Builders Risk October 8, 2011 Niagara-on-the-Lake, Ontario Society of Risk Management Consultants

1. Builders RiskOctober 8, 2011Niagara-on-the-Lake, OntarioSociety of Risk Management Consultants Steve Coombs, CPCU, ARM Risk Resources scoombs@riskresources.net Donald S. Malecki, CPCU Malecki Deimling Nielander & Assoc., LLC don.malecki@mdnconsults.com

2. Exploration of Three Areas • Contract Requirements • Physical Damage: Common Coverage Problems • Delay Coverage: Soft Costs and Loss of Revenue 1

3. Our BR Philosophy/Biases • BR is the backbone of construction insurance programs • BR policy must comply minimally with “contract documents” • BR insulates other types of insurance (i.e. CIPs) • Broad is beautiful! 2

4. Common Misconceptions with BR Insurance • BR insurance is generic • Lower limits/reduced coverage benefit the sponsor • BR policies are designed to work hand-in-hand with “contract documents” • Fault based vs. no fault 3

5. A. Contract Requirements 1.Sources of BR Insurance Requirements • AIA • ConsensusDOCS • DBIA • EJCDC • Custom 2. Comparison of Provisions • See separate handout • Highlights • Can all requirements be met? • Key areas to consider: Who, what, where, when and how 4

6. BR Policy vs. Property Policy • Is property insurance the “equivalent” of BR insurance? • Common areas where property insurance falls short: • Naming of insureds • Inadequate automatic limits • Foundations and underground property • Land improvements • Property off-site • Property in transit • Scope of exclusions (i.e. testing) • Large deductibles • Unintended coverage for contractors (i.e. time element) • Troublesome conditions (i.e. vacancy/unoccupancy, increases in hazard, concealment) 5

7. B. Physical Damage: Common Coverage Problems • Insureds Not Named Properly • Named insureds vs. additional insureds • “As Their Interest May Appear” • Problems with architects, engineers and surveyors • Problems with material suppliers • Lender issues 6

8. Covered Property • Description of “insured project” in policy • “Covered Property” definition • Existing buildings • Limitations (i.e. airborne, waterborne, off-site) 3.Where Coverage Applies • How site specific is it? • “Policy Territory” definition • Overseas suppliers • Suppliers: tie in with soft costs and delay • When Coverage Begins and Ends • Definitions vary by policy • Commonly don’t match contract requirements • “When occupied in whole or part” • Transitioning to a permanent property policy 7

9. Where Coverage Applies • How site specific is it? • “Policy Territory” definition • Overseas suppliers • Suppliers: Tie in with soft costs and delay 8

10. When Coverage Begins and Ends • Definitions vary by policy • Commonly don’t match contract requirements • “When occupied in whole or part” • Transitioning to a permanent property policy 8

11. 5. Exclusion: Faulty design, workmanship, materials • U.S. Underwriters: • Ranges from outright exclusion to “resultant damage” wordings • European underwriters: • DE clauses: 5 variations (DE1-5) • LEG clauses: 3 variations (1-3) 10

12. 6. Exclusion: Rain/Snow/Sleet/Hail • Exclusions range from outright to limited buy back • Often backstopped with concurrent causation language • Underwriters may be receptive to “resultant damage” exception (typically with a sub-limit) • State statutes usurp policy language 11

13. 7. Catastrophe Perils: Wind, Flood, Earthquake • Limits may be aggregated (issue for multi-year projects) • Earthquake vs. earth movement • Deductible wordings (flat vs. percentages) 12

14. 8. Condition: Occupancy Clauses • Projects often include some element of occupancy • The majority of policies void coverage in the event of occupancy • Clauses are wide ranging: • “In whole or part” • A certain % of square footage • Limited permission for a short time • Underwriters freely permit occupancy once exposure to underwritten 13

15. 9. SubrogationProblems • Continue to be a major source of litigation for many reasons • Recent trend: Some insurers will not honor waivers involving architects/engineers • “Work” vs “Non-Work” • “As their Interests May Appear” • Post-construction issues 14

16. 10. Rehabilitation/Renovation Projects • Differences between these projects • “Existing Property” exclusion/limitation • Property policy vs. project specific BR policy • Underwriters perceptions 15

17. C. Delay Coverage: Soft Costs and Loss of Revenue • Soft Costs • This term is a moving target : Each insurer defines “soft costs” differently • AAIS spokesman: “Soft costs may be another term that obscures more than it clarifies…I wish we could get rid of the term…” • Generally thought of as indirect costs: Expenditures for items other than hard costs, that are necessary for construction, but not typically part of the construction contract • Examples: Advertising, professional fees, loan interest, property taxes, insurance premiums, development fees, leasing costs, permits 16

18. Soft Costs Coverage Prerequisites • Specifically described • Actually expended • Deemed necessary (or alternately reasonable) • Would not have been incurred without the delay 17

19. 3. Loss of Revenue • Loss of earnings • Loss of rental income • More readily understood compared to “soft costs” • Actual loss sustained in nature; valued forms are unusual but effective • Imagine proving a loss on a facility that has not commenced operations and has no track record 18

20. 4. Delay Coverage Requirements • Subject to terms/conditions of delay coverage forms and BR policy • Must have underlying insured physical damage loss • Underlying physical damage loss must be at a scheduled location • Loss must take place during the “period of indemnity” 19

21. 5. Period of Indemnity • Starts on the anticipated completion date and ends as set forth in the policy (ignoring deductibles for the moment) • Source of debate between insurers and insureds • “Anticipated completion date” generally means the date the project would be put in normal operation 20

22. The anticipated completion date moves + or - throughout a project • With most BR policies the delay coverage automatically tracks with the revisions to the anticipated completion date 21

23. However most policies do not recognize anticipated completion dates that are ahead of the original schedule 22

24. Impact of an Insured Loss 23

25. Potential Coverage Gap illustration-Soft Costs • Gap below is from July 1-Sept 1, 2011 24

26. The “period of indemnity” ends as stated in the policy • Can be stated in a number of ways: • Number of days • 12 months • Most common approach incorporates some variation of phrases such as: ”that date the project should be completed” or “the date when the project is completed”; “with reasonable dispatch” or “with due diligence; “with similar materials” or “similar quality” • Conflicts are common due to vagueness of terms 25

27. The “Ramp Up Effect”: Permanent Property vs. BR Policies Business Interruption: Permanent Property Policy 26

28. Loss of Revenue: Builders Risk Policy 27

29. Questions?? 28