Wheaton, Ill., Oct. 31, 2008—For years, experts in construction insurance have debated how to classify, for insurance purposes, the various costs incurred when completion of a construction project is delayed due to a covered loss.
Those questions are addressed directly in the latest revision of Builders' Risk policy forms developed by the American Association of Insurance Services (AAIS), a national insurance advisory organization that develops forms and rating information used by more than 600 property/casualty insurers.
The revised forms appear in the AAIS Inland Marine Guide of forms, rating procedures, underwriting guidelines, and other information for the traditionally nonfiled classes of inland marine insurance. The forms will be filed with a proposed effective date of April 1, 2009 in certain states that require filing of all inland marine forms.
Among other things, the revised AAIS Builders' Risk base forms implement a new exclusion for any additional costs caused by a delay in completing a project.
This exclusion was implemented in response to a federal court ruling in a builders risk case that could create open-ended exposure for all costs resulting from a delay caused by an insured peril.
The federal court ruling and the AAIS response to it in the Builders' Risk revision are explained in an online presentation with slides and audio available free of charge at www.AAISonline.com.
Certain costs arising from a delay can be insured, however, under a new AAIS "Delay in Completion Coverage Part." This new coverage part introduces a distinction between "additional construction expenses" and "additional soft costs" that clarifies the difference between two types of costs incurred during a construction delay.
For both of those categories of costs, recovery is limited to expenses over and above those that would have been incurred had there been no delay.
The additional "construction expenses" are limited to the following:
Additional advertising, public relations, and promotional expenses;
Additional fees for architects, designers, engineers, and other advisers;
Additional non-interest costs for financing, such as commissions and loan fees;
Additional costs for renegotiating leases;
Additional fees for accountant and attorney services that were being provided before the loss occurred; and
Additional fees for renewing or replacing construction permits and licenses.
"These costs are usually incurred in lump sums during the delay in construction," says Robert Guevara, AAIS vice president of inland marine. "The length of the delay has little if any impact on these costs."
For that reason, says Guevara, the additional construction expenses have a single per occurrence limit, and are subject to the basic builders' risk dollar deductible.
Soft costs, long a loosely used term in the industry, are a carefully defined and delimited set of expenses under the new coverage part. Soft costs include:
Additional interest for money borrowed to finance the construction work;
Additional real estate taxes incurred during the period of delay;
Additional costs to extend leases for construction equipment and temporary office space; and
Additional costs of insurance premiums to renew or extend coverage.
"These costs grow with time," says Guevara. "Therefore, in addition to its own per occurrence limit, the additional soft costs coverage is subject to a limit per 30-day period."
As a true time element coverage, the coverage for additional soft costs can be subject to a waiting period deductible, if so indicated on the schedule that accompanies the policy.
Beyond that, the revised AAIS Builders' Risk forms respond to another ruling of the federal court, which held that debris removal costs were limited only to the costs incurred to haul debris away, and did not include the cost of demolishing damaged property so it could be hauled away.
The implications of that finding would be that the cost of demolishing damaged property would fall under the basic limit under most builders' risk forms, not under the separate, and generally lower, debris removal limit.
To address the potential for additional exposure, the revised AAIS Builders' Risk forms specify that the coverage extension for debris removal applies to the cost for "demolition, clearing, and removal" of debris. The basic policy limit applies only to the value of the damaged property, or to the cost to rebuild, repair, or replace it.
For information on affiliating with AAIS for use of the Inland Marine Guide, contact Rick Maka, director of marketing, at our contact form or by calling 800-564-AAIS.