Author: Jim Lobb, Best Lawyers© 2017 Real Estate “Lawyer of the Year” for Louisville.

Is the Builder’s Risk Insurance provision set out in part one of this series accurate?

NO!!!! (Could there have been any different answer, after all?)

At a minimum, the provision should identify whether the Builder’s Risk Insurance is to be written on ISO or Inland Marine forms. If the former, the provision should identify the ISO form and endorsements to be obtained. If the latter, the provision should require the placement of “all-perils”, or “special causes of loss” coverage. Just as important, the provision should identify (i) those insurable interests that are to be covered; (ii) the party that will provide the coverage; (iii) the named insureds; (iv) any required endorsements that expand the basic coverage, (v) the event(s) that will trigger the termination of the coverage.

Once you obtain answers to the checklist questions above, you should be able to draft this provision for the Construction Agreement, Lease Agreement or Construction Loan documents—at the same time you negotiate the terms of the Builder’s Risk Insurance Policy.

Can you get additional help in drafting these provisions?

YES!!! (Are you beginning to see a pattern here?)

Check to see if your Inland Marine Insurance carrier has a licensed affiliation with AAIS. If so, your carrier should have access to the Inland Marine Guide. “The Guide is the property/casualty industry’s premier resource for forms, rating procedures, underwriting guidelines, and other information for the traditionally non-filed classes (which includes most Inland Marine Insurance policies). The Guide provides more than 400 multistate forms, endorsements, and schedules, plus required state specific endorsements.”[1]

The Guide “also provides:

Detailed explanations of coverages, including coverage intent, property covered, property not covered, additional coverage, perils excluded, valuation, coinsurance.. .
Underwriting considerations…
Comparisons of coverage forms within each class, so you (the insurance broker) can readily assess, compare, and modify your options for providing coverage.”[2]

If your insurance carrier won’t or can’t give you access to Guide forms and related information to help you in your negotiation of the underlying Builder’s Risk Insurance policy, Construction Agreement and/or Construction Loan documents, then these authors believe you need to consider, again, whether you should hire an independent insurance consultant with access to these materials to help you negotiate the terms of these documents.

Analyzing the Proposed Policy.

In addition to thinking through the details of the construction project to make sure that the risks unique to your project are addressed, this author recommends that whenever you are faced with a prospective insurance question, be it under a builder’s risk policy or any other insurance policy impacting your client’s property, you analyze the policy terms, at the outset, in much the same way that you know an insurance coverage attorney will analyze the policy. This analysis could help you determine whether coverage could exist for a given claim that may be of concern to your clients.

The real estate attorney tasked with analyzing whether a particular claim triggers coverage under an insurance policy needs several documents that are reviewed in a particular order in order to complete the task. Thus, if you are trying to insure that a property owner is adequately covered, you should consider requesting the same documentation from the owner’s insurance carrier in order to best protect the owner’s interests.

First and foremost, the real estate attorney needs the original insurance policy and every renewal policy issued by the insurance company to the insured. In a construction defect claim, the original work may be done during one policy period but the resulting damage may not occur until several years later.[3] Therefore, the attorney will need to review each and every policy issued to the named insured to determine how the policy may have changed during the time the claimant has been an insured.

The policy includes multiple documents: the declarations sheet, which identifies the named insured, the carrier who issues the policy and the agency that brokered the policy, the dates for the applicable policy period, the common form numbers and endorsements that are applicable to the coverage parts that make up the policy, the policy limits for the various forms of coverage that the policy provides, the list of scheduled property, and possibly the identities of additional named insureds;[4] common policy conditions, if any;[5] the different coverage parts, which may include coverage forms for commercial general liability coverage, commercial property coverage, commercial auto coverage, employee benefits liability coverage, commercial inland coverage, computer coverage, etc.; the schedules of property that are specific to certain coverage parts, where applicable; and the endorsements to the policy.[6]

The real estate attorney first needs to identify the named insured, and how the named insured fits into the facts of the claim. Is the named insured the party who is receiving a demand for payment? If not, how is the person receiving the demand connected to the named insured? Next, has the claim been made during a present policy period? When did the action given rise to the claim take place?

The attorney also has to review the common policy conditions, if there are any. These conditions will apply to each coverage part that makes up the policy and generally govern things like when and how the insured must give notice of the claim, and how the insurance carrier may give notice of cancellation of the policy.[7] Have all parties followed these conditions for coverage?

Once the attorney determine the basic parameters of coverage, then she must analyze the terms of the applicable coverage forms.

Regardless of the type of coverage, each coverage form generally has at least two parts: 1) the insuring agreement, which explains when coverage is triggered under the terms of the policy, and 2) the exclusions to the policy. If there is no coverage under the terms of the insuring agreement, then logically there is nothing to exclude. Policies may also have endorsements, which change the terms of the policy and must be analyzed with the coverage form.[8]

The insuring agreement will usually be brief, and in fact may only be a paragraph or two. However, each word and phrase within that agreement provides a necessary requirement for triggering coverage. As will be explained in part 5, a Builder’s Risk Insurance policy usually has an insuring agreement that is intended to be much broader than other coverage forms.

[1] See http://www.aaisonline.com/AAISFrame/ProductsFrame/InlandMarineFrame/tadib
/142/ArticleID/Inland-Marine-Guide.aspx .

[2] Id. Parentheses added.

[3] See, e.g., Montrose Chemical Corp. v. Admiral Ins. Co., 913 P.2d 878, 880-81 (Cal. 1995)(describing such instances as “continuous trigger” triggers of coverage).

[4] See, e.g., N.Y. Dep’t Fin. Serv., Sample Insurance Policy Declarations Page (2013).

[5] See, e.g., Nael G. Bunni, Risk and Insurance in Construction 344 (2d ed. 2003).

[6] See, e.g., Nael G. Bunni, Risk and Insurance in Construction 346 (2d ed. 2003).

[7] See, e.g., Nael G. Bunni, Risk and Insurance in Construction 344 (2d ed. 2003).

[8] See Kemper Nat’l Ins. Co. v. Heaven Hill Distilleries, 82 S.W.3d 869, 875 (Ky. 2002).