Calling all builders risk insurers! It is time to enter the 21st century with a much needed clause.1
Builders risk policies typically cover multiple entities, such as the project owner, general contractor, and subcontractors. These policies are also subject to a variety of policy conditions. Specific warranties may also apply.
So, how does the typical builders risk policy respond to the situation where one insured breaches a policy condition or warranty? Does coverage apply to the "innocent" insureds (those that do not contribute to the breach)? Is a builders risk policy divisible? (When a policy is divisible, it means that coverage for all insureds is not voided because another insured violates a policy condition or warranty.)2
Most builders risk policies do not address this. Industry action is needed.
What Kind of Clause Are We Talking about?
I am proposing an additional policy condition that clarifies that coverage will remain intact for insureds that do not contribute to a breach of a policy condition or warranty. In liability policies, these clauses are often referred to as "severability of interest" or "separation of insureds."
In the United States, the vast majority of builders risk policies do not contain such a clause. If you don't believe me, pick up a builders risk policy and read it. Europe, on the other hand, is seemingly ahead of US-based underwriters in this regard. This is an issue that has received much attention in Europe. These clauses (often referred to as "non-vitiation" or "non-invalidation" clauses) are readily utilized.3
I am not saying that these clauses are never used in the United States. Savvy insurance brokers will sometimes negotiate a clause with an underwriter, particularly on a large construction project.
I was recently involved in the negotiation of a builders risk policy involving a new hospital. I requested a "separation of insureds" clause. The underwriter said that he did not have a preprinted endorsement or "stock wording." He suggested I propose wording for him to consider. I did, and this was readily accepted. But this process should not have to occur.
Most builders risk policies are designed by individual insurers and use proprietary policies and endorsements. As such, each insurer should draft a clause that is included in the standard conditions of its own policy.
Reasons To Add a Clause
This is more of a clarification than anything. Many, if most states, already treat builders risk policies as divisible (by statute and/or case law).
Contractors reduce their construction bids when an owner or general contractor provides builders risk insurance that provides each with insured status. Since each does not have to secure separate builders risk or installation floater insurance, savings are passed back to the project owner. They are entitled to coverage.
Underwriters routinely provide similar protection to lenders via mortgageholders or loss payable provisions.
This change adds contract certainty. One will no longer have to guess what will happen following a loss. (Some construction lawyers advise project owners to not add contractors as insureds to the builders risk insurance because of the lack of an appropriate clause.)
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1 I will share feedback that I receive from brokers and insurers on progress that is made regarding this issue.
2 For more information on this issue, refer to The Builders Risk Book by Steven A. Coombs and Donald S. Malecki, published by International Risk Management Institute, Inc., in 2010. The discussion begins on page 99.
3 For history, guidance, notes, and examples, see International Underwriting Association Circular 068/09 (June 2009).