Thousands of U.S. building projects were shut down when the economy crashed and the banking crisis dried up funding, creating insurance coverage dilemmas for property owners and contractors that persist today.

Resuming work on offices, hotels, condominiums and homes that stalled after the recession began in December 2007 raises a host of insurance-related questions. While the National Bureau of Economic Research said last week that the recession officially ended in June 2009, the economy remains weak and owners and builders face the additional challenge of what insurance will cover once a project is restarted.

“Stalled projects complicate things from an insurance standpoint,” said Stacy Pocrass, Denver-based vp and account executive in Lockton Cos. L.L.C.'s construction practice. “Particularly when you restart a project, you need to know what type of insurance was in place prior to the restart, who was the project owner, and will the work completed prior to the work stoppage be covered by insurance once the project is completed.”

Construction projects are abandoned for several reasons, but it often comes down to financing for those projects, industry experts say.

Between January and August 2008, 5,980 projects reached the abandoned phase, according to Norcross, Ga.-based Reed Construction Data Inc., a division of Reed Business Information. That number jumped 6.2% to 6,348 during the same time period in 2009 and crept up another 1.5% during same period this year.

Construction projects that were shut down in 2008-2010 were up 20% to 25% from 2006 and 2007, before the recession began, said Jim Haughey, a Boston-based chief economist with Reed Construction Data.

Further, several projects were abandoned in the proposal phase, which Mr. Haughey said makes it difficult to get good data on the number of projects that stalled after breaking ground.

“Basically, in 2008 and 2009, construction spending stopped,” Mr. Haughey said. “Of those major projects that have stopped, only a few have restarted.”

When a project stalls, contractors should evaluate their work to determine if it can be left as is or if further work or tear-down is needed to limit liability, insurance experts said. Further, contractors should document the site's status through pictures or written documentation before leaving, said Michael Hastings, Atlanta-based national project insurance practice leader with Marsh Inc.'s construction practice.

“They'll want to document the exact status of the site when they leave it,” he said. “If something collapses, it could be the result of defective construction. Having documentation of how the site was when you left it is key because it will help if a claim arises later,” he said (see related story).

Coverage problems that can arise from a stalled project vary and hinge on whether there is an owner-controlled insurance program in place or if the contractor provided its own insurance.

“The owner of the project would be the primary coverage on a stalled site unless they are impaired financially and are behind on premium payments,” said James Conroy, Boston-based vp and chief underwriting officer for Liberty Mutual Group's construction practice. “Then the liability would be left to the contractor as they are the only one left and likely have good insurance and assets.”

While OCIPs can provide sufficient construction project coverage, they usually are arranged with completion in mind, Mr. Conroy said. When a project stalls, the OCIP can stall, too. This is due either to nonpayment of premiums or the insurer canceling coverage because the nature of the risk changed to a partially completed project.

While insurance experts say contractors can shore up the coverage gap in their commercial general liability policy for work completed on the site, this can prove to be tricky, said Mary Ann Krautheim, New York-based client strategy officer with Aon Risk Solutions' Construction Services Group. That is because most insurers' CGL policies have a wrap-up exclusion, she said.

“It's going to take a heightened awareness on behalf of the contractor to know that they are covered no matter what,” Ms. Krautheim said. “They will have to work with their broker and insurer to make sure they get the coverage that they need if they're involved in a wrap-up and the project they're working on stalls.”

Throwing one more wrench into things is completed operations coverage, which is designed to cover claims that arise after the contractor has left the site and the project is finished. Marsh's Mr. Hastings called this the “wild card” when dealing with stalled projects, because insurers may or may not cover the completed work.

The recession-hit economy has rebounded somewhat and the construction industry is expected to follow, Reed's Mr. Haughey said. Along with restarting projects come questions of what will be covered and by which insurers.

“There's a bit of a gray area here in how the insurance would work because there isn't a lot of precedence for (stalled projects) and it will vary from project to project,” Liberty Mutual's Mr. Conroy said.

How much time elapsed is a key question for underwriters as they check to see how long the building and its materials have been exposed to the weather and other factors. If the shutdown time is relatively short, the original insurer still may be involved with the project, Mr. Conroy said.

If the original project insurer no longer is involved, owners, contractors and potential new insurers will grapple with coverage terms and conditions on previously completed work.

This opens a line of questioning from insurers, such as the condition of the previously completed work and whether any of it has deteriorated, Mr. Conroy said.

“The fact that there is a stalled project causes a lot of insurance dilemmas,” Ms. Krautheim said. “There is insurance for a stalled construction project, but there really isn't a clean solution.”