With most builders risk claims, the adjuster will review the
circumstances of a loss, the terms and conditions of the
insurance policy, and the proof of loss provided by the insured.
The claim will be adjusted and the insured paid an appropriate
amount. In some cases, however, the process becomes more
complicated because coverage cannot be determined without first
referencing documents apart from the policy. This is not
necessarily a problem if things are structured properly. In
other cases, there may be conflicting terms or ambiguity,
leading to an unanticipated and unintended result.
Why and How Contract Documents Are Referenced
Not all builders risk
policies reference contract documents,1
but most do. The reason for this is to provide clarity. For
instance, a construction contract will generally include a
listing of the contract documents, the identity of key parties,
a detailed description of the work to be performed, project
descriptions, timelines, insurance requirements, subrogation
provisions, and defined terms. Insurers include such references
in their preprinted policy forms (e.g., subrogation clause). In
addition, insureds, their insurance brokers, or underwriters may
find it useful to reference specific provisions contained in the
contract documents (e.g., in describing an insured project) as
part of a builders risk policy. The thought process is that the
builders risk policy should work hand-in-hand with the contract
documents.
Such references may be very specific or are inferred.
These are found in a variety of places within a builders risk
policy. These may appear in preprinted insurer policies and
endorsements or in manuscripted wordings. The following includes
several areas where references to contract documents appear in
policies. The list is not exhaustive. To further illustrate,
each area is followed by one for more actual wordings taken from
policies (emphasis is added as appropriate).
Naming of Insureds
To the extent required by
any contract or
subcontract for the Insured Project, and then
only as their respective interests may appear, all owners, all
contractors and subcontractors of every tier, tenants of the
Insured Project, any other individual or entity specified in
such contract or subcontract, are recognized
as....
The following persons or organizations are included as a
Named Insured when you have agreed in a written contract or
written agreement, executed prior to a loss, to
name such persons or organizations as a Named Insured, but only
to the extent of their financial interest in the Covered
Property: (1) Owner(s) of Covered Property; (2) Contractors; and
(3) Sub Contractors and Sub-Sub Contractors.
Named Insured:
[Name of Insured], its divisions, subsidiaries or affiliated
corporations or companies, or companies or corporations
associated through ownership or management, or any other entity
for which the insured has agreed to provide insurance.
Policy Term
... Such coverage shall apply only for such periods
commencing directly with work at the Insured Project and
continuing in full force and effect until the earlier of the
final acceptance of the owner....
In the event
an owner places insurance on any portion of the work which has
been declared and accepted as Substantially Complete ...
coverage hereunder as respects the portion of the work shall
cease as of the Substantial Completion Date as stated in
Certificate of Substantial Completion....
Note:
Since "final acceptance" and "substantially complete" are
generally not defined terms in builders risk policies, the
contract documents would most likely be relied on.
Project
Description
Work the Insured is contractually obligated to
perform in accordance with the contract documents....
Insured Project:
All the contracts
for the construction, erection and testing of the [Project
Name]....
Covered Property
Covered property includes
property of every kind and description that you own
or are
liable for that is intended to become a
permanent part of the building or structure described in the
Declarations.
Permanent Works—All materials, supplies,
equipment, machinery, and other property of a similar nature,
being property of the insured or of others for which the Insured
may be contractually responsible....
Note: The
phrases "or are liable" or "contractually responsible" will
usually require a review of the contract documents to determine
the scope of responsibilities.
Excluded Property
- This policy does not insure land and land values and
the value of cut, fill and backfill materials existing at the
project site prior to project commencement; however, to the
extent included in the contract bid documents
and declared for premium purposes, the value of fill and
backfill materials for use in the completion of the project is
not excluded.
Other Exclusions
Damages for breach of
contract, late or noncompletion of orders, or
for any penalties of any nature.
Error, omission, or deficiency
in design, plans, specifications, engineering
or surveying.
Liquidated Damages—If the
construction
contract for the "project" contains a clause
that requires payments to you because of a delay in the
completion of the "project" beyond the "planned completion
date," we will subtract the amount due from others....
Additional Coverages
- Construction Contract
Penalty—If your construction contract contains
a clause that requires you to pay a penalty as a direct result
of a Covered Cause of Loss to "Builders Risk," we will pay up to
[$ Amount] during each separate 12 month period of this policy
for all such expenses.
Definitions
"Completion date" means
the later of the original scheduled completion date
in the
construction contract or the date the structure
would have been completed if a loss hadn't occurred.
"Contractor" means a Contractor of any tier who performs
operations at the Project under contract with
the Owner and Construction Manager....
Conditions
Subrogation—The Company will have no rights
of subrogation against (1) any person or entity,
which is an Additional Insured; (2) any other
person or entity, against which the Insured has
waived its rights of subrogation
in writing
before the time of loss.
Valuation for Property under
Construction—The cost to repair or replace the
lost or damaged property, valued as of the time
and place of loss, with material of like kind
and quality, less betterment, including
contractor's reasonable profit and overhead in
the same proportion as that included
in the original
contract documents.
Recent Case Illustrates How Conflicts Can Arise
A recent case provides an illustration of the problems that
can arise when a builders risk policy is structured in such a
way as to require a review of the contract documents to
ascertain coverage. In WH Holdings, LLC
v. Ace Am. Ins. Co., No. 10–31091 (U.S. Ct. App. June 6,
2012), the sole issue was whether the construction contract
obligated WH Holdings, LLC, or Gootee Construction to purchase
builders risk insurance on renovation work at a hotel in New
Orleans. The district court determined that WH Holdings was
obligated under the construction contract to provide the
insurance. WH Holdings appealed this decision, and the appeals
court found the contract provisions to be ambiguous and remanded
the case to the district court for considering course of conduct
evidence and other forms of extrinsic evidence.
The facts of the case are fairly straightforward. WH Holdings
("Owner") owned the Ritz Carlton Hotel Complex in New Orleans.
The Owner hired Gootee Construction Company ("Contractor") to
perform renovation work on an existing structure of the Ritz.
Hurricane Katrina caused damage in excess of $1.6 million to the
façade and exterior insulation finishing system. The Contractor
secured a builders risk insurance policy from Ace American
Insurance Company ("ACE"). Rather than naming the specific
parties to be insured, the ACE policy contained a broad form
named insured endorsement, which provided coverage to any party
of interest that the insured (Contractor) was responsible to
insure. As such, a determination of whether the owner qualified
as an insured under the ACE policy hinged on the terms of the
contract documents. This is where things turn a little murky.
The construction contract between the Owner and Contractor
incorporated General Conditions (AIA Document A201–1997), which
was amended in several areas by the parties. (It may be helpful
for the reader to download and print a complimentary copy of a
comparison of AIA A201–1997 to AIA A201–2007.) Subsection
11.4 is the section of AIA A201 that addresses property
insurance on the work to be performed. The standard provision
calls for the Owner to secure the property insurance (builders
risk policy). In this case, however, the parties amended this
section (Part 11.4.1) to require the Contractor to secure and
maintain this insurance, in lieu of the Owner.
If this were the end of the story, all would have concluded
that the policy provided coverage to the Owner. However, the
Contractor's Liability Insurance part (Subsection 11.1) was
amended to include the following:
g. Builders Risk Insurance Limits
Full Replacement Cost Value on the Work being
installed as described in the Construction Contract. The policy
shall name as an [sic] named
insured the Owner and any other entity required by the Contract
between the Owner and the Contractor. This policy shall waive
subrogation against Owner and any other Owner related entity
whether or not required by the Contract between the Contractor
and the Owner. This coverage will be placed by the Contractor on
an "All Risk" replacement cost basis for the full value of the
construction unless the construction is an addition or
renovation to an existing structure.
If this construction is an addition
or renovation than [sic] the
Owner shall be responsible for providing this coverage and will
add the Contractor and its subcontractors and sub-subcontractors
as additional insureds(s) and waive subrogation against the
Contractor and its subcontractors and sub-subcontractors as
regards any structures being built or renovated and already
existing at the site [emphasis added].
Based on 11.1.5(g), the district court concluded that the
Owner was responsible for procuring the builders risk policy.
The appeals court recognized that the Contract contained
conflicting provisions and found the contract to be ambiguous.
Tips for Practitioners
Other than by sheer luck, a builders risk policy cannot be
properly structured without a review and understanding of the
contract documents. Practitioners would be well advised to
adhere to the following:
- Obtain and review the contract documents to
understand the insurance requirements and other
provisions. This review is not limited to the
construction contract, as other documents may
contain additional requirements.
- If the provisions therein are not clear or
are in conflict, seek clarification from the
stakeholders.
- Understand the sections of preprinted
builders risk policy forms that reference one or
more of the contract documents.
- When crafting manuscript clauses for the
builder risk policy, be certain these changes
clarify coverage and are unambiguous.
- Changing one section of an existing
contract, such as the ones offered by the
American Institute of Architects, may also
require other sections to be amended as well.
Conclusion
While most builders risk claims are adjusted within the
confines of the four corners of a builders risk policy, there
are situations where coverage cannot be determined without a
review of nonpolicy documents. Following a review of the
contract documents, professionals have an opportunity to add
value by providing appropriate counsel to their clients.