Minimizing Financial Losses Using Builder’s Risk Insurance

Dayna Anderson, CFESeth Lamden, Esq.

Dayna Anderson, CFE

• Principal at The Kenrich Group• ~12 years of experience • Perform complex economic and financial analyses and

calculate economic damages in a variety of industries including construction and insurance

• “Something You Don’t Know About Me” = I’d love to own a Corvette Z06 someday

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Seth Lamden, Esq.

• Partner in the Insurance Policyholder Practice Group of Neal, Gerber & Eisenberg LLP (Chicago).

• 15+ years experience representing and counseling corporate policyholders in resolving disputed insurance claims.

• “Something You Don’t Know About Me” = Last night, I won $15,000 playing blackjack.

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Outline

1. What is Builder’s Risk Insurance?2. Coverage for Construction Delays3. Recommended Practices for Submitting a Builder’s Risk Insurance Claim5. Wrap-Up6. Q& A

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WHAT IS BUILDER’S RISK INSURANCE?

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Confucius says...

"Needing insurance is like needing a parachute. If it isn't there the first time, chances are you won't be needing it again."

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What Does a Builder’s Risk Policy Cover?

• “First party” coverage for the cost of repairing or replacing course-of-construction physical damage to the work and other covered property.

• May cover additional costs resulting from delay in completing the project when the delay is caused by covered physical damage.

• Insureds: All parties with an “insurable interest” in the project, materials, and equipment.

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Anatomy of a Builder’s Risk Policy

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Anatomy of a Builder’s Risk Policy

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Elements of a Covered Loss

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Covered Property

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Don’t Assume All Property is Covered:

Covered Causes of Loss

• Policies contain a broad coverage grant (insuring agreement) that is narrowed by exclusions.

• Exclusions may contain “resulting loss” (a/k/a “ensuing loss”) exceptions.

• Identify the cause of loss with precision. Was the “resulting loss” caused by an excluded cause of loss or a covered cause of loss?

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Two Types of “Insuring Agreements”

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Exclusions and Resulting Loss Clauses

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Most builder’s risk policies have some sort of construction defect exclusion, such as the following:

We will not pay for loss caused by or resulting from inadequate or defective: (1) Design or specifications; or (2) Materials, workmanship or maintenance. But if loss by a covered cause of loss results, we will pay for that resulting loss. [Resulting loss clause]

Exclusions and Resulting Loss Clauses

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• A wire shorts out and the sparks start a fire. • Cause of short is defective installation.• Damage to wire itself: Not covered.• Fire damage to other property: Covered.

Explanation:Policy does not pay for loss by excluded cause of loss

(defectively-installed wire) but if there is a resulting loss to covered property (fire damage) caused by a covered cause of loss (fire), then policy pays for that loss (fire damage to property other than wire).

Policy Period

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COVERAGE FOR CONSTRUCTION DELAYS

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Coverage for Construction Delays

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Elements of a Covered Delay Claim

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Duration of Delay Coverage

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– When does coverage start?• After time deductible (e.g. project must be delayed for 30 days

before coverage is triggered).– When does coverage end?

• Coverage usually capped at specified period of delay delay (e.g. coverage stops after one year of delay).

RECOMMENDED PRACTICES FOR SUBMITTING A BUILDER’S RISK CLAIM

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1. Provide Immediate Notice to the Insurer

• Call your insurance broker as soon as possible – Request a copy of your policy and any endorsements

• Establish a reporting relationship with adjuster

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2. Establish a Claims Handling Team

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Single Point of Contact with

Insurer

Risk Manager

In-House/Outside Counsel

Other Project PersonnelInsurance Broker

3rd Party Claims Consultant

Establish separate accounting codes to

track losses

Substantiate claim with supporting documentation

Organize documentation

Submit to Insurance Carrier

3. Document Losses Carefully & Accurately

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Quantifying Delay Associated with Loss

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• Substantiate But-For Completion Date– Contract – Bid documents– Change orders– Project schedule updates

• Show that delay is direct result of loss– CPM schedule analysis

Quantifying Soft Costs

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• Track additional costs related to delay separately– Project administration costs– Increased financing costs– Additional design fees– Additional equipment rental expenses– Taxes– Lost profits– Other delay-related expenses separately

4. Evaluate the Cause of the Loss

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• Don’t speculate

• Remember that the insurer’s investigation is on-going– Be aware of what you write or say

• Hire a technical expert to perform a root cause analysis

• Hire counsel to protect privilege

5. Request Interim or Advance Payment

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• It’s not all or nothing

• Insurers may pay the undisputed portions of a claim on an ongoing basis

WRAP-UP

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Three Main Take-Aways

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1. Primary purpose of builder’s risk insurance is to ensure that if loss occurs, funds are available immediately to repair damage and minimize disruption to the project.

2. To maximize funds and minimize disputes with the insurer, tailor the coverage to the specific risks of the project and the expectations of the project stakeholders when procuring the policy.

3. Accurately document the loss and present the claim to the insurer in a way that permits the insurer to investigate the loss promptly and thoroughly, while at the same time maximizing the amount of coverage provided by the policy.

QUESTIONS/COMMENTS? (PLEASE USE MICROPHONE)

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