Close attention to policies key to avoiding cover fightsPosted On: Nov. 27, 2011 12:00 AM CST
SAN DIEGO—If their policy forms are well-written and diligently maintained, construction project owners and contractors should see very little overlap between their builders risk and commercial general liability policies—two of the core insurance lines builders and developers use to protect their projects.
However, ambiguous language regarding covered loss events and limits, primary policy designation, insured parties or subrogation rights can lead to costly and time-consuming disputes that can easily jeopardize a project's schedule and budget, experts said during a presentation at the International Risk Management Institute's 31st Construction Risk Conference.
“In theory, these policies don't interact,” Karen Reutter, a Minneapolis-based senior vp for Marsh Inc., said during the presentation. “They're designed to dovetail each other and respond during the course of construction claims, but not necessarily to the same exposures. When they do interact, usually it's only when lawyers get involved.”
One common way in which a lack of contract certainty can invite conflict between builders risk and CGL policies is to allow progress on a construction project to outpace change order reporting to their builders risk underwriters, Ms. Reutter said.
In February 2004, for example, an overnight fire wiped out a custom mansion project in Groveland, Fla. The general contractor, Clermont, Fla.-based Key Custom Homes Inc., was able to collect the full $820,000 policy limit of its builders risk coverage, but the total cost of the house had risen to more than $1.6 million in the course of construction, a fact Key Custom Homes failed to report to its underwriter. Key Custom was sued by its lenders and subcontractors for breach of contract as well as money they alleged they were owed.
“There obviously are a number of change orders in the course of construction that should have been communicated to the underwriter, who then could have increased the limit on the policy accordingly,” Kelly Kinzer, a Minneapolis-based vp for Marsh said during the presentation. “Had that happened, it's likely that this lawsuit” never would have gotten filed.
Key Custom attempted and was denied recovery of the difference between its builders risk payout and the actual cost of the damage under its CGL policy. The company unsuccessfully sued its insurer, arguing that the policy—which, among other things, covers damage to third-party property—should cover the loss. It also argued that the CGL policy included language that designated it as excess coverage to the builders risk policy.
A Florida federal judge, however, ruled that Key Custom's claim ultimately was in service of an economic loss, not a property loss, and that the debt to the lenders and subcontractors would exist even if the project had not burned down. As such, the court ruled, excess coverage was not triggered because there was no underlying property damage under the CGL policy.
“The takeaway there is to make sure your builders risk policy is set up to capture costs as the project progresses,” Ms. Reutter said. “That way if there's escalation, at the end of the day you'll have the right policy to cover the total loss.”
Clearly spelling out in the builders risk and CGL policies exactly which parties are meant to be insured, and what rights of recovery they will be granted under each policy, also is critical to avoiding cross-over complications, the speakers said.
In 1994, AGIP Petroleum Co. Inc., a Houston-based petroleum company, learned a difficult lesson in contract certainty when it sued Houma, La.-based Gulf Island Fabrication Inc., the company it contracted with to build, transport and install an offshore drilling platform. During installation, the platform toppled onto its side and nearly sank, costing $15 million in repairs and delays. AGIP's damage claim was denied by its CGL underwriter—although that policy had been designated as the primary coverage—but it received a full payout from its builders risk carrier.
However, when AGIP and its builders risk insurer tried to collect against Gulf Island's builders risk policy for alleged deviation from the project's designs and specifications, Gulf Island filed a countersuit claiming breach of insurance contract, asserting it was covered as an additional named insured under AGIP's builders risk policy and therefore protected from subrogation.
AGIP “denied that they intended to include Gulf Island as an additional named insured on the policy,” Ms. Kinzer said. The company and its insurer also contended that Gulf Island shouldn't have been covered because all of the actual work was done by subcontractors.
In 1996, a Houston federal judge ruled that AGIP did, in fact, intend to include Gulf Island as an additional named insured and, because the policy contained a waiver of subrogation provision, that neither AGIP nor the insurer could seek relief against Gulf Island or its insurers.
“What's important here is the blanket additional named insured provision under the builders risk policy as well as the waiver of subrogation provision,” Ms. Kinzer said. Both provisions, she said, are common inclusions on builders risk policies, and companies on either end of the contracting relationship—in this case, the project owner—gloss over them at their own peril, she said.