When adding entities as insureds to builders risk policies, the phrase "as their interests may appear" is sometimes referenced in the coverage grant. What does this phrase mean and what are its ramifications?1
It is not uncommon when reading builders risk policies to see endorsements adding general contractors, subcontractors, and others as insureds "as their interests may appear" or "ATIMA." The ATIMA phrase seems innocent enough on its face, but its use sometimes causes misunderstanding and conflict between insurers and their insureds. When contractors are added to builders risk policies as insureds, they assume they are insured against accidental physical damage to the project. When underwriters utilize the ATIMA phrase in conjunction with adding insureds to the policy, claims adjusters sometimes interpret this is to mean that coverage for contractors is limited to the incremental work that they individually perform. In their minds, this opens the door to subrogation actions. When litigation ensues, the phrase is left to the interpretation of judges and juries, with occasional unintended results.
History of Insurable Interest and ATIMA
Establishing insurable interest as a requirement of insurance can be traced to the United Kingdom through passage of the Life Assurance Act of 1774. The Act eliminated a common practice of gambling, whereby life insurance was purchased on strangers and well-known public figures alike for speculative gain, often in conjunction with "death pools.
The meaning of insurable interest for property-related insurance policies has evolved through case loss during the past 3 centuries. In Le Cras v. Hughes (99 Eng. Rep. 549 (KB 1782)), the British seized a Spanish ship during wartime. Under the "Prize Act," the British captain and crew believed they possessed certain rights, which entitled them to title of the ship and goods once it was sailed back to England. They insured the ship, and it was destroyed by a storm during the voyage. They made an insurance claim. The insurer denied the claim by reasoning that they had no right to the ship, only expectancy that they would eventually obtain the ship. A court reviewed the case, and the judge found that a factual expectancy existed, and an insurable interest was therefore supported.
The use of the ATIMA phrase was probably rooted in marine contracts. In Marine Insurance: Its Principles and Practices (McGraw Hill 1919), author William Winter writes:
The expression as their interests may appear, while in general use, is technically objectionable in that it may put on the underwriter the burden of deciding what the respective interests of the parties are.
Fire underwriters in the 1800s felt that insuring interests, other than fee simple, was to be avoided. In fact, most fire policies of the era included a condition that automatically voided the policy if the insured's interest was less than entire, unconditional and sole ownership, unless such interest was disclosed and added to the policy. In a Guide to Agents by F.C. Moore (published for the Continental Insurance Company of New York, January 1877), the following appears on page 117:
The insurance of interests smaller than that of the fee simple is so often attended with moral hazard and danger that companies have been obliged to protect themselves … by a clause in their policies.
At the time, such additional interests were typically added to fire policies by preprinted forms with areas to "fill in the blanks." Such forms made references to "as interest may appear," "as to the interests of …" or "as its or their interest may appear."
A good explanation of the term "As interest may appear" is set forth on page 39 of the Agents Key to Fire Insurance by Robert Barbour (The Spectator Company, 1920):
This phrase is often used where owner and lienor, owner and contractor, owner and tenant, or vendor and vendee desire protection under one policy. By so doing two interests are covered without stating the precise interest of each. It relieves the insured from the warranty as to sale and unconditional ownership. The phrase is employed rather indiscriminately, but there is usually no harm in its use and there are circumstances when it is advisable if not necessary. Moreover, when used it gives each interest the right to demand payment to it individually of a loss sustained, in accordance with the terms and conditions of the policy contract, to the property owned by such interest. This right is very seldom exercised, for insurance companies customarily pay a loss by draft made to the several interests as designated by the policy, leaving the division of money to those entitled thereto.
The use of the ATIMA or similar phrases was clearly embraced by fire underwriters, particularly with regard to mortgage endorsements, as a way of matching coverage to the financial interest of a specified entity or person and avoiding violations of the policy condition relating to sole property ownership.
The phrase "ATIMA" continues to surface today in builders risk policies due to the custom and practice of some underwriters. Underwriters historically may have borrowed the phrase from other marine policies or permanent property policies of owners that provide coverage for contractors' interests. The use of the phrase may also be reinforced in part due to the language in standardized contracts commonly used for construction work. For instance, the American Institute of Architects General Conditions A201 requires the property insurance to include the interests of the owner, contractor, subcontractors, and sub-subcontractors in the project (see AIA A201–2007, Section 11.3.1).
Recent Case Illustrates Competing Interests and Conflicts
The 2009 case of St. Paul Fire & Marine Ins. Co. v. F.D. Sprinkler, Inc., No. 119 021/06, N.Y. Sup. Ct. August 31, 2009) illustrates how the "ATIMA" wording can lead to problems. In that case, St. Paul issued a builders risk policy to Chelsea 27th Street Apartments LLC ("owner") on a building under construction in New York. On December 24, 2003, a sprinkler head located in a temporary bathroom on the 21st floor accidentally discharged, causing extensive water damage to multiple floors all the way down to the lobby.
The sprinkler head was installed by F.D. Sprinkler, and the framing of the temporary bathroom was performed by Woodworkers Construction Co. Both F.D. Sprinkler and Woodworkers were hired as subcontractors to the general contractor and both were added as additional insureds to the builders risk policy.
The insurer ultimately paid the owner $714,438 for the necessary repairs to fix the water damage. The insurer proceeded to bring this action to recover damages in subrogation against F.D. Sprinkler, Woodworkers, and others who the insurer alleged caused the loss. F.D. and Woodworkers moved for summary judgment and asserted that the insurer was barred from bringing its action by the doctrine of antisubrogation, as they were named as additional insureds under the policy.
The language extending coverage to the subcontractors in the builders risk policy is as follows.
All Subcontractors as Additional Insureds, ATIMA. St. Paul does not waive its rights of subrogation. The Insured is not permitted to release from liability any such subcontractor after a loss.
The insurer argued that F.D. Sprinkler and Woodworkers are not insureds for the damages at issue (the resulting water damage). Rather, they were only covered for the property damage to the extent of their respective financial interests (their work). The insurer supported this limited nature of coverage to F.D. Sprinkler and Woodworkers by the fact that the written trade subcontracts required subcontractors to procure comprehensive general liability insurance to protect themselves.
The court focused on the issue of the subcontractors' insurable interests in the damaged property. Under New York Insurance Law 3401, "insurable interest" is defined to mean "any lawful and substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage." Under the trade subcontracts, the subcontractors agreed that any work performed by others that is damaged by the subcontractor or its employees or agents shall be the responsibility of the subcontractor at no additional cost to the general contractor. As a result, the court ruled that:
Both F.D. Sprinkler and Woodworkers had an insurable interest in the damaged property.
The insurer had no right of subrogation against its own insured for a claim arising from the very risk for which the insured was covered.
The reference to "St. Paul does not waive rights of subrogation. The insured is not permitted to release from liability any such subcontractor after a loss" is overridden by New York's doctrine of antisubrogation.
One of the interesting things about this case is the court did not merely grant summary judgment based on the antisubrogation rule, but rather relied on non-insurance language in the trade subcontracts to support its decision.
There have been many cases involving insurers' subrogation attempts against contractors and subcontractors who were insureds ATIMA.2 While the majority of courts have disallowed the subrogation attempts, insurers apparently win enough of these to keep trying.
Should ATIMA Appear in Builders Risk Policies?
A strong argument can be made that the clause is not necessary and serves no useful purpose in builders risk policies. When used, it can lead to unintended consequences and unnecessary litigation. Builders risk and other forms of property insurance are predicated on the basic premise that one cannot legally insure property in which it has no insurable interest (this is supported by state statutes and regulations). Builders risk policies require the insured to prove its loss as a condition for reimbursement. This is commonly set forth in the Conditions Section of the policy. This is further backstopped by the commonly used Commercial Inland Marine Conditions (Form CM 00 01 09 04) and other similar forms used by builders risk underwriters. Part E.2. Loss Payment of this form specifies "We will not pay you more than your financial interest in Covered Property."
An insured will not be reimbursed for a loss it did not financially sustain, even in the absence of specific ATIMA language. So if an underwriter's intent is to limit coverage to insureds that are added to the policy, this is already accomplished without the ATIMA wording. By including the ATIMA phrase, the door opens to interpretations of claims adjusters, which may conflict with the contract documents and/or intent of the owner and contracting parties.
The era of indiscriminately using ATIMA language in builders risk policies should come to an end. If underwriters want to limit the coverage extended to contractors and subcontractors to only their specific work, they should specifically say so in their quotations and in an endorsement to the policy. Underwriters would also be better served if they read the insurance and subrogation clauses in the contract documents. By doing so they would obtain an understanding of the intent of the contracting parties.
Perhaps the lesson here is that in those instances where the parties to a construction contract intend to allocate the risk of accidental physical damage to a project to an insurer via a builders risk policy, without recourse to such parties, the respective parties should (a) be included as insureds in the builders risk policy (preferably without reference to ATIMA), (b) mutually waive their rights of subrogation in the contract documents, and (c) confirm that the builders risk policy allows for such waivers. Then perhaps everyone can sleep a little easier.
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