What Owners and Contractors Need to Know

Transcription

1 Builder s RiskInsurance: What Owners and Contractors Need to Know Seth D. Lamden Neal, Gerber & Eisenberg LLP Insurance Policyholder PracticeGroup Two N. LaSalle St. Chicago, IL [email protected] WPL Publishing March 27, 2014

2 What is Builder's Risk ik Insurance? 2

3 What Builder's Risk Insurance is Not: Standardized, d d one size fits all insurance that covers everything that could go wrong during construction 3

4 Structure of a Builder's Risk Policy 4

5 Four Main Components: Declarations Lists insureds, insurer, policy number, covered property, policy limits, i policy period, forms and endorsements. Insuring Agreement States what policy covers. Policy Exclusions Provisions that eliminate coverage from Insuring Agreement (e.g. excluded causes of loss and property). t) Conditions Obligations imposed on insured (e.g. file proof of loss, cooperate with insurer). 5

6 Additional Parts of Policy: Definitions Certain policy terms are expressly defined in the policy. Coverage Extensions Optional coverages added to the policy, usually for additional premium. Policy Endorsements Forms added to policy that alter or modify coverage. Schedules May list named insureds or covered property. 6

7 Every word has meaning: Coverage for hundreds of millions of dollars of construction losses has turned on how courts interpreted the following terms (not a complete list): Collapse Arising out of Caused by Occurrence Sudden and accidental And Or Workmanship Building materials Pollutant You Accident Complete falling in Structure Dwelling Policy Application Property damage Subcontractor Materialman Making good Resulting Damage Occupancy Roof Covered Property Loss Property of Others for Which You are Liable Completed value Construction Physical loss or damage Work Contractor Builder Owned by the insured Similar property 7

8 Covered Parties 8

9 Who Should Be an Insured? Parties with an insurable interest t in the project, materials, and equipment. Project owner, general contractor, subcontractors, and sub subcontractors. Lenders? Other parties bearing risk of loss? 9

10 Be Named as an Insured Key reasons: Right to file claim li directly against insurer and subrogation protection. Confirm status as named insured on declarations and endorsements. Note: A loss payee is not an insured. 10

11 Covered Property 11

12 Don t Assume all Property Is Covered Other than project titself, covered property can vary from policy to policy. Look at "Covered Property" and "Property Not Covered" sections of the policy. Read descriptions of covered property in policy very carefully. 12

13 Commonly Covered Property: Building or structure under construction Foundations Fixtures and machinery Building materials and supplies onsite Temporary structures Property in transit Property stored off site Property of others Office trailers Underground pipes Landscaping materials Personal property of insured or within insured s care, custody and control (could include contractor s tools) 13

14 Existing property Contractors tools, equipment, and machinery (consider separate policy or coverage extension) Land, including fill and backfill materialsat project site prior to commencement of the project Landscaping materials, including trees, grass, shrubbery, etc. Timber and crops Commonly Excluded Property: Water Animals Waterborne and/or airborne property Motor vehicles, aircraft, and watercraft Signs Transmission or distribution lines, poles, towers and attached equipment Accounts, bills, currency, money, and securities 14

15 Covered Causes of Loss 15

16 Two Forms of Builder's Risk Policies: All Risk : Covers direct physical lloss from all causes except those that are expressly excluded din the policy. Specified Peril or Named Peril : Covers direct physical loss from causes that are expressly stated in the policy. 16

17 Example of All Risk Insuring Agreement: This Policy, subject to the Limit of Liability and the terms, conditions, and limitations contained herein or endorsed dhereon, insures against all risks of direct physical loss of or direct physical damage to Insured Property while at the construction site, stored off site, or in the course of transit within the Territorial Limits specified in the Schedule during the Period of Insurance of each Insured Project. 17

18 Commonly Excluded Risks or Perils : Dishonest acts of the insured Increased cost of construction Wear and tear, gradual deterioration, i corrosion, etc. due to law or ordinance Flood, mudslide, sewer backup, (except ensuing loss) and seepage of water Settling, cracking, expansion, Earth movement etc. (except ensuing loss) Mechanical breakdown, Freezing (unless proper electrical injury, boiler explosion precautions have been taken) Faulty workmanship, design or Asbestos materials (except ensuing loss) Release of pollutants, unless resulting from specified perils Collapse, except from specified causes Delay and consequential losses Loss covered under guarantee, warranty, or obligation of manufacturer or supplier 18

19 Coverage for Losses Caused dby Defective Design or Workmanship 19

20 Defective Design and Workmanship: Most policies exclude coverage for some losses caused by faulty design and workmanship. Wording (and scope of coverage) can vary significantly from policy to policy. A few words could be the difference between full coverage and no coverage. 20

21 First, what is workmanship? Defective completed product or performance of work (e.g. accident or equipment malfunction)? Onlydefectivecompleted completed product? Ambiguous? 21

22 Scenario 1: Insured Seeks Coverage for Cleanup Costs and Delay Damages Caused by Crane Collapse at Worksite Due to Operator s Negligence Policy Exclusion: This Policy does not insure against physical loss or damage caused by or resulting from... errors or defects in design or specification, faulty workmanship or faulty materials.... Insured s Interpretation of Exclusion: Damage ageis covered ed because faulty workmanship only means defects ects in completed work. Insurer s Interpretation of Exclusion: Damage is not covered because faulty workmanship means either: (1) defects in completed work; and (2) accidents or equipment malfunctions during construction. 22

23 Scenario 1: Insured Seeks Coverage for Cleanup Costs and Delay Damages Caused by Crane Collapse at Worksite Due to Operator s Negligence Court s Interpretation of Exclusion: Insured wins: Losses caused by crane collapse were covered because faulty workmanship refers to flawed products, not process of performing work. See 1765 First Associates, LLC v. Cont l. Cas. Co., 817 F. Supp. 2d 374 (S.D.N.Y. DNY2011) Note: One month earlier, the Nevada Supreme Court had held that a contractor s failure to properly p secure a tarp, which resulted in water damage, was faulty workmanship because workmanship includes both defective products and defective processes. Fourth St. Place v. Travelers Indem. Co., 270 P.3d 1235 (Nev. 2011) 23

24 London Market Design Exclusions (DE) and London Engineering i Group (LEG) Model lexclusions DE1: DE2: DE3: DE4: Outright Defect Extended Defective Limited Defective Defective Part Exclusion Condition Exclusion Condition Exclusion Exclusion DE5: Design Improvement Exclusion Least coverage Most coverage LEG 1/96 LEG 2/96 LEG 3/06 Outright Defects Exclusion Consequences Defects Exclusion Improvement Defects Exclusion 24

25 Scenario 2: Mere Presence of Defect in Design, Plan, Specification, Materials, or Workmanship (New tower being built in Pisa, Italy). I skimped a little on the foundation, but no one will ever know it!!" 25

26 Scenario 2: Mere Presence of Defect in Design, Plan, Specification, Materials, or Workmanship (New tower being built in Pisa, Italy). DE1 (1995) OutrightDefectsExclusion: This policy excludes loss of or damage to the Property Insured due to defective design, plan, specification, materials, or workmanship. Covered Damage None DE2 (1995) Limited Defective Condition Exclusion: DE3 (1995) Limited Defective Condition Exclusion: DE4 (1995) Defective Part Exclusion: DE5 (1995) Design Improvement Exclusion: For the purpose of the Policy and not merely this Exclusion, the Property Insured shall hllnot be regarded ddas lost or damaged dsolely ll by virtue of the existence of any defect in design, plan, specification, materials, or workmanship in the Property Insured or any part thereof. None 26

27 Scenario 3: Defect Causes Physical Damage to Defective Property and Non Defective Property One temporary angle piece used during structural steel erection not compliant with specifications As Designed As Built 27

28 Scenario 3: Defect Causes Physical Damage to Defective Property and Non Defective Property Angle piece fails, which leads to collapse of steel beam held in place by defectively installed piece. Collapsed beam was on highest level of structure. Weight of falling beam causes otherbeamsto to collapse, and also damages other property. It is possible that other angle pieces were installed in the same defective manner. 28

29 Scenario 3: Defect Causes Physical Damage to Defective Property and Non Defective Property DE1 (1995) Outright Defects Exclusion This policy excludes loss of or damage to the Property Insured due to defective design, plan, specification, materials, or workmanship. Covered Damage None 29

30 Scenario 3: Defect Causes Physical Damage to Defective Property and Non Defective Property DE2 (1995) Extended defective condition exclusion This policy excludes loss of or damage to and the cost necessary to replace, repair or rectify: (a) Property Insured which is in a defective condition due to defect in design, plan, specification, materials, or workmanship of such Property Insured or any part thereof; (b) Property Insured which relies for its support or stability on (a) above; (c) Property Insured lost or damaged to enable the replacement, repair, rectification of Property Insured excluded by (a) and (b) above Exclusion (a) and (b) above shall not apply to other Property Insured which is free of the defective condition but is damaged in consequence thereof. For the purpose of the Policy and not merely this Exclusion, the Property Insured shall not be regarded as lost or damaged solely by virtue of the existence of any defect in design, plan, specification, materials, or workmanship in the Property Insured or any part thereof. Covered Damage Not Covered: Defective angle piece(s) that have not failed. Defective angle piece that failed. Steel beam supported by angle piece that failed. Covered: All other property damage resulting from failed angle piece. 30

31 Scenario 3: Defect Causes Physical Damage to Defective Property and Non Defective Property DE3 (1995) Limited Defective Condition Exclusion This policy excludes loss of or damage to and the cost necessary to replace, repair, or rectify: (a) Property Insured which is in a defective condition due to a defect in design, plan, specification, materials, or workmanship of such Property Insured or any part thereof; (b) Property Insured lost or damaged to enable the replacement, repair, rectification of Property Insured excluded by (a) above Exclusion (a) above shall not apply to other Property Insured which h is free of the defective condition but is damaged in consequence thereof. For the purpose of the Policy and not merely this Exclusion the Property Insured shall not be regarded as lost or damaged solely by virtue of the existence of any defect in design plan specification material or workmanship in the Property Insured or any part thereof. Covered Damage Not Covered: Defective angle piece(s) that have not failed. Defective angle piece that failed. Covered: All other property damage resulting from failed angle piece, including steel beam held in place by angle piece that failed. 31

32 Scenario 3: Defect Causes Physical Damage to Defective Property and Non Defective Property DE4 (1995) Defective Part Exclusion This policy excludes loss of or damage to and the cost necessary to replace, repair, or rectify: (a)any component part or individual item of the Property Insured which is defective in design, plant, specification, materials, or workmanship; or (b)property Insured lost or damaged to enable the replacement, repair or rectification of Property Insured excluded by (a) above. Exclusion (a) above shall not apply to other Property Insured which is free of the defective condition but is damaged in consequence thereof. For the purpose of the Policy and not merely this Exclusion, the Property Insured shall not be regarded as lost or damaged solely by virtue of the existence of any defect in design, plan, specification, materials, or workmanship in the Property Insured or any part thereof. Covered Damage Not Covered: Defective angle piece(s) that have not failed. Defective angle piece that failed. Covered: All other property damage resulting from failed angle piece, including steel beam held in place by angle piece that failed. 32

33 Scenario 3: Defect Causes Physical Damage to Defective Property and Non Defective Property DE5 (1995) Design Improvement Exclusion Covered Damage This policy excludes: Not Covered: Defective angle (a) The cost necessary to replace repair or rectify any Property Insured piece(s) that have which is defective in design, plan, specification, materials, or workmanship. not failed. (b) Loss or damage to the Property Insured caused to enable replacement repair or rectification of such defective Property Insured. Covered: But should damage to the Property Insured which is free of such defective All other property condition i (other than damage as defined dfi di in (b) above) result from such a damage resulting li defect this exclusion shall be limited to the costs of additional work from failed angle resulting from and the additional costs of improvement to the original piece, including design plan specification materials or workmanship. steel beam held in For the purpose of the policy and not merely this Exclusion the Property Insured shall not be regarded as lost or damaged solely by virtue of the existence of any defect in design plan specification materials or workmanship in the Property Insured or any part thereof. f place by angle piece that failed and defective angle piece that failed. 33

34 Scenario 3: Defect Causes Physical Damage to Defective Property and Non Defective Property What if the policy also excludes loss caused by collapse... We will not pay for loss caused by or resulting from... collapse, except as provided for in Coverage Extensions. But if loss by a Covered Cause of Loss results in collapse at the location(s) described in the Declarations, we will pay for that resulting loss. And defective workmanship is not a covered cause of loss? For the purpose of the policy and not merely this Exclusion the Property Insured shall not be regarded as lost or damaged solely by virtue of the existence of any defect in design, plan, specification, materials, or workmanship in the Property Insured or any part thereof. Is this policy ambiguous? Is there coverage if it is ambiguous? 34

35 Coverage Extensions 35

36 Coverage Extensions: Can provide coverage for types of property or loss that would not otherwise be covered. Some exclusions can be bought back. Often subject to sub limits 36

37 Coverage For Construction Delays 37

38 Coverage For Construction Delays Most policies expressly exclude soft cost coverage, but coverage can be purchased. Even without express exclusion, coverage often limited to hard costs (repair of direct physical ll loss). Costs included in insured value? 38

39 Example of Soft Cost Exclusion: This policy excludes consequential loss, damage or expense of any kind or description including but not limited to loss of market or delay, liquidated damages, performance penalties, penalties for non completion, delay in completion, or non compliance with contract conditions, whether caused by a peril insured or otherwise. 39

40 Elements of a Covered Delay Claim: Covered Damage Delay in Schedule Soft ftcosts Caused by Delay* *Although policy languagevaries, g in general, soft costs must be: Resulting from covered physical damage; Specifically described in the policy; Actually incurred by insured; Necessary and reasonable; and Would not have been incurred but for the delay. 40

41 Duration of Delay Coverage: Covered Physical Loss Time Deductible Covered Delay Period Project Completion 41

42 Amount of Coverage: Limits, Sublimits and Deductibles 42

43 How Much Coverage Do You Need? Full value of completed construction project. Policy may include an escalation clause that increases the coverage limits (and premium) if change orders or other factors increase the completed value of the project. Actual cash value v. replacement cost coverage: Difference is deduction of physical depreciation. 43

44 Sublimits Lower limits that apply to loss resulting from a specific peril or type of property. 44

45 Common Sublimits: Location: Property at the construction site Property in transit Property at off site storage locations Coverage Extensions: Debris removal Acceleration Specified Peril: Earthquake Named storm Type of Property: Scaffolding Temporary structures 45

46 How Does a Deductible Work? Example: Covered $12M Loss $1M Deductible $10M Policy Limit $1M $10M $1M Insured pays Insurer pays Insured pays 46

47 Deductibles Almost always per occurrence deductible that applies to all losses. May include separate, higher deductibles for specified perils such as flood, theft, etc. If delay coverage, time based deductible often applies. 47

48 When Does Coverage End? 48

49 When Does Coverage End? Substantial Acceptance Certificate of Completion? by Purchaser? Occupancy? End of Maintenance Period? Policy Expiration Date? 49

50 Example of Policy Termination Clause: Coverage will end when one of the following first occurs: a. This policy expires or is cancelled; b. The covered structure or building is accepted by the purchaser; c. Your interest in the property ceases; d. You abandon the construction with no intention to complete it; e. The structure of building has been completed for more than 90 days; f. No work has been performed for at least 90 days. 50

51 When Does Coverage End? Event that terminates coverage should be stated clearly in the policy, and should match the parties contractual obligations. Completion, occupancy, etc. may not always be dt determined dby a fully objective measure. 51

52 Using Commercial Property Insurance to Cover Construction Risks 52

53 Commercial Property Insurance Lack of adequate coverage, including for property located off premises and while in transit. (i.e. lower limits, fewer specified perils, etc.). Contractor is not aninsured insured. Claims could lead to increased premiums for owner, or disputes with contractor if owner does not want to make claim. 53

54 Buying a Builder s Risk Policy 54

55 Buying a Builder s Risk Policy Insureds Property and Locations Covered Causes of Loss Amount of Coverage Project owner All contractors and subcontractors (except soft cost/delay) Other stakeholders? Structure/construction site Fixtures Scaffolding and temporary structures Tools and equipment Off site storage Property in transit Existing property and land Named peril or all risk? Faulty design and workmanship ensuing loss Testing Boiler and machinery Collapse Earth movement Wear and tear ensuing loss Actual cash value or replacement value Demolition and increased cost of construction Limits, sublimits and deductibles: per occurrence and aggregate Estimated value or contract price Additional Coverage Subrogation Termination of Coverage Delay in Completion Debris removal Expediting expenses Expense to reduce loss or delay Pollution Terrorism Law and ordinance Claim preparation expenses Insured permitted to waive recovery rights against others before loss Waiver of subrogation Policy expiration Occupancy Acceptance by owner Other specified event Loss of income/rent Soft costs Expense incurred to reduce delay Indemnity period: commencement and expiration 55

56 Drafting Insurance Specifications 56

57 Drafting Insurance Specifications Who buys coverage/pays premiums? Who pays deductibles? Types of coverage Identity of insureds Deductibles and SIRs Limits and deductibles Priority of coverage Failure to provide insurance Waiver of subrogation Notice of cancellation Evidence of insurance Acceptability of insurers Duration of coverage (including possibly post-completion maintenance) 57

58 Making an Insurance Claim 58

59 Making an Insurance Claim Immediate notice to insurer and broker. Confirm that you have complete copy of policy. Preservation of evidence. Get insurer s consent before incurring non emergency repair expenses Cooperate p with adjuster. Provide complete documentation. Establish communication protocol. Use of counsel to establish privilege. Creation of discoverable documents would I want to be cross examined on this? Avoid committing premature cause analysis to writing. Carefuldocumentation of losses. Use of internal cost codes. Consider counsel and consultants to help categorize expenses/maximize coverage. Proofs of loss/interim proofs of loss Request for interim payment/advance payment 59

60 Builder s RiskInsurance: What Owners and Contractors Need to Know Seth D. Lamden Neal, Gerber & Eisenberg LLP Insurance Policyholder PracticeGroup Two N. LaSalle St. Chicago, IL [email protected] WPL Publishing March 27, 2014