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WORKSHOP M5
Monday, November 9
10:30 a.m.–11:45 a.m.
DOES YOUR BUILDERS RISK COVERAGE PASS INSPECTION?
Presented by
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
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 off er 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 off ers Property Insurance, Terrorism, Builders Risk, Casualty, Professional Lines, Cyber Insurance and other niche coverages. All of our policies are backed by the exceptional fi nancial 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.
AXIS Insurance
Design, Construction,
Environmental & Surety
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Steven A. Coombs
President
Risk Resources, Inc.
Mr. Coombs has 35 years of industry experience, with the last 28 years in a consulting environ-ment. 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, construc-tion 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 Man-agement (ARM) certificate and Chartered Property Casualty Underwriter (CPCU) designation.
Worksh op M5
Presented By:
Steve Coombs
President
Risk Resources
Does Your
Builders Risk
Pass Inspection?
#IRMI2015Areas of Focus
1. Contract requirements
2. Physical damage: Common Coverage Problems
3. Delay coverages: Soft Costs and Loss of Revenue
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!
#IRMI2015 3Common
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
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Contract
Requirements
1. Sources of BR Insurance Requirements
• AIA • ConsensusDOCS • DBIA • EJCDC • Custom #IRMI2015 5
Contract
Requirements
2. Comparison of Provisions
• See handout • Highlights• Can all requirements be met?
BR vs. Property
Insurance
3. BR Policy vs. Property Policy
• 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)
#IRMI2015
7
Physical Damage:
Common Coverage
Problems
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
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Physical Damage:
Common Coverage
Problems
2. Covered Property (What?)
• Description of “insured project” in policy • “Covered Property” definition
• Foundations and underground property • Land improvements • Contractors’ equipment • Existing buildings #IRMI2015 9
Physical Damage:
Common Coverage
Problems
3. Where Coverage Applies (Where?)
• How site specific is it? • “Policy Territory” definition
• Limitations (i.e. airborne, waterborne, transit, off-site) • Overseas suppliers
Physical Damage:
Common Coverage
Problems
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
#IRMI2015
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Physical Damage:
Common Coverage
Problems
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
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Physical Damage:
Common Coverage
Problems
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
#IRMI2015
13
Physical Damage:
Common Coverage
Problems
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)
Physical Damage:
Common Coverage
Problems
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
#IRMI2015
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Physical Damage:
Common Coverage
Problems
9. Catastrophe Perils: Wind, Flood, Earthquake
• Limits may be aggregated (issue for multi-year projects) • Earthquake vs. earth movement
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Physical Damage:
Common Coverage
Problems
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
#IRMI2015 17
Physical Damage:
Common Coverage
Problems
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
Physical Damage:
Common Coverage
Problems
12. Rehabilitation/Renovation Projects
• Differences between these projects • “Existing Property” exclusion/limitation • Property policy vs. project specific BR policy • Underwriters’ perceptions and attitudes
#IRMI2015
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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
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Delay Coverage
2. Soft Costs Coverage Prerequisites
• Specifically described • Actually expended
• Deemed necessary (or alternately reasonable) • Would not have been incurred without the delay
#IRMI2015
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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
Delay Coverage
4. Delay Coverage Requirements
• 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”
#IRMI2015
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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
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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
#IRMI2015
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Delay Coverage
Delay Coverage
5. Period of Indemnity
(cont.)• Impact of an insured loss
#IRMI2015
Source: The Builders Risk Book,
Copyright International Risk Management Institute, Inc., 2010 27
Delay Coverage
5. Period of Indemnity
(cont.)Worksh
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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
#IRMI2015
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Delay Coverage
6. Period of Indemnity- Ramp Up Effect
Delay Coverage
6. Period of Indemnity- Ramp Up Effect
(cont.)• BR Policy
#IRMI2015
Source: The Builders Risk Book,
Copyright International Risk Management Institute, Inc., 2010 31
Does Your BR Pass
Inspection?
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?
4
3
2
1
0
Steven A. Coombs
Preparation and quality of information 4 3 2 1 0
Energy and enthusiasm of delivery 4 3 2 1 0
Educational focus (not a sales pitch) 4 3 2 1 0
Comments:
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