WILL YOUR BUILDERS RISK POLICY COVER DELAYS IN PROJECT COMPLETION?

Work on the new office complex was progressing on schedule. The owner had lined up tenants for two-thirds of the space and was in talks with several others. The general contractor expected to finish construction on time. All that changed when a fire broke out on the first floor late one afternoon. It spread from a stack of drywall awaiting installation to a pile of scrap plywood, where the wind picked up the flames and carried them to the structure. Drywall, insulation and plastic wiring all soon ignited. Firefighters were able to contain the blaze and limit the damage. However, it would now take an additional two months to complete the project because the contractors would have to clean up the debris from the fire and ensuing water damage, order replacement materials, and re-do much of the first floor’s construction. The owner faced the certainty of thousands of dollars in lost rents and additional interest on the construction loans.

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The owner and general contractor had purchased a Builders Risk insurance policy to cover damage to the project. They would have coverage for the lost rents and interest expenses if the policy included special protection known as “Soft Costs Coverage.” Soft costs are costs or reduced income resulting from a delay in a project’s completion. They include expenses such as:

• Lost rents
• Additional interest on loans
• Additional real estate taxes
• Additional advertising costs
• Additional insurance premiums

Some Builders Risk policies have this coverage built in, while others provide it only if the insurance company adds it and charges an additional premium. The insurance covers the named insured for loss of income and additional expenses that result from direct physical loss of or damage to the covered property. There is no coverage unless the peril causing the loss is one that the policy covers for direct damage. For example, the policy will cover losses caused by fire but not losses caused by faulty workmanship. The lost revenue and extra expenses must accrue during the period starting a specified number of days after construction would have been complete if no loss had occurred and the date construction actually was complete. Some policies limit this period to no more than six or 12 months.

Soft costs coverage may provide one limit of insurance that applies to all covered losses, or it may have separate limits for different types of losses. For example, one company’s policy defines “soft costs” as loss of rental income, loss of gross earnings, additional interest and finance expenses, and additional expenses. The policy could have separate limits for each of these categories. A waiting period deductible applies, though some policies may apply a dollar deductible to losses that occur in a lump sum, such as legal fees. Some policies may also set a maximum amount that they will pay for any one month. They do not cover certain types of losses, such as those caused by strikes, breach of contract, design errors and omissions, lack of funds for repair or reconstruction, building laws and ordinances, and others.

The insurance company will determine the value of a loss by calculating the actual amount of income lost or extra expenses incurred during the delay period because of the delay. It will pay the amount of the loss or the amount of the insurance purchased, whichever is less.

Work with our professional insurance agents experienced in arranging your Builders Risk insurance. To make sure that the coverage terms and limits are appropriate, you should review the building contract, financing agreements, construction schedules, and other related documents. The type and amount of coverage will vary from one project to another, so it is important to give careful attention to each job’s particular circumstances.

WHAT ARE YOU REALLY BUYING WITH A CONTRACTOR’S EQUIPMENT POLICY?

Contractor’s Equipment insurance is an essential part of any construction firm’s insurance program. Commercial Property insurance covers a business’s personal property while it is at a location listed on the policy, but it does not cover property that moves among different locations. Business Automobile insurance does insure property that moves around, but it does not cover “mobile equipment” -- property such as bulldozers, loaders, digging equipment, and power tools that the business uses off its own premises. Power tools might cost only a few hundred dollars, but large pieces like backhoes and excavators might be worth tens of thousands of dollars. To properly insure such property, the firm needs Contractor’s Equipment insurance.

A typical Contractor’s Equipment policy will cover the insured’s owned pieces of equipment listed on its declarations page or a separate schedule. It will also cover equipment that someone else owns and that is in the insured’s care, custody, or control. For example, the policy will cover a loader that the insured borrows from another contractor on a job site or that it rents from an equipment dealer. It might also provide one amount of insurance to cover a group of less expensive items, such as power hand tools. For example, it might provide $10,000 coverage on tools but no more than $500 for any one item. It will not cover automobiles, trucks, aircraft, watercraft, contraband, and it might not cover equipment the insured uses in underground mining operations, or equipment rented or loaned to others.

The policy will cover equipment for a variety of losses, including fire, explosion, vandalism, theft, collision with other equipment or objects, and overturning. Unlike standard property insurance policies, Contractor’s Equipment insurance often covers losses caused by floods and earthquakes. Insurance companies usually offer several coverage options, such as:

• Rental reimbursement coverage, which covers the cost of renting a temporary substitute when a covered cause of loss damages an insured item.
• Reimbursement of income the insured loses when it cannot complete a project because a covered cause of loss has damaged an insured item.
• Blanket coverage, which insures all covered equipment under one large amount of insurance instead of insuring each item under its own individual amount.

To purchase the proper amount of insurance, the firm must determine the values of each piece of equipment. A typical policy covers equipment for its “actual cash value,” which is the difference between the cost of replacing the equipment and the amount by which it has depreciated. Published equipment pricing guides, advertisements in trade magazines, and local equipment dealers are good sources of information on equipment values. In addition to the other options available, an insured must consider factors such as:

• Whether to pay extra to insure the equipment for its replacement cost without depreciation. This might depend on both the firm’s budget and the ease with which the firm can obtain used equipment should it need to.
• Whether the policy has a coinsurance clause, which penalizes the insured if coverage on the damaged item is less than its value at the time of the loss. Some companies might offer “agreed value” coverage, which eliminates the coinsurance clause and requires coverage up to some agreed amount.
• Whether to buy a higher deductible to decrease the premium.

Contractor’s Equipment insurance is not just for contractors; municipal governments and other organizations that uses this type of equipment need it as well. A consultation with one of our professional insurance agents will reveal your coverage needs and the appropriate insurance companies to meet them. Because the equipment is so expensive, the buying decision should be based on coverage and a company’s reputation, not just the premium.

BUSINESS OWNERS: PROTECT YOUR COMPANY WITH EPLI

Some of the most common lawsuits heard in courtrooms are discrimination suits against businesses. This is confirmed by the fact that in 2009 more than 130,000 complaints were filed with the Equal Employment Opportunity Commission alone. There is no officially estimated figure as to the total cost of discrimination lawsuits on businesses, but a reasonable estimate is around $2 billion per year.

Fortunately, there is an insurance product designed to protect businesses from these kinds of lawsuits: Employment Practices Liability insurance (EPLI). Insurance companies offer EPLI as part of their Business insurance product line. However, there is a disparity involved: A lot of eligible companies do not purchase EPLI. Despite the fact that the United States has become a litigious society, and despite the huge costs to businesses who do not have this kind of insurance, it seems odd that so many would resist protecting themselves from this incredible liability.

Regrettably, there are many myths about EPLI that have taken hold in the popular business consciousness. It is necessary to dispel these myths in order to drive home to businesses that they need to protect themselves from discrimination-related litigation.

1. Too many companies believe, whether due to the structure of their business or some other factor, that they are immune from lawsuits. This is flat out false. No matter what kind of company it is or how it is structured, even if it is set up as a corporation, legal protections can be stripped away instantly by a judge. Depending on the size of the business, it might not have the human resources practices and policies necessary to prevent a discrimination lawsuit. Therefore, if the business does not have that administrative structure in place, they are more exposed than they realize, and thus are a candidate for EPLI coverage.

2. Aside from believing that a business is immune from lawsuits, believing that they can absorb the costs of a lawsuit is the next most damning myth. Legal action is inevitably costly, and not just financially, either. Since in legal situations management staff and other professional members are asked to testify, gather evidence, and perform other actions for the court, the more time they spend on these non-core business activities, the less time they are focusing on the bottom line. Therefore, the more time it takes, the more lost revenue it costs that business. It is actually quite easy for a business to go bankrupt as the result of a lawsuit.

In addition to the non-calculable cost through lost earnings, an examination of the precise costs to businesses from discrimination lawsuits is very revealing. In two 2005 cases, Wachovia Corporation and Consolidated Freightways agreed to pay more than $5 million and $3 million to settle their respective lawsuits. In 2004, United Airlines was forced to pay more than $36 million to settle its own discrimination lawsuit case.

3. The final myth involves business owners failing to understand the full extent of their current coverage. Falsely, many think that general business insurance protects them against discrimination lawsuits, when in fact, it does not. Business Owner Policies, Workers Compensation, General and Professional Liability policies actually sometimes specifically exclude liability from discrimination suits.

Despite all possible non-insurance precautions that businesses take, EPLI is still the only way to protect themselves fully from the costs of lawsuits based on discrimination. EPLI provides coverage for liabilities such as sexual harassment, general discrimination, wrongful termination, breach of employment contract, negligent evaluation, failure to employ or promote, wrongful discipline, deprivation of career opportunity, wrongful infliction of emotional distress, and management of employee benefit plans.