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This is the first of three articles on the complex and challenging course of construction exposures and provide risk mitigating solutions available through builder’s risk insurance coverage.  Part I, Builder’s Risk Coverage, addresses a select few critical exposures to projects under the course of construction. Subsequent articles address less common, but effective builder’s risk insurance solutions to mitigate risk and examine how other coverage could potentially respond to loss. 

Faulty design, materials and workmanship

Universally, nearly all builder’s risk policies include exclusions for faulty design, materials and workmanship. This exclusion is often tempered by an ensuing loss exception, which essentially states that if the loss is caused by an otherwise insured peril, the resultant loss will be covered.  

For example, a contractor fails to incorporate the specified amount of steel rebar in vertical structure members of a new building. This issue is discovered 75% of the way through construction. If no loss occurs, a typical builder’s risk policy would not respond to the need for rework. However, if the building collapses, and collapse is a covered peril under builder’s risk, while damage to the faulty columns would not be covered, resultant damage should be covered. 

Partial Occupancy Exclusions

Whether performing renovations or new construction, there is pressure from owners for buildings to become occupied before construction is complete. Owners want to start generating revenue from areas already completed, while construction continues in adjacent areas concurrently.  Most builders risk policies either exclude coverage for otherwise covered loss arising from early occupancy or are quite restrictive with what must be reported to be covered.

For example, a contractor furnishes builder’s risk for a mixed-use apartment project. The policy does not automatically allow early occupancy. The first-floor retail space is completed four months ahead of the apartments above and a restaurant occupied the space. A fire in the restaurant causes extensive damage to the entire structure. The policy requires underwriters to be notified of early occupancy by the insured and approve of any early occupancy. Because this dos not occur, builder’s risk coverage may be excluded for this loss.

Concurrent Causation Clauses

In general, concurrent causation clauses under builder’s risk policies exclude coverage for loss or damage caused directly or indirectly by any number of individually listed perils. This exclusion is regardless of any other cause or event contributing concurrently or in sequence to the loss. 

As an example, a new construction hotel and casino along a coastline is caught in a hurricane and sustains $20 million in damage as a result. It’s determined $15 million of the damage is caused by wind and $3 million is caused by flood. The responding builder’s risk policy provides coverage for the peril of a named windstorm but does not cover flood. If certain concurrent causation language remains unamended in the policy, the entire loss may not be covered. The language in the builder’s risk policy matters. If a course of construction loss occurs, it can determine the financial future of a construction company. The insurance broker can help a contractor review, construct and understand policies, ensuring critical loss is a covered matter. 


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