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How to Assure Builders Risk Coverage Remains In Place During The Coronavirus Shutdown
Kevin Moore
Kevin Reimers
Gary McCann
Apr 20, 2020
This blog post can also be found on our Coronavirus Resource Center.
Governmental responses to contain the coronavirus continue to negatively impact the economy, and the construction and real estate community is not immune to its effects. Projects under construction and near completion are affected as shelter-in-place-orders and other mitigation efforts may slow or stop work altogether. Most projects under construction are insured via a course of construction or builders risk policy and coverage may be impacted if work is suspended due to the virus.
Builders risk policy forms vary by insurance carrier and many contain clauses that can reduce or eliminate coverage in the event of a project suspension, termination, or other cessation of construction activity. Understanding how coverage will respond to a shutdown is critical as the government continues to grapple with the virus. For these reasons we recommend you review the following builders risk policy elements on any of your projects facing an interruption of construction operations as well as understanding coverage during a shutdown.
Construction Interruption: Builders Risk Policy Clauses of Concern
Cessation of Work Limitations
A "cessation of work" limitation typically requires notice to the insurer if work is stopped for more than a certain period of time (e.g. 30, 60, or 90 consecutive days). Failure to properly notify the insurer can result in a termination or reduction of coverage.
Abandonment of Work Limitations
Some policies may contain an "abandonment of work" limitation. This is a clause in some policies that prohibits the insured from abandoning property to the insurer. Policy language should be reviewed to assure that a temporary suspension of construction activity due to COVID-19 does not constitute an abandonment.
Increased Hazard Clauses
An "increased hazard" clause requires the insured to report a materially increased risk to the insurer within a certain time period. Suspension of construction activities may reasonably be considered an increased hazard. Failure to notify the insurer may void coverage.
Protective Safeguard Requirements
Certain policies may include "Protective Safeguard" requirements like off-hours security, 100% secured fencing, or lighting. It is important to review these warranties and ensure the project is in compliance with these requirements.
Extensions of Coverage During Shutdown
Extensions of coverage are also a critical component of managing the effects of a project shutdown. These are defined as either an extension of the current policy for an additional period of time or placement of a new policy if the current policy expires as the project is not yet complete. Delays, even for projects just getting underway, increase the likelihood that schedules may not be met once work begins again. It is essential to have early discussions with your insurer on what they can provide and the conditions that might apply, i.e., protective safeguards, costs to extend, etc.
Many insurers are requiring or strongly encouraging projects to follow a check-list of items to make the project safe for short- or longer-term shutdowns. Documenting the percentage complete of each element of the project at the time of shutdown will be helpful if an extension is required at the end of the policy term. A sampling of check-lists are available at the end of the article, though we encourage you to work with your specific builders risk carrier to understand their individual requirements.
If a current project is moving toward a suspension of construction activities, we recommend informing the builders risk broker as soon as possible in order to pre-emptively address any potential coverage issues. Whether you are a contractor, developer, or subcontractor all parties have a vested interest in making sure coverage is not jeopardized by a project shutdown. The party charged with placement of the policy should follow these guidelines and document the specific steps they have taken to comply.
Woodruff Sawyer stands ready to assist if you have any questions in these unprecedented times. Reach out to your Account Executive to discuss these issues.
For more guidance, refer to these checklists from our carrier partners:
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