage. Moreover, it is important to pay particular attention to construction contracts to be sure that the rights and responsibilities of each party are appropriately addressed.