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Coverages important to Thyme include the following. While not necessarily unique to a builder’s risk policy, are typically offered by insurers also with sublimits:
In electing to purchase the builder’s risk insurance in accord with the AIA A201™-2007, Thyme has agreed to include coverage in the builder’s risk policy for not only their interest, but also the interests in the project of Perkins and any other contractor, subcontractor or sub-subcontractor. Unless others object, Thyme is authorized to settle a claim with the builder’s risk insurer, but holds the proceeds as a fiduciary for other insured interests. Further, Jennifer notices that Thyme is required to continue the builder’s risk insurance in effect until final payments have been made or Thyme is the only person or organization with an interest in the project – whichever is later. The time period for which Thyme has agreed to maintain the builder’s risk in force will influence the selected policy period – particularly if the project is expected to take over one year. Jennifer’s research has revealed that obtaining a builder’s risk policy from a new insurer on a building that is partially completed is very difficult – if available at all – and thus the strong preference to continue the same builder’s risk policy until the project is finished.
Thyme is considering a larger deductible – $25,000 – to keep premium costs down. This raises a question – if the loss is caused by the negligence of Perkins or a subcontractor, can Thyme charge the deductible to that responsible party? After a conference with Thyme’s legal counsel, Jennifer learns that Thyme cannot recover such costs because Thyme has agreed to the AIA A201™-2007 conditions – which clearly state Thyme is responsible for any loss within the builder’s risk deductible. In fact, Thyme’s legal counsel points out to Jennifer that Thyme has waived its rights against Perkins and any of their subcontractors or sub-subcontractors to the extent that the builder’s risk policy (or other property insurance) provides coverage for the damage. Further, Perkins and its subcontractors and sub-subcontractors also waive any rights they may have to recover from Thyme – again, to the extent the damage caused is covered by insurance. The implications of the waiver clause are clear to Jennifer– the builder’s risk policy she purchases must allow Thyme to waive its rights against all other interests covered by this policy – including damage to the project that is not the work of a subcontractor or sub-subcontractor.4
As might be expected, Thyme’s owner, Justin, is very eager to get the project finished and is already asking Perkins when he can move into the new facility and start manufacturing. Apparently this may be a problem – Jennifer learns that a builder’s risk policy may cease providing coverage if Thyme begins to occupy the new facility. However, after some inquiry, she finds that insurers will generally grant permission to occupy. After a discussion between Jennifer and Justin about this matter, Justin agrees to give Jennifer as much notice as possible before he begins occupying the new facility – giving Jennifer time to seek permission from the insurer for occupancy and avoid losing coverage under the builder’s risk policy.
An area that is not at all clear to Jennifer is the section of the AIA A201™-2007 contract that is entitled “Loss of Use Insurance.” While Jennifer understands that Thyme has waived all of its rights of action against Perkins for loss of use of the facility due to “fire or other hazards, however caused” and also knows the purchase of this insurance is at the option of Thyme, she does not know what is meant by “loss of use insurance.”
If an insured cause of loss damages Thyme’s facility and that damage results in a delay in the project completion, Thyme could suffer two types of consequential loss:
Jennifer has a strong understanding of the general contours of Thyme’s builder’s risk insurance needs, including its obligations under its construction contract with Perkins. However, she has a great deal of work left to do – starting with choosing a building limit, including sublimits for certain coverages and coverage extensions, as well as whether and how much loss of income and soft cost coverage (including the categories of soft costs coverage) to purchase. In addition, upon review of builder’s risk proposals, it is important for Jennifer to review the policy forms being offered to make sure she has the coverage she wants or needs, including but not limited to the causes of loss, whether all interests are insured and whether Thyme’s waiver of it rights against the others is allowed in the policy. Finally, Jennifer needs to explore limitations in the builder’s risk policy as respects occupancy by Thyme – will the insurer permit occupancy – if so, when and under what conditions.
ABOUT THE AUTHOR
Craig F. Stanovich, CPCU, CIC, CRM, AU is co-founder and principal of Austin & Stanovich Risk Managers, LLC, a risk management and insurance advisory consulting firm specializing in all aspects of commercial insurance and risk management, providing risk management and insurance solutions, not insurance sales. Services include fee based risk management, expert witness and litigation support and technical/educational support to insurance companies, agents and brokers. He can be reached via email at email@example.com, or the website austinstanovich.com.
1 © 2007 by the American Institute of Architects
2 Falsework is defined as the temporary structure erected to support work in the process of construction. Source: dictionaryofconstruction.com
3 Coverage for an existing building undergoing renovation can usually be arranged, often with a separate limit from the value of the renovations and often on an actual cash value basis.
4 “Thus, to determine which fire damages are covered by the subrogation waiver, we must look at everything that follows the phrase ‘to the extent.’ The positioning and plain meaning of the word "covered" restricts the scope of the subrogation waiver based on the source and extent of the property insurance coverage, not the nature of the damages or of the damaged property.” Bd. Of Comm’rs of Cnty. of Jefferson v. Teton Corp.,30 N.E.3d 711 (Ind. 2015)