-Partners in Practice -

Suppose there is a severe windstorm late one night. One of your projects is damaged by the storm. Portions of the steel frame under construction fail, and a partial collapse ensues. The damage is substantial. Who is responsible for the loss?

A wide range of possibilities come to mind. The failure might be traced to fabrication errors, faulty workmanship, inadequate inspection, or even negligence in design. The loss, on the other hand, could simply have been caused by the wind. The situation has all the elements of a dream come true for the plaintiffs' bar. The arguments over the facts could go on for years.

These arguments can largely be avoided, and it is in the best interests of everyone involved to see to it that they are. The answer lies in the simple expedient of assuring that you, your consultants, the general contractor, and the subcontractors on the job are named as Additional Insureds under the Builders' Risk policy purchased to protect the property during construction. It could be important to you to understand why.

Your interests are twofold. First, a natural disaster during construction is likely to lead to a requirement for additional services on your part. The costs of these services are somehow going to have to be paid. This is your insurable interest in the property, and it is the basis for extending the protection of the Builders' Risk policy to you. Second, there is always a risk that the insurer of a property loss will seek to recover at least part of its costs from the design team. The allegation? "But for your negligence, the steel frame would not have failed." This risk, in theory, is not covered under the policy. In practice, coverage is often afforded. Your being named as an Additional Insured has the effect of discouraging subrogation.

Subrogation is the legal right of an insurer to recover from those who are actually responsible for a loss. It seems reasonable, in principle, that an insurer should be entitled to do so. But, insureds also have an important right; the right to the protection intended by the policy of insurance. What happens, then, when there is a conflict between the two?

In situations in which you are the only insured under a property policy, subrogation is seldom an issue. If you were to cause an accidental fire in your garage, for example, your homeowner's policy would compensate you for the loss-whether you were negligent or not. Under a Builders' Risk policy, with exclusions covering faulty workmanship, materials, and design, and with multiple insureds having varying degrees of interest in the property, the issues are far more complex.

Enter the courts. In spite of unfavorable rulings in the early 1970's, decisions in recent years have rather consistently come down on the side of the insured. In the absence of fraud, willful misconduct, or negligence as the obvious cause of the loss, the courts have generally held that a Builders' Risk insurer is not entitled to subrogate against those whose interests are intended to be protected. As a practical matter, this means that, even if you may have contributed to the loss, the property insurer is not likely to come after you if you are named on the policy.

Securing the protection of the Builders' Risk policy is not difficult. You can be included as an Additional Insured at little or no cost, and having you named on the policy is in your client's interest as well as your own. But the contractual and administrative details are important, and if you are not using standard forms of agreement and standard General Conditions published by the AIA or the Engineers' Joint Contract Documents Committee (EJCDC), you may have to attend to those details with some degree of care.

The place to start is your agreement with your client. It is both reasonable and appropriate to include a provision which identifies any participation in the replacement of work damaged by fire or other causes during construction as an additional service. Both the AIA and EJCDC documents contain such a provision. Many client forms do not.

The issue of property insurance also needs to be addressed. Builders' Risk insurance is normally purchased and administered by the owner, but this responsibility may be passed on to the general contractor at the owner's option. In either event, property insurance specifications should require an extension of coverage to you and your consultants as well as to each of the parties in the workforce. Although this requirement is included in both the AIA and EJCDC General Conditions, you will want to review any modifications you receive from the owner for incorporation into the Supplementary Conditions. Make certain these extensions of coverage have not been inadvertently deleted.

The standard forms also contain provisions calling for mutual waivers of subrogation for damages covered by any property insurance which may be in place during construction. They require that the waivers be further extended by the contractor to each of the subcontractors on the job (and by you to each of your consultants). The idea is to reinforce, by contract, the prevailing weight of authority in the Common Law; to vest in the Builders' Risk insurer full and final responsibility for property damage to work in progress.

In an attempt to keep their subrogation options open, some property insurers have recently introduced an important policy change. Historically, Builders' Risk policies have been written to prohibit waivers of subrogation by insureds, but only those agreed upon after a loss. More recent language adopted by some carriers seeks to declare the policy null and void in the event an insured should enter into any agreement, either before or after a loss, which would impair the subrogation rights of the insurer. Where this problem exists, it can generally be overcome by endorsement. It is, nevertheless, a detail that may require the attention of the owner and the owner's insurance advisor.

What does all this mean to you? For one thing, it underscores the importance of making certain that the owner furnish the insurance requirements for the construction contract and that he or she be afforded an opportunity to review and approve those requirements before they are cast in stone. For another, it suggests that you may want to obtain a Certificate of Insurance showing that you have, in fact, been named as an Additional Insured on the Builders' Risk policy (and evidencing coverage for your waiver of subrogation if you have signed one). You may also want to forward the Certificate to us for review. We would be pleased to lend our expertise to assist you in any way we can.

For inquiries or problems please contact us via e-mail at Earleen Thomas or call us directly at 800-705-7742.
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