9/13/2020 Builders Risk: 5 Common Coverage Exclusions and Clauses

MARKETS BUILDERS RISK 13 March 2017

Builders Risk: 5 Common

Coverage Exclusions and
Clauses
BY JACQUELYN CONNELLY

Between rapidly changing

construction trends and

increasingly sophisticated risk

mitigation tactics, property owners

and contractors have a deluge of

details to keep in mind when

they’re working to complete a

project.

These individuals trust you to help

them secure effective builders risk
coverage for their various
exposures—and that means you
need to hone an expert

understanding of policy language.

Here are five builders risk coverage exclusions and clauses that could have a significant
impact on a client’s ability to recover from a loss.

Exclusions to Address
Faulty design, materials and workmanship: Almost all builders risk policies contain
exclusions for faulty
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9/13/2020 Builders Risk: 5 Common Coverage Exclusions and Clauses

peril, the resulting loss will be covered,” says Steve Coombs, president of Risk Resources, a
risk management and insurance consulting firm.

Consider a project that involves constructing a concrete parking garage. The contractors install

a faulty beam, and 80% of the way through construction, everything collapses. “Under most
policies in the U.S., what’s excluded is the faulty beam. But if collapse is an otherwise insured
peril, the resulting loss should be covered,” Coombs explains.

“Many carriers have developed coverage terms to broaden how a builders risk policy could

potentially respond to a loss resulting from faulty workmanship,” agrees Sharon Primerano,
chief underwriting officer for The Hartford’s marine practice. “Typically, the broadened
coverage is available with a higher deductible and additional premium, and can also be sub-
limited.”

Another option is using one of three standardized exclusions developed by the London
Engineering Group (LEG), which limit the exclusionary scope. LEG 1, a total exclusion,
provides no coverage—period—in the event of a loss caused by faulty design, materials or
workmanship. LEG 2, however, excludes only rectification costs for preventing damage.

“Let’s say there’s faulty electrical equipment at a construction site that causes a fire—this
would exclude the cost of replacing and installing that faulty component, but the rest of the loss
is covered,” Coombs explains.

LEG 3 provides the broadest coverage by excluding only improvements to the original
material, design or specification. In the same example as above, “let’s say we should have
never used that component—we should have used a totally different component that costs 10
times as much,” Coombs says. “What LEG 3 excludes is the cost of the upgrade.”

Already prevalent in Europe and Canada, LEG endorsements are now becoming “fairly
common on large construction projects in the U.S.,” Coombs observes. “Three years ago, I
would have said $100-million projects only. But now I’m seeing some of these endorsements
on projects $50 million and up. As time goes on, you’re going to see them being introduced in

projects that are smaller and smaller, because they bring some certainty.”

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9/13/2020 Builders Risk: 5 Common Coverage Exclusions and Clauses

Concurrent causation: Coombs calls these exclusions, which cropped up in the 1980s to

protect insurers against losses with multiple causes, the “broadest yet.” Although the terms
vary greatly between forms, concurrent causation exclusions deny coverage for loss or
damage caused directly or indirectly by any number of specific, listed perils—regardless of any
other cause or event that contributes concurrently or in sequence to the loss.

Consider a beachside hotel construction project that sustains $10 million worth of damage
after a hurricane. “Let’s say $9 million of that is caused by wind and $1 million is caused by
flood, and in the builders risk policy, they have coverage for wind but they don’t have coverage
for flood,” Coombs says. “An unsophisticated consumer might think they’d at least get $9

million. Depending on the actual wording of the exclusion and applicable insurance laws, they
may get nothing.”

Coombs, who co-wrote “The

“The Builders Risk Book”
Book” with Don Malecki, says concurrent causation
exclusions are becoming more extensive in builders risk policies. “It’s something agents need
to be very careful about when reviewing proposals from different insurance companies,” he
warns. “Nearly all of them have some sort of concurrent causation language, but if you have a
list of 10 [excluded perils] vs. a list of only four, there’s going to be a big difference in
coverage.”

Partial occupancy exclusions: As renovations continue to pick up steam in the construction

industry, many buildings are occupied before construction is complete, says Christie Lucas,

vice president of commercial product management at Erie Insurance. “The owners want to

start generating revenue as soon as possible, so perhaps they will fill the first space and then
continue with the remaining space to start getting some revenue in,” she explains.

That’s a problem for your contractor clients, because most builders risk policies contain some
kind of partial occupancy exclusion. “Agents need to have that removed if the building’s going

to be occupied at any time during construction,” Lucas says. “For an individual building, you
can purchase a partial occupancy endorsement that’s basically like a permit. If the agent fails

to do that, it could be a costly E&O issue.”

Clauses
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9/13/2020 Builders Risk: 5 Common Coverage Exclusions and Clauses

Separation of insureds: Nearly all builders risk policies insure multiple parties—the owner,

the general contractor and the subcontractors. But most don’t contain a separation of insureds

clause, which protects each insured individually. “What that means is if one insured violates a
policy warranty or condition, that impacts all insureds,” Coombs explains.

For example, a builders risk policy may require the general contractor to keep the entire
construction site lit and surrounded by an eight foot-tall fence. “Let’s say that the owner

secured that policy and the general contractor doesn’t get a copy of it, so they don’t even
realize this warranty is in the policy,” Coombs says. “And it turns out that there was no eight-

foot fencing around the entire site, and then there’s a loss—there’s no coverage for anybody.”

Coombs notes that in Europe and in Canada, separation of insureds clauses are “standard
stuff,” but the U.S. insurance industry has been “slow to catch on.”

Other insurance: Many builders risk policies contain this baffling clause, which states that in

the event that any other insurance applies to a construction project, the builders risk policy is
excess.

“If someone buys a builders risk policy, they intend for that builders risk to be primary

insurance—that’s the reason they’re buying it,” Coombs says. “They understand the contractor
may have separate liability insurance or something, but the purpose of a builders risk policy is

to provide funding for repairs or reconstruction so that the parties don’t sit there and spend
years litigating.”

Slowly but surely, the industry is developing endorsements to confirm that their policies are
primary. “But it’s real slow,” Coombs says. “Agents and brokers should be careful to ask for an

endorsement which confirms primary coverage, just for contract certainty.”

Jacquelyn Connelly is IA senior editor.

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