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Owners Should Purchase Builder’s Risk Insurance (CPG)

The owner of a construction project is better off purchasing builder’s risk insurance rather than leaving it to the contractor, as this makes it easier for the owner to include business interruption insurance. This was one of the key points discussed at a the recent Construction Practice Group teleconference.

Contractors will often argue that they can get a better deal than the owner but some prefer to place in the name of the owner. The owner can specify all coverages needed, including business interruption in the case of delays.

The group also discussed LEG 3 issues and coverage specifications.

Among the key points were the following:

  • Business interruption insurance for delays can vary widely in what it covers. Check to see whether loss of rents and soft costs such as interest are included.
  • Be aware that the insured will have to prove the loss. “Companies will hire a forensic accountant. The company wants to make the number as large as possible and the carrier wants to make it as small as possible, creating a somewhat adversarial relationship.”
  • Alleged faulty workmanship is a particular challenge. Is this a builder’s risk claim or not? The contractor will want the situation to be covered by insurance so the costs don’t come out of his pocket.
  • Check insurance coverage if ownership of a building is transferred.

The group talked about LEG 3, which has developed as the London Engineering Group crafted three variations of defects exclusions in the 1990s. The defect exclusions have been adopted by the European insurance market and are now finding their way into the U.S. marketplace.

Case History: Collapse of Kansas City Hyatt Regency Atrium Walkway

Loss: Two of three suspended walkways inside a hotel atrium collapsed during a public event in the hotel’s lobby in 1981. The falling walkways killed 114 and injured 216. The two-level walkway was suspended over the hotel atrium with the use of threaded steel rods supported from the atrium ceiling. The hanger rods connected to welded, steel box-beams that were part of the walkway support framing.

Design Change: A modification of the original design occurred during construction because the contractor on site found the installation of the continuous support rods too complex. The contractor proposed using two hanger rods in lieu of a single rod, offset at the upper walkway support connection. The design firm was allegedly called and a change discussed. The designer approved the shop drawings reflecting the modification. Later, it was determined this was done without any re-calculation of loads and stresses. The change ultimately doubled the load on the connection between the upper walkway support beams and the hanger rods carrying the weight of both walkways.

Insurance issues: The cost of redesigning the defective structures was not covered.


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