Is it appropriate for builders risk policies to restrict "who is insured" under the delay/soft costs coverages to the project owner? The short answer is "yes," but read on.
Many builders risk policies insure against loss of revenue and/or soft costs that result from a project delay due to insured physical damage to the project. These coverages should generally be reserved for the project owner. While the project owner, general contractor, and subcontractors are usually named as insureds on builders risk policies for damage to the project, the same does not hold true for the delay/soft costs ("delay") coverages. In most cases, the project owner and its affiliated entities are the only named insureds under the delay coverages.
The major reason for limiting insured status to the project owner under such coverages is to preserve the insurance limits solely for the owner. This prevents competition for insurance proceeds from unintended stakeholders. Otherwise, others that are insured against physical damage to the insured project could make their own claims, resulting in dilution or exhaustion of available delay limits to the project owner. Further, underwriters generally do not review delay-related loss exposures or underwriting information associated with nonowner entities nor charge a separate premium.
Contractual Insurance Requirements
Stakeholders in a construction project must review and satisfy the applicable insurance requirements in contracts, such as the construction contract and loan agreements. Such agreements typically do not require that the delay coverages insure anyone other than the project owner. (Note: Some loan agreements require the lender(s) be protected as an insured or loss payee.) However, it is possible that insurance requirements in contracts are expanded to include additional parties. This can only be determined through careful contract review.
As a starting point, in initially drafting the construction contract documents, attorneys often utilize so-called standardized or model contracts. The most commonly used forms are those authored by the American Institute of Architects (AIA), the Engineers Joint Contract Documents Committee (EJCDC), and by ConsensusDocs (a collaborative effort by trade organizations representing nearly all facets of the construction industry).
The most recent versions of construction contract forms issued by each of these groups contain property/builders risk insurance requirements that mandate which parties are to be included as additional insureds and for which coverages. These provisions are summarized below.
Physical Damage Coverages
Here are the model contract provisions for physical damage coverages.
AIA. For the total value of the project on a replacement cost basis, the required insurance shall include the interests of the Owner, Contractor, Subcontractors and Sub-subcontractors as insureds (see AIA Document A101-2017 Exhibit A Insurance and Bonds, Article A.2.3.1).
EJCDC. For the Work in the amount of the Work's full insurable replacement cost (see EJCDC C-700-2018 Standard General Conditions of the Construction Contract, Article 6.04 A.). This required insurance shall include the Owner, Contractor, and Subcontractors of every tier as named insureds (see C-800-2018 Supplementary Conditions—SC 6.04 F.10).
ConsensusDocs. For the entire Project based on the full cost of replacement, the required insurance shall name the Constructor, Subcontractors, Sub-subcontractors, Suppliers and Design Professionals as insureds (see ConsensusDocs 200- Standard Agreement and General Conditions Between Owner and Constructor—2017, Article 10.3.1).
Two of the identified model contracts require coverage for additional costs incurred in the repair of insured property (AIA and EJCDC). These provisions are set forth below.
AIA. The required insurance must include reasonable compensation for the Architect's and Contractor's services and expenses required as a result of an insured loss, including claim preparation expenses (see AIA Document A101-2017 Exhibit A Insurance and Bonds, Article A.22.214.171.124).
EJCDC. The required insurance must include expenses incurred in the repair or replacement of any insured property. This includes fees and charges of contractors, engineers, and architects (see C-800-2018 Supplementary Conditions—SC 6.04 F.3).
ConsensusDocs. No requirement.
These costs can be insured as an add-on coverage to the physical damages section of a builders risk policy. If this is not possible, coverage can be secured as part of the soft-costs portion of the delay coverage. Depending on the circumstances, this approach may require that parties other than the owner be needed to be included as insureds in order to satisfy the insurance requirements.
Here are the model contract provisions for delay coverages.
AIA. AIA Document A101-2017 Exhibit A Insurance and Bonds contains a section for "Optional Extended Property Insurance" (see Article A.2.4). Included within, there are checkboxes for "Loss of Use, Business Interruption and Delay in Completion Insurance" (to reimburse the Owner—see Article A.2.4.1), and "Soft Costs Insurance" (also to reimburse the Owner—see Article A.2.4.7). Note that there is no reference to reimbursing anyone other than the project owner, so delay coverages under a builders risk policy would be properly written with the owner as the only named insured.
EJCDC. EJCDC C-800-2018 Supplementary Conditions contains a section for "Coverage for Completion Delays" (see C-800-2018 Supplementary Conditions-SC 6.04 G.). This requires that the builders risk policy include, for the benefit of the owner, loss of revenue and soft cost coverage for losses arising from delays in completion that result from covered physical losses or damage. This coverage must include fixed expenses and debt service for a minimum of 12 months, compensation for loss of net revenues, rental costs, and attorneys' fees and engineering or other consultants' fees, if not otherwise covered. Similar to the AIA provisions above, there is no reference to reimbursing any party other than the project owner.
ConsensusDocs. There are no delay insurance requirements.
To summarize, with the standard construction contracts reviewed, there are no standardized requirements for including any party, other than the project owner, as an insured for delay coverages. However, based on the AIA and EJCDC commentary above, it may be necessary to modify the delay coverage listing of insureds if extra expenses coverage cannot be provided by the physical damage section of the applicable builders risk policy.
For a detailed discussion of contractual insurance requirements and naming of insureds under builders risk policies, please refer to The Builders Risk Book (IRMI 2019), and in particular, Chapter 4—Contractual Requirements, Chapter 6—Who Is Covered: Naming the Parties Appropriately, Chapter 16—Delay in Project Completion, and Appendix C—Comparison of Builders Risk Insurance Requirements.
What about Contractors?
As mentioned earlier, the AIA and EJCDC standard contracts require the builders risk policy to insure specified extra expenses incurred by contractors and design professionals. The applicable builders risk policy may also provide protection to contractors via one or more coverage extensions, such as the following.
Sue and labor/preservation of property
Claim preparation expense
Crane re-erection expense
Inflation on incomplete work
In addition, most delay and soft costs coverage forms include a provision whereby additional expenses necessarily incurred are insured to the extent that the delay/soft costs claim is reduced. In other words, if a project owner directs a contractor to take specified actions, the resultant additional costs are insured to the extent the owner's delay/soft costs claim is reduced.
A contractor may also negotiate with a project owner to secure coverage for one or more specified soft costs that a contractor feels it needs. This is a subject of negotiation.
Lastly, in many cases, contractors arrange for project-specific builder risk insurance. Many larger contractors also maintain master builders risk policies. In any event, the contractor has an opportunity to structure and secure needed coverage on those projects that the contractor has the responsibility for securing the builders risk insurance. These policies are routinely customized to meet the specific needs of the sponsoring contractor. Such policies can also be amended to provide the contractually required/needed delay coverages for the project owner. This is often overlooked in many contractor-provided builders risk policies.
Much can be learned from reading how courts interpret insurance policies and specific coverage wordings. Summaries of two cases follow.
EL-AD 250 W. LLC v. Zurich Am. Ins. Co., 146 A.D.3d 677, 45 N.Y.S.3d 456 (N.Y. App. Div. 1st Dept, Jan. 26, 2017), illustrates the importance of designating the correct parties to be insured for delay and soft costs coverages. In this case, the insurers attempted to restrict the recovery for a delay in a completion claim caused by Superstorm Sandy to only the loss suffered by the particular entity shown as the named insured for the delay in completion coverage. The delay in completion coverage schedule stated, "[T]here shall be no Additional Named Insureds, unless endorsed otherwise." El-Ad was the only named insured for the delay in completion coverage.
Affiliates of El-Ad also sustained losses but were not named as insureds. The court ultimately ruled in favor of El-Ad by denying Zurich's motion for partial summary judgment. The court relied on extrinsic evidence in coming to its decision, including the fact that Zurich intended to insure the project, knowing that different tiers of financing would be allocated among various "El-Ad" entities.
A more recent case favored the builders risk insurer: Downtown Lofts LIHTC LLLP v. Travelers Prop. Cas. Co. of Am., No. 19-cv-3295-WJM-SKC (USDC-Dist. of CO, Dec. 31, 2020). FCI Constructors, Inc., served as the general contractor and constructed a building for the Colorado Coalition for the Homeless (CCH). CCH assigned its interest in the project to the plaintiffs prior to loss. FCI purchased a builders risk policy from Travelers ("Insurer"). The policy included a coverage extension for soft costs with a $1 million limit.
In November 2017, the project experienced insured water damage. FCI notified the Insurer of the loss and was paid $3,079,519 for physical damage to the project and $238,897 for soft costs. In addition, the plaintiffs presented a soft costs claim in the amount of $657,211. This claim was denied by the Insurer because, while FCI and six other entities were listed as named insureds in the policy, the plaintiffs were not.
The builders risk policy contained a provision that automatically included "Additional Named Insureds" when agreed to in a written agreement executed prior to loss, "but only to the extent of their financial interest in the Covered Property …" [Emphasis added]. Covered property was defined in the policy to include "Permanent Works" and "Temporary Works." There was no dispute that the plaintiffs were "additional named insureds" for their financial interest in the covered property.
However, the policy also stated, "Throughout this policy, the words 'you' and 'your' refer to the 'Named Insureds in the Declarations.'" Accordingly, the court found that the soft costs coverage extension applied solely to the named insureds listed in the policy declarations. It also concluded that the parties could have written the builders risk policy in such a manner to provide the soft costs coverage to both named insureds and additional named insureds. They did not do so.
Modern Builders Risk Policies
Many older builders risk policies do not contain a place on the applicable delay coverage form(s) to insert a list of the named insureds. Therefore, those parties designated as named insureds on the builders risk policy were also named insureds for the delay coverages. This resulted in many problems.
Increasingly, modern delay and soft-costs-related endorsements contain a section to insert a list of named insureds. Care is needed when completing this. If an entity that should be shown is not shown in the list, a gap in coverage may result.
With most builders risk policies, the only named insured for the delay coverages is the project owner and its affiliated entities. Lending institutions may also need to be protected depending on the terms of applicable loan agreements. Construction contracts may also require the builders risk insurance to cover specified additional expenses incurred by contractors and/or design professionals. Depending on the structure of a builders risk policy, such coverage may be afforded as an extension to the physical damage section or as a soft cost under the delay coverage.
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