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Risk Management Course of construction policies Inland marine-type policies appear to offer the broadest coverage By Donald S. Malecki, CPCU Apart from the fact that some property losses are meant to be excluded by course of construction policies, such as errors in design, faulty work or the use of defective materials, many types of losses confronting purchasers of these policies can be covered. Among the common reasons that course of construction (builders risk) policies could provide coverage but fail to do so are (1) exposures are not identified properly and the policy is not evaluated in terms of the exposures to loss, (2) the sole basis of policy selection is one provision or price, or (3) the same policy is available for all construction projects—which are rarely alike. Producers who select a course of construction policy without doing an exposure analysis and simply choose from among the policies available to the agency should consider a policy that offers the essential coverages without having to add endorsements (to the extent possible) to tailor the risk. This may be easier said than done, but if one were to review the many course of construction policies currently available, few endorsements are necessary to provide the basic coverages. Within this category are inland marine-type policies that cover property while in off-site storage locations, while in transit, and while being installed. To the extent that they cover property of others, these policies also can provide a certain amount of rigger’s liability coverage. Briefly, a rigger’s liability policy is necessary when property of others in the insured’s care, custody or control is being installed through the use of contractors’ equipment, aircraft (such as a helicopter) or watercraft. This coverage is necessary because commercial general liability policies commonly exclude liability for damage to personal property in the insured’s care, custody or control. Sometimes course of construction policies are broad enough to provide rigger’s liability coverage, but it is likely to be on a limited basis. For example, many course of construction policies do not provide coverage for property while airborne, except while the property is in transit in a regularly scheduled airline flight. If, therefore, a contractor were required to install some heavy equipment within a building or structure and found that use of a helicopter was the most viable way of accomplishing this task, a course of construction policy could not be relied on. Of course, not all rigger’s liability policies are broad in scope; they need to be reviewed before selecting the appropriate one. Advantages of inland marine-type policy Apart from the in-storage and in-transit coverage of an inland marine-type course of construction policy, these policies are commonly written to cover risks of direct physical loss or damage, unless the loss is limited or caused by a peril that is excluded. In other words, it is not necessary to attach a separate form consisting of the covered causes of loss. Most of these policies automatically include special or “all-risk” causes of loss. While excluding such business risks as errors in design, faulty work, workmanship, and defective materials, many of these policies commonly cover resulting physical loss or damage that is not otherwise excluded. An example is collapse. If it were found after a loss that a collapse was caused by the implementation of faulty work, coverage should apply to the resulting damage. The point is that it is not necessary to include one or more endorsements for purposes of obtaining collapse coverage when caused by faulty work, workmanship, defective materials or error in design. For the producer who does nothing more than choose from among the various course of construction policies available to the agency, this may be the “saving grace” against some allegation of fault following a noncovered claim. Some of these inland marine-type course of construction policies also include soft costs coverages. Briefly, a hard cost is the physical loss or damage to covered property. Soft costs represent the costs incurred as a consequence of direct physical loss or damage. Examples of soft costs are the costs incurred as the result of a delay in completion: the additional interest on money the named insured borrowed to finance the construction; and the actual loss of net rental income which results from delay beyond the projected completion date. Not all of those who are approached to purchase soft costs coverage will elect to purchase it because price sometimes is an obstacle. Prospective insurance buyers also do not foresee any loss occurring and therefore consider consequential loss coverage to be unnecessary. It is only after a serious loss occurs that the need for soft costs is viewed as having been necessary. One of the few exclusions that may be necessary in relation to course of construction policies has to do with renovation work. The reason is that course of construction policies are meant to cover losses involving new construction. Renovation work deals with existing buildings and structures. Unless a policy makes an exception for renovation work, a renovations endorsement likely will be necessary for all loss or damage to an existing building or structure. If producers do not perform any exposure analysis, the very least they should do is to inquire as to the nature of the work. If the job involves renovation work, this would be important, because, again, loss or damage to existing property is not meant to be covered. An avoidable problem A case where a course of construc-tion form provided coverage for renovation but ended up not covering a loss from collapse is McGuire, et al. v. Century Surety Company, 861 N.E.2d 357 (Ind. App. 2007). It involved renovation work on a house built in the mid-1800s. The coverage for this work consisted of a Builders Risk Coverage Form and Causes of Loss-Special Form. Two walls collapsed during the renovation. After the insurer denied coverage, the insureds believed coverage applied based on provisions of the Causes of Loss-Special Form dealing with the section titled “Additional Coverage Collapse.” This states in part that coverage applies if collapse is caused by one or more of the following: “f. [u]se of defective material or methods in construction, remodeling or renovation if the collapse occurs during the course of the construction, remodeling or renovation ….” The problem here was that the collapse was caused by faulty workmanship that was held by this court to not be an exception to the preceding provision. It was the court’s opinion that, viewing the language of the policy as a whole, coverage for collapse from faulty workmanship was clearly and unambiguously excluded. How the court showed why coverage did not apply is very confusing. Very troubling in this regard was the court’s opinion that the Builders Risk Coverage Form was intended to take precedence over the Causes of Loss-Special Form. In that vein, the court held that while there was an apparent exception to the faulty workmanship exclusion in the Causes of Loss-Special Form with respect to collapses of buildings, it would not apply because the Builders Risk Coverage Form removes this exception. Any further explanation of the court’s rationale for ruling against coverage not only would be a complete waste of time but also incomprehensible. Unfortunately this kind of result, where a court gets blind-sided, often happens through the tactic of “smoke and mirrors.” Adding insult to injury, this loss could have been covered had Builders Risk-Collapse During Construction endorsement CP 11 20 been issued. The reason is that this endorsement replaces the preceding provision in the Causes of Loss-Special Form dealing with additional coverage collapse. In doing so, collapse not only is covered if caused by the use of defective materials or methods in construction but also for faulty design, plans, specifica-tions, workmanship. Conclusion If an inland marine-type course of construction policy had been issued, the insurer might have had a more difficult time denying coverage. The reason is that the majority of these policies exclude faulty workmanship, materials, design, etc., but make an exception for resulting physical loss or damage not otherwise excluded. Thus, if collapse were to be caused by faulty work or workmanship, the damage from resulting collapse would be covered. There may be situations where even the damage from faulty work or workmanship also is covered, apart from a policy sub-limit covering such losses. Some insurers will do this strictly as an accommodation, but it is likely to involve large construction projects. The point is that if a producer is not going to do an exposure analysis, it would make good risk manage-ment sense for the producer to suggest a course of construction policy that utilizes a limited number of endorsements to provide coverage. Considering that faulty work and workmanship are increasingly prevalent causes of loss, it would behoove producers to suggest policies that will at least cover resulting physical loss or damage, such as collapse. If a course of construction policy excludes damage to renovation work, this needs to be pointed out, particularly where the insurance buyer does not appear to be sophisticated enough to figure this out. Of course policyholders have an obligation to read their policies, but pointing this out may avoid a future argument. * The author |
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