An insurance adviser to a tunneling contractor objected to a tunneling endorsement on a project owner's builders risk policy. The adviser concluded that the endorsement excluded all coverage for the tunnel work being performed. He advised his client to purchase its own builders risk policy at a significant additional cost. He was mistaken in his understanding of how the policy worked. This can be a lesson to all who advise, place, or purchase builders risk policies covering tunnels and other underground projects.
Tunneling and other underground projects (collectively referred to as "underground") involve significant risks not inherent to other forms of construction. As a result, builders risk insurance involving underground work is one of the most difficult types of projects to underwrite. Some builders risk insurers avoid providing coverage as a matter of corporate policy. Others provide coverage but impose limitations. The purpose of this article is to discuss such exclusions and limitations.
Those insurers that want no part of tunneling projects exclude coverage in one of three ways.
Even when a builders risk policy provides coverage on an underground project, the underwriter will typically add an endorsement that excludes coverage for risks that are considered to be entirely within the control of the contractor or otherwise deemed a "business risk." These endorsements are drafted by individual insurers and go under many names, including the following.
In addition, in June 2014, the London Engineering Group published a benchmark "Leg Tunnel Works Clause" intended to provide greater clarity. The exclusions section of this clause is based on the Munich Re Endorsement 101, with changes to reduce ambiguity.
Each of these endorsements contain a list of exclusions/limitations. Some examples follow.
There is much variability in the use of and wordings contained in these exclusions and limitations. In addition, some may include exceptions that grant coverage under certain circumstances (e.g., for resultant damage).
Most of these endorsements have an additional section or paragraphs that stipulate the maximum amount the insured will be indemnified for in the event of loss or damage to the project. This amount can be expressed as a monetary amount or as a percentage (the latter is more prevalent). An example follows:
In the event of insured loss or damage to underground construction, the Company's liability shall be limited to the costs incurred to repair or replace, whichever is less, the insured property to a standard or condition technically equivalent to that which existed immediately before the Occurrence of loss or damage, but not in excess of the percentage stated below or the original average per-foot construction costs of the immediate damaged area.
Maximum percentage payable: [XXX%]
The percentage used is negotiated between the insurer and the insured. The general range is 100–150 percent, averaging about 125 percent.
Lastly, these endorsements sometimes include additional conditions that are imposed on the insured. Advisers to insureds need to be aware of such provisions.
As with any insurance policy, all the policy forms must be read together to truly understand the breadth of coverage. This is particularly true with policies insuring underground work.
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