When buildings are being constructed under contract, the guidelines for arranging insurance for property loss--both those during construction and those immediately after construction--are not set in stone. However, underwriting and loss experience underscore the importance of:
* clarity in the contract with respect to the obligation to secure insurance and compliance with it
* care in making certain that the several interests are fully covered
* making certain that permanent coverage is effective when required and is in force before builders risk insurance is terminated
Responsibility for securing builders risk insurance must be firmly established in writing. Failure to do so can have serious consequences, as is demonstrated by a recent occurrence in northern Michigan. A downstate couple was looking forward to occupying their nearly completed home on the Lake Michigan shoreline. The house was destroyed by fire during the night. A jury awarded the couple $350,000 in their lawsuit against the contractor for breach of promise in failing to secure a builders risk policy.
The jury found that the construction firm failed to obtain insurance, having made a "clear and definite" promise to do so, a contention of the property owners with which the contractor disagreed. The couple had not arranged property insurance for the construction of the house because of statements allegedly made by the builder. An insurance provision in a construction contract/agreement is essential. A handshake alone is a bit risky.
Whether the construction project involves an industrial, commercial or residential building, each of the parties with an investment in the project has an insurable interest that must be protected. There is a community of interests here that can be covered cooperatively by insurance, avoiding adversarial situations.
Owners and contractors have property at stake in building projects. Our files of court decisions reveal situations that can be prevented by clear-cut contractual arrangements and insurance procedures. The experiences of others in courtrooms provide convincing guidelines.
Reliance Insurance Company v. Liberty Mutual Fire Insurance Company, decided by the United States Court of Appeals for the Sixth Circuit in 1994, is a case in point. An apartment complex developer/owner contracted with a builder for its construction. The contract provided for each to waive rights against the other for damages caused by fire to the extent of property insurance obtained pursuant to the agreement. A specific provision required the owner to purchase insurance that would cover the complex during construction--including the peril of fire.
Each of the parties bought a builders risk policy in its own name with neither including the other as an additional insured or loss payee. Fire destroyed part of the complex and the owner was paid in full for the damage to the property. The builder withdrew claim against its insurer and undertook reconstruction.
The owner's insurer appealed the trial court judgment in favor of the builder's insurer when it sued the latter for contribution to the settlement amount. The appeal court sustained, stating that the interests insured in the two policies were different. One covered an ownership interest, the other, contractual interests in completing and delivering the complex. Neither included the other party as an additional insured or loss payee.
The third essential on which we are focusing is the necessity for careful attention to dovetailing permanent property insurance with the termination of builders risk insurance. A case briefly identified as Baldwin v. Lititz Mutual Insurance Company et al., decided by the North Carolina Court of Appeals in 1990, demonstrates that gaps in protection can occur and insurance agents are in a position to minimize their happening.
The record showed that a contractor had built several hundred residential homes over a period of years and had obtained a builders risk policy through the same agency for each house. Most were built under contract with a buyer; but a few, as in this case, were begun speculatively, without a specific buyer. Buyers would purchase permanent insurance on their own initiative; the builders risk policies were canceled after construction and unearned premiums refunded to the contractor. The agency did not arrange permanent insurance for the buyers.
An agency representative called the contractor for a status report on the house in question and was advised that construction was completed. She testified that she informed him that there was no coverage under the builders risk policy after completion and that he should make arrangements for other insurance. He testified that he was asked if construction was completed but not advised that coverage had ended and that it was necessary for him to purchase other insurance for continuing protection.
The structure was destroyed by fire. Coverage was not applicable under the builders risk policy by virtue of its termination conditions. The builder had not secured permanent insurance and sued the agency. The agency was absolved. It had always provided only builders risk insurance. There was no evidence that the builder expected the agency to prepare permanent insurance or that he was misled.
An agent's expertise and guidance are needed and wanted for projects ranging from major commercial developments to single-family dwellings. Whether the client at the moment is the contractor or the owner, our advice to agents is to:
* Verify, from the contract, which party is required to secure builders risk insurance.
* Make certain that the interests of the contractor, owner and mortgagee(s) are covered, preferably under a single builders risk policy when practical.
* Review "when coverage ceases" conditions in applicable forms and stress the need for securing permanent insurance accordingly. *
©COPYRIGHT: The Rough Notes Magazine, 1999