Builder's Risk Insurance: Resurrecting the Project After the Storm
Best Practices for Securing Coverage for Project and Claim Costs After Major Loss Events
HIGHLIGHTS:
- Catastrophic storms such as Hurricane Harvey and Hurricane Irma invariably cause property damage, schedule delays and other "soft costs" when they hit during a project's construction.
- Owners and contractors engaged in ongoing construction projects may experience both covered project losses and noninsured contract damages as a result of these rare and unpredictable weather events. Builder's risk insurance provides coverage for damages to insured property resulting from wind, flood, rain, windstorms, hurricanes and tropical storms.
- An experienced understanding of builder's risk insurance coverage, its common policy terms and the process and planning for proceeding with project and contract claims after catastrophic events will be critical to maximizing coverage and recovery for project and contract losses.
Catastrophic storms such as Hurricane Harvey and Hurricane Irma invariably cause property damage, schedule delays and other "soft costs" when they hit during a project's construction. Owners and contractors engaged in ongoing construction projects may experience both covered project losses and noninsured contract damages as a result of these rare and unpredictable weather events. Builder's risk insurance provides coverage for damages to insured property resulting from wind, flood, rain, windstorms, hurricanes and tropical storms. Exclusions to coverage often lead to contract claims under a number of contract clauses which can exceed insured claims.
Most insureds are unaware that unlike commercial general liability policies and other formalized polices of insurance, builder's risk polices are usually not written on standardized insurance industry coverage forms. Although the Insurance Services Office drafted a standardized builder's risk policy form, it is a general practice for insurance companies to issue builder's risk insurance on their own manuscripted forms. Given the variations, there are always nuances to a builder's risk claim. As a result, insurance industry and claim handling experience will benefit a client's claim process. An experienced understanding of builder's risk insurance coverage, its common policy terms and the process and planning for proceeding with project and contract claims after catastrophic events will be critical to maximizing coverage and recovery for project and contract losses.
General Policy Understanding
Most builder's risk insurance policies do not require a formal claim or suit to trigger coverage under policy terms. Builder's risk insurance provides coverage for defined property, resulting from specified perils for specifically named insureds. These policies provide coverage for ongoing construction projects along with specified materials, designs, plans, infrastructure and equipment that is designated to become a permanent part of project. There can be several exclusions for project-based claims that could include project defects, construction equipment, existing buildings, various definitions of "land" where the project is located, tools, temporary buildings, infrastructure and technology used in the process of construction.
Furthermore, most policies describe exclusions for delay, scheduling and other "soft costs" or contract-based claims. The scope of these exclusions may vary and terms exist that may actually allow such claims through policy riders and endorsements. An insured may also fail to realize that "soft costs" may be covered because of complicated policy terms and provisions. For example, some polices are structured to exclude consequential damages but separately provide coverage for expedited construction costs, expenses, consultant costs, professional fees, costs to prepare a claim and work to reinstate the project. Recognizing and proceeding with "soft cost" claims is important to ensure timely completion of the project, manage future project costs and provide coverage for contract change orders or overruns as a result of covered damages. These provisions may also allow for recovery of attorney's fees for the insured.
General practitioners and project team members should understand the context and format to submit claims. Policy conditions prescribe detailed claim forms, procedures and deadlines for claim submission and disputes after adjustments for claim losses. An insured must honor these requirements because failure to cooperate could result in the denial of a part of or the entirety of the claim.
Claim Handling
It is critically important for an insured to plan for an organized claim handling and submission process. There are five best practices when proceeding with a builder's risk claim with significant project losses.
- Create the claim team. This will include legal counsel, those with the most knowledge about the project (pre-occurrence event), those with knowledge about the project as a result of the cause of loss, engineers, contractors, accountants, the insured's insurance broker and corporate risk managers.
- Designate one point of organized contact with the insurance adjuster to provide details for the claim. Insured's must take care to determine what they write or say to the insurer and when they do so. In nearly all cases the point of contact includes legal counsel for the insured. The information provided to the adjuster will be used for and against the insured when adjusting claim losses based upon the facts and information provided to the insurer. Counsel for an insured will help establish the protections of attorney client, work product and other applicable privileges to protect sensitive information.
- Secure and certify the entire builder's risk insurance policy. A builder's risk policy generally includes declarations, an insuring agreement, exclusions, conditions, additional expansions of coverage, endorsements and policy jackets or covers. The terms of the policy will provide the road map to recovery and detail the coverage for the claim. Certifying the entire scope of the applicable policy will be important to maximize and plan for the claim submission.
- Begin to document and process losses carefully and accurately. Project accountants can create separate project codes or accounting codes. This process can also allow for separate tracking of "soft costs," which includes project administration costs, overhead, financing costs, design fees, taxes, lost profits, travel and/or transportation.
- Notify all carriers. Large value builder's risk coverage is usually underwritten through a syndicated insurance policy. This means that although there will be only one policy, there may be several different insurance companies with an agreed percentage of risk. It is important to identify all syndicated carriers and make sure to coordinate to place them on notice of the claim as early as possible.
Conclusion
Although damages caused by major events can be destructive, proper preparation of a builder's risk claim will maximize recovery of project losses. Industry professionals with claim experience will add value to the claims process. Many insurance brokers are not licensed in the United Kingdom where many of these catastrophic policies are underwritten by insurance syndicates. Without a clear understanding of the potential noncovered contract claims and the covered claims under the builder's risk policy, both contractors and owners may be underrepresented by qualified advisors. It is important to take a comprehensive approach to a coordinated claim that will reinstate the project, recover the project schedule and minimize damages and costs to all parties involved.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.