Model contracts are changed from time to time. ConsensusDocs recently made numerous changes to its model contracts, including a major one that relates to builders risk insurance. The purpose of this article is to provide an overview of ConsensusDocs, identify the recent change that relates to builders risk insurance, and discuss future implications.
What Is ConsensusDocs, and What Is Its Function?
ConsensusDocs is a collaborative effort by over 40 trade organizations representing nearly all facets of the construction industry. ConsensusDocs first introduced its contracts and forms in 2007. It currently publishes about 115 model contract documents, and these are organized by project delivery method and are updated about every 5 years.
The most popular project delivery method is general contracting, and this method is represented by the "200 Series-General Contracting" documents. The standard agreement and general conditions between owner and constructor is known as ConsensusDocs 200.
For more information on ConsensusDocs or a copy of their contract catalog, please visit its website: www.consensusdocs.org. You can request specific sample model contract forms by completing a brief online request form.
The Major Change Relating to Builders Risk
The major change relating to builders risk insurance is the elimination of the requirement to insure existing structures in paragraph 10.3.1. A strike-through of this change appears below:
10.3. PROPERTY INSURANCE
10.3.1 Unless otherwise directed in writing by Owner, before starting the Work, Constructor shall obtain and maintain a Builder's Risk Policy upon the entire project for the full cost of replacement at time of loss, including existing
structures. This insurance shall also: (a) name Constructor, Subcontractors, Subsubcontractors, Suppliers, and Design Professionals as insureds; (b) be written in such for as to cover all risks of physical loss except those specifically excluded by the policy; and (c) insure at least against and not exclude:.…
ConsensusDocs added the requirement to insure existing structures with its 2016 model contract revisions. This requirement came about because many projects involve additions, rehabilitation, renovations, or repairs to existing buildings. Contractors were concerned that there could be damage to existing buildings or structures that would not be insured by the builders risk insurance.
Following implementation of the requirement to insure existing structures with the model contract 2016 revisions, it became apparent that builders risk insurers would not always agree to insure large existing structures. For instance, if a contractor is doing $1 million of work in an auto manufacturing plant that has a replacement cost of $300 million, it quickly became apparent to the contractor that the cost to add the entire existing plant to its builders risk policy was cost prohibitive or the builders risk insurer would simply not agree to do it. This put the contractor in a situation where it could not comply with the insurance requirements in its contract with the project owner.
Future Implications of Changes to ConsensusDocs
There are implications for stakeholders that use ConsensusDocs model contracts and insurance agents/brokers.
While the elimination of the requirement to insure existing structures for the full replacement cost, there is another insurance requirement that must be considered. This is paragraph 10.3.1.3:
10.3. PROPERTY INSURANCE
10.3.1 Unless otherwise directed in writing by Owner, before starting the Work, Constructor shall obtain and maintain a Builder's Risk Policy upon the entire project for the full cost of replacement at time of loss. This insurance shall also: (a) name Constructor, Subcontractors, Subsubcontractors, Suppliers, and Design Professionals as insureds; (b) be written in such for as to cover all risks of physical loss except those specifically excluded by the policy; and (c) insure at least against and not exclude:.…
10.3.1.3 coverage extension for damage to existing buildings, plant, or other structures at the Worksite, when the Project is contained within or attached to such existing buildings, plant, or structures. Coverage shall be to the extent loss or damage arises out of constructor's activities or operations at the Project;
So, while full replacement cost coverage is not required on the existing structures, coverage is still required for damage to existing buildings and structures at the worksite (defined as the area of the project location identified in Article 1 where the work is to be performed), provided the project is within or attached to existing buildings or structures. The insured limit for such coverage extension is subjective and puts the contractor at risk. It would be prudent for a contractor purchasing builders risk to contractually agree with the project owner on a specific sublimit that satisfies 10.3.1.3.
As a matter of interest, most builders risk insurers will cover physical damage to existing buildings or structures subject to a specified sublimit.
Very often, contractors provide their insurance agent/broker with a copy of the construction contracts, budget, and time line and request the agent/broker to secure a builders risk policy that complies with the insurance requirements. The agent/broker must pay very close attention to all the insurance requirements and ensure the secured builders risk policy provides coverage at least as broad as the requirements.
Looking to the Future
It is likely that the American Institute of Architects (AIA) will be looking closely at its builders risk requirements, as these apply to existing buildings and structures. The reason for this is that A201-2017 Exhibit A, paragraph A.2.3.3 Insurance for Existing Structures applies. This paragraph reads as follows:
A.2.3 Required Property Insurance
A.2.3.3 Insurance for Existing Structures
If the Work involves remodeling an existing structure or constructing an addition to an existing structure, the Owner shall purchase and maintain, until the expiration of the period for correction of Work as set forth in Section 12.2.2 of the General Conditions, "all-risks" property insurance, on a replacement cost basis, protecting the existing structure against direct physical loss or damage from the causes of loss identified in Section A.2.3.1, notwithstanding the undertaking of the Work. The Owner shall be responsible for all co-insurance penalties.
The same issue that ConsensusDocs identified (lack of the ability to secure coverage on existing buildings/structures in compliance with the contract requirements) exists with respect to unmodified AIA model agreements that contain the above clause.
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