By LeRoy Utschig, CPCU, CLU, ARM
In the last issue, we discussed builders risk exposures and how to insure them by using Insurance Services Office's (ISO) commercial Property Builders Risk coverage forms. This article will discuss using American Association of Insurance Services' (AAIS) Inland Marine forms to insure builders risk exposures. At the conclusion of this article, I will give my reasons for recommending that Inland Marine Builders Risk coverage forms always be used.
Let's consider a hypothetical risk--Project Building, Inc. (PBI)--which was building a four-story structure. Their agent used AAIS Builders Risk Coverage, Form IM-7050 to provide the insurance for property exposures during the construction. As the agent was not familiar with the options of Inland Marine Builders Risk, coverage was written in the same way as if they were using a property builders risk form. This meant that insurance coverage applied only to a structure being built at the named location.
The contractors for the job moved to the site, removed ground so there could be a basement, laid down and packed sand before pouring the cement floor, and started to construct the walls. About two months after the beginning of the construction, the heating and air conditioning equipment to be used in PBI's structure was being shipped directly to the job site. En route, the truck transporting the equipment had a serious accident resulting in the machine's being destroyed.
The owner of the project expected the trucking firm to pay for the loss. They were surprised when the trucker replied that they did not owe for the damaged item as the machinery had been shipped under a released bill of lading. The bill of lading (bill of lading is the shipping document that always accompanies cargo that is being shipped via a common carrier) did state that the trucker was not responsible for the damage. Shippers will use a released bill of lading as a way of reducing their shipping costs.
After learning that the trucker would not pay for the damaged machine, PBI asked the air conditioner manufacturer to cover the loss. In response to this request, the air conditioner manufacturer said they were not responsible for the goods damaged in transit saying, "The goods were sent f.o.b. origin." The letters f.o.b. stand for "free on board." Historically, it meant that the title to the goods was transferred from seller to buyer once the goods had been loaded on board a ship. The word origin means the location of the firm shipping the goods. As most shipments in the United States are not done with ships, f.o.b. origin means that the title to goods being shipped transfers as soon as the goods leave the shipper's dock. In this case, goods were loaded on a truck at the air conditioning equipment manufacturer, and the title for the goods was transferred from the air conditioner manufacturer to Project Building, Inc., as soon as the truck left the air conditioning manufacturer's dock.
As f.o.b. origin was used when shipping the air conditioning machinery, PBI owned and was responsible for the air conditioning equipment while it was being transported.
Project Building, Inc.'s, insurer denied coverage. After the denial, the insurance agent asked if they could write a shipper's interest form to cover any subsequent shipments. The underwriter told the agent that the shipping exposure could be covered by using the Builders Risk coverage form. On the Builders Risk coverage form, the following words from AAIS's Form IM-7061 will be found:
"We cover...loss...to materials and supplies...in transit."
A $2,500 limit is automatically included with the AAIS Builders Risk coverage form. I recommend increasing this limit to whatever is appropriate for the account you are insuring.
On some cargo coverage forms, the vehicles hauling the items need to be listed with a specific limit per truck. Some also restrict the kinds of cargo that are covered, while still others have a mileage radius limitation. None of the normal cargo coverage limitations applies to the transit coverage on the Inland Marine Builders Risk coverage form. The Builders Risk coverage form simply has a limit per loss for claim damage to any property, to be used in the construction, while it is being transported to the construction site. Whether the item is being shipped by truck, airplane, railroad, or watercraft, the Builders Risk coverage form can cover the shipping exposure simply by putting a limit on the declaration page opposite the transit exposure.
Also, there was not enough room at the construction site to store all of the materials that were being delivered prior to being installed into the structure. To make room, a vacant lot was rented several blocks from the project site, a fence was built around it and materials that were being delivered for the project were stored behind the fence. Daily, the construction crew would take the material they needed for that day's work from the storage site to the actual construction location.
Despite the fence, vandals damaged materials at the storage site. This $15,000 loss was turned into the insurer. AAIS's Form IM-7050, Builders Risk Coverage, has an automatic coverage limit of $2,500 that applies to storage locations. My recommendation is to change the limit to reflect the values at the storage location.
A theft loss occurred at the project site. No watchperson or guard was on duty. You may recall that the ISO Property Builders Risk forms did not provide theft coverage unless there was a watchperson at the site. AAIS's Inland Marine Builders Risk coverage form covers theft losses whether or not there is a watchperson on duty. The insurer paid this theft loss even though there was no watchperson on duty.
Occupancy leases were being signed as construction was commencing. Six months into the building phase, a small natural gas explosion damaged the building. Construction was delayed for three months due to this loss. Also, three months of rental income was lost due to this occurrence. There was no coverage for this loss of rental income. Checking on the availability of coverage, the agent was told that coverage could have been provided by using AAIS's Form-7061, Soft Cost and Rental Income Endorsement, which can be added directly to the Inland Marine Builders Risk coverage form. This form covers rental income and soft costs, consisting of advertising, expediting expenses, fees, interest, leases and realty taxes.
At many construction sites, ground, sand or gravel is moved around, leveled and used as the base upon which the structure is built. Sometimes this base shifts after the weight of the building is put upon it. When the ground, gravel or sand shifts, the structure on top is damaged. That is what happened with this project. The material under the cement floor and the footing of the structure shifted. A cracked wall and part of the roof were damaged. The wall was cracked so badly that an entire section needed to be rebuilt. New girders and roof covering needed to be ordered to replace the damaged section of the roof. This claim was denied with the adjuster quoting the following from the AAIS's IM-7050, Builders Risk coverage form:
"We do not pay for loss...Settling, Cracking, Shrinking, Bulging, or Expanding."
Some insurers will provide coverage for settling, cracking, shrinking, bulging or expanding. I urge you to seek this coverage for your clients.
Several of the sub-contractors on the job wanted payment for the work they had done but for which they had not yet been paid. Form IM-7050 has no provision regarding whether or not payment should be made to sub-contractors. And, as is typical, the construction contract did not state that payment should or should not be made to the sub-contractors. The general contractor and Project Building, Inc., needed to resolve this question. AAIS provisions allow individual insurers to use a blank endorsement to either insure or not insure the sub-contractor's interest.
Nearing the completion of the project, a design error became evident as a part of the structure failed. The Builders Risk coverage form does not cover a loss due to a design error. Here is the actual exclusion from AAIS's Form IM-7050:
"We do not pay for loss caused by an act, defect, error, or omission relating to: design, specifications, construction or workmanship."
The current agent told Project Building, Inc., that there was no coverage available for this exposure. He had already talked to his underwriter and his underwriter told him that the insurer had no way to provide the coverage. While he was talking about this loss with an insurance agent friend of his from another town, she told him that she had been writing this coverage for years and was writing it with the same insurer that was writing the insurance for Project Building, Inc. Upon hearing this, the insurance agent writing the builders risk contacted his underwriter a second time to order the coverage. A blank endorsement can be used to provide coverage for losses due to design and related errors.
Seeking recovery under A&E may result in dispute
This loss was actually caused by the incompetency of the architect who designed the structure. It can be argued that this loss should be covered under the architects and engineers professional liability policy for the firm which designed the project. And, it probably will. When seeking to recover from the architects' and engineers' professional liability insurer, expect a declination followed by a lengthy court battle to finally get the loss paid. However, by the time attorney fees and court costs are deducted from the settlement, there will not be much money left to cover the loss. The delay in recovering the money might be enough to bankrupt the general contractor on the job, which certainly means that the project will not be completed on time.
Soon after all of the mechanicals (air conditioning, heating, ventilating, electrical and similar items) were installed, the entire setup was to be tested. The heating and air conditioning system was some of the first equipment to be tested. Many controls and switches were adjusted, and then the main power relay to the huge units on the roof was thrown up. There was a slight hesitation while it seemed like nothing was happening, but then all the lights in the entire building dimmed and an explosion was the next thing that everyone heard. The contractors and engineers on the project knew immediately what had happened and ran or climbed to the roof. None of the elevators was working as a result of the explosion. So, many men and women were running up several flights of stairs to get to the roof where the heating and air conditioning towers were. Upon coming out of the doorway to the roof, they realized their worst fears. Pieces of the heating and air conditioning tower were strewn everywhere.
Soon after reporting this loss to the insurer, PBI was informed that there was coverage. AAIS's Builders Risk form does not have a testing exclusion.
Tenants began moving their furnishings and fixtures into the structure while construction was still in progress. A small windstorm loss happened while this was going on. The loss was declined by the adjuster as she quoted the following from the Inland Marine Builders Risk form:
"We do not cover...loss of use."
Some might say that partial occupancy is not enough to activate this exclusion. My experience is that insurers tend to invoke this exclusion whenever there is any occupancy at all. To eliminate any possibility of a problem regarding partial occupancy, I recommend using American Association of Insurance Services' Permission to Occupy Endorsement, Form IM 7063. This is its wording:
"The Occupancy and Use provisions under Other Conditions are deleted and permission is hereby granted to occupy covered property."
ISO Builders Risk coverage forms do not have these coverages that are available on Inland Marine Builders Risk coverage: theft coverage without a watchperson's service being required; testing; soft costs.
Summary
These are the ideas presented in this article:
* Use an inland marine builders risk form as the coverage is broader than the regular property builders risk coverage form.
* No watchperson is needed to have theft of building materials covered.
* Loss of earnings/rents coverage is needed on all commercial projects.
* Settling coverage is always needed.
* Sub-contractors' coverage needs to be decided upon, whether to insure or not to insure their work.
* Error in design is an exposure that needs to be covered on all builders risk policies.
* Testing coverage is needed on any project.
* Permission to occupy the premises should be added. *
©COPYRIGHT: The Rough Notes Magazine, 1997