Builders Risk Policies: Are You Really Covered?

Pertinent Policy Language

The builders risk policy provided coverage for "direct physical loss of or damage to Covered Property from any of the Covered Causes of Loss." "Covered Causes of Loss" were defined as "Risk of Direct Physical Loss or Damage." "Covered Property" was defined as "Builders' Risk," which was defined as follows:

• a. Buildings or structures including temporary structures while being constructed, erected, or fabricated at the "job site,"
• b. Property that will become part of a permanent part of the buildings or structures at the "job site:"
  • 1. While in transit to the "job site" or at a temporary storage location;
  • 2. While at the "job site" or at a temporary storage location;

"Builders' Risk" does not include:

• a. Contraband, or property in the course of illegal transit or trade;
• b. Buildings or structures that existed at the "job site" prior to the inception of this policy;
• c. Land (including land on which the property is located) or water.

The policy also provided coverage for "'Builders' Risk Site Preparation" as follows:

• If:
  • 1. The cost of excavation, site preparation, land grading and similar work is included in the "Basic Limit of Insurance" for the "job site" shown in the Declarations; and
  • 2. You incur expenses to reexcavate the site, reprepare the site, regrade the land, or perform similar work because of loss of or damage to Covered Property by a Covered Cause of Loss,
• you may extend the applicable Limit of Insurance for that "job site" to pay for such expense.

The Lawsuit and Decision

Glacier filed suit against Travelers, and the District Court ruled that the policy covered only the "cost of repairing and reworking [the original] four wells and sumps." Glacier appealed, arguing that the district court improperly limited its recovery under the policy. Travelers cross-appealed, arguing that the district court erred in holding that any of Glacier's costs were covered by the policy.

On appeal, the Tenth Circuit first addressed Travelers' cross-motion and agreed with the district court that the original wells/pumps "were temporary structures constituting covered property" within the terms of the policy and did not fall within any of the policy exclusions.

The Tenth Circuit then turned to Glacier's claim that the district court improperly limited the scope of its recovery under the policy. Glacier argued that the site preparation clause quoted above "covered its costs to design a new dewatering plan and to install a shoring system, engineering tie-backs, and a well-point system." The court explained that the site preparation clause "covered costs necessary to re-excavate the site, re-prepare the site, re-grade the land, or re-perform similar work" and that the "ordinary and accepted sense of the policy terms limited coverage to correction of work previously done." Thus, the court rejected Glacier's argument and held that the site preparation clause "did not cover the expense of a new dewatering design and the costs to implement that design." The court reasoned:

Construing the Policy as Glacier advocates would encourage a builder to economize on an initial dewatering plan and later require the insurer pay for a more elaborate plan. This would misallocate the construction expense between the construction company and the insurer.

The court therefore held that, as a matter of law, "the policy coverage was limited to the repair and reworking of the original wells/pumps." In light of this holding, the court also rejected Glacier's argument that the jury instructions improperly limited the amount of Glacier's damages because it precluded the jury from considering costs covered under the site preparation clause, as well as Glacier's bad faith claim. As a result, Glacier recovered nothing for the costs it incurred in designing and implementing the second dewatering plan.

The Tenth Circuit construed the policy incorrectly. An insurance policy should be read according to its plain language. The court did not do so. Instead, it read the policy and applied it to the facts of the case based on its own view of how the risks should be allocated between the insurer and a contractor. That approach is contrary to black letter insurance law and leads to unpredictable results.

The Tenth Circuit could have reached the same result by holding that the cost to "reexcavate" or "reprepare" the site or "reperform such work" was not due to the failure of the wells and pumps. Instead, the court could have held that the additional work was required because of the preexisting soil conditions, which were not a covered cause of loss. The Tenth Circuit seemed to go out of its way to help Travelers avoid coverage on an unnecessarily broad and theoretically unsound basis.

Analysis

Although the court's reasoning was flawed, this case still has valuable lessons to teach. It should serve as a reminder to contractors of the potentially limited scope of builders risk policies. Listed below are several issues to consider when reviewing a builders risk insurance policy.

First, identify the risks to be insured. If the project involves renovation of an existing structure, is that structure insured for full replacement cost? Many builders risk policies insure existing structures only at actual cash value. The difference between the two can sink a project in the event of a loss.

Determine who will bear responsibility for additional design and extras in the event a loss triggers such work, as happened in Glacier. Most insurers will not pay for additional costs resulting from design and construction changes made after a loss. One question that comes to mind on reading this case is why the contractor was paying for the redesign of the dewatering system and not the owner, particularly when it was made necessary by undiscovered soil conditions.

A very important consideration is coverage for soft costs, including lost rent or profits caused by delay in completion. Most insurers offer this coverage, but it can be very limited.

Finally, the policyholder must recognize that builders risk coverage will not pay for the cost to redo sloppy or faulty work. If, for example, a mason builds a wall that does not meet the specifications, a builders risk policy will not pay the cost of rebuilding the wall. If, on the other hand, the wall collapses and brings the structure down, the cost of rebuilding should be covered.