Speakers: Vice President, Global Risk Management & Insurance Starwood Hotels & Resorts Worldwide Senior Vice President - National Director National Property Claims - Strategic Outcomes Practice Willis Group, SPPA, President Goodman-Gable-Gould/Adjusters International 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 by the Risk Manager. To indemnify for damage to a project in the course of construction To insure against financial / economic losses arising in the course of construction 3 Project Owner / Developer General Contractor Sub-Contractors 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? Pre-Existing Structures at the Site Project Duration Type of Structure Under Construction Any Other Entities with Interests in the Property 4 5 6
Machinery & Equipment (cranes, forklifts, etc.) 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 7 8 9 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. 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 11 Underground Works Sidewalks & Paving Maps, Plans, Blueprints Trees, Shrubs & Plants Overhead & Profit Percentage Property of Others 12
When Construction is Complete Punch List Warranty Work Partial Sales / Owner Occupancy Expiration of the Policy Certificate of Occupancy Acceptance of Project by Owner Unless Amended or Endorsed With Permission To Occupy 13 14 15 Amendments / Endorsements Granting Permission To Occupy 16 17
19 20 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: 21 PERILS EXCLUDED 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. 22 23 24
Defective Design & Workmanship Exclusion Defective Design & Workmanship Exclusion One of the most frequently cited exclusions is the Defective Design & Workmanship Exclusion g. 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. 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; 25 26 26 27 DEFINITION OF ENSUING* The courts have been inconsistent in drawing the line on ensuing losses Hard Costs / Contract Works Soft Costs / Income Loss *Dictionary.com 28 29 30
Hard Costs Definition of Contract Works EXTENSIONS OF COVERAGE 2.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. What is it? How is it measured within the context of a builders risk exposure? 33 Zurich American Insurance Company v. Keating Building Corporation 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 Zurich American Insurance Company v. Keating Building Corporation 513 F. Supp. 2d 55NJ Code Compliance Overhead & Profit Expediting Expense Holdings: The District Court, Simandle, J., held that: (3) The policy covered increased costs to complete construction of undamaged property; and (4) Consequential loss exclusion did not apply to increased costs to complete construction of undamaged property. 34 35 36
Zurich American Insurance Company v. Keating Building Corporation TYPICAL EXCLUSIONARY LANGUAGE FOR ORDINANCE OR LAW 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 37 38 TYPICAL LAW AND ORDINANCE COVERAGE ENDORSEMENT Overtime Labor Weekends & Holidays Slotting Charges for Material Purchases Express Freight & Transportation General Conditions Temporary Heat & Utilities Temporary Structures & Enclosures Equipment Rental Expediting Costs Coverage Policies Typically are Written with Nominal Sub-Limits 40 41 41 42
To Provide Coverage For Additional Costs Incurred as a Result of a Delay in the Completion of a Project Due to a Covered Cause of Loss Original Project Schedule Revised Schedule / Change Orders Non Loss Related Factors 43 44 45 Soft Costs Expenditures resulting from the delay that would not otherwise have been incurred Gross Earnings Lost income from a delay in start up of operations Rental Value Lost income associated with a delay in tenant occupancy Extra Expense Typical Exposures to be Considered: Real Estate Taxes Interest Consulting Fees Legal & Accounting Equipment Rental Overhead / Extended General Conditions Often Claimed as a Hard Cost General Contractor vs. Developer Insurance Refinance Charges Architectural & Engineering Historic Tax Credits Direct Costs Non-Operational Developer Overhead / Extended General Conditions Leasing Fees / Re-Negotiation 46 47 48
Refinance Charges Letter of Credit Remarketing of Bonds Advertising & Promotional Holdover Indemnity Others as Accepted by the Company 49 ALL POLICIES ARE NOT CREATED EQUAL 50 Soft Costs Coverage Comparison POLICY 1 A. Interest on money borrowed to finance construction or repair; B. Real estate and property taxes; C. Architect, engineering and consultant fees; D. Legal and accounting fees; E. Advertising and promotional expenses; and F. Rental or lease of construction equipment POLICY 2 Interest upon money borrowed to finance the contract work Other as accepted by the Company POLICY 3 1. Extra construction costs incurred to continue construction ad meet contract dates; 2. Construction loan interest on money borrowed to finance construction or repair; 3. Realty taxes and other assessments on the construction site accruing during the period of delay; 4. Architect, engineering and consultant fees; 5. Legal and accounting fees; 6. Insurance premiums; 7. License and permit fees; 8. Title fees; 9. Additional general overhead; 10. Additional debt service payment; 11. Additional bond interest; 12. Additional refinancing charges; 13. Additional construction loan fees Business Income Covers Only Those Earnings That Would Have Been Generated Had the Loss Not Occurred Soft / Delay Costs Provides for the Additional Cost Irrespective of Anticipated Earnings Rental income, meaning the: Net rental income (net profit or loss before taxes) that would have been earned or incurred; and Continuing normal expenses incurred in your rental operations Ramp-Up vs. Stabilization in the Calculation of the Loss 52 53
45000 40000 35000 LOSS OF RENTS Stabilized Occupancy STABLIZED TYPICAL POLICY LANGUAGE FOR EXPENSES TO REDUCE LOSS 30000 25000 20000 15000 Projected Actual Acceleration Costs 10000 5000 Slotting Charges 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Other Construction Costs Anticipated Completion Date Actual Completion Date JANUARY 1 APRIL 1 56 57 Factors Affecting Claim Evaluation & Preparation Subrogation Waivers Architectural/Engineering Services & Consulting Fees Legal & Accounting Fees Advisory /Consulting Services To Assist the Insured with Loss Related Activities From Emergency Services and Stabilization/Resumption of Operations Relates to Services In Connection With the Evaluation of the Loss & Preparation of the Necessary Claims and Supporting Documentation Additional Legal & Accounting as a Result of the Claim (i.e. New Lease) Questions? Steve Truono, Steve.Truono@starwoodhotels.com Dave Passman, David.Passman@willis.com Harvey Goodman, HGoodman@gggco.com 58 59