HOT TOPICS IN MULTI-USE BUILDINGS: INSURANCE, CONSTRUCTION AND DEVELOPMENT Philip K. Glick, CPCU, RPLU Two Liberty Place 50 S. 16 th Street, Suite 3600 Philadelphia, PA 19102 P: 267-702-1374 C: 610-551-4734 pglick@connerstrong.com
INTRODUCTION AND OVERVIEW 1. Substantial increase in mixed use construction and development projects over the last several years. 2. Resulting potential increase in the range of operations, tenant exposures and resulting property and liability insurance claims. 3. Need to identify and then avoid potential gaps in insurance coverages needed. 4. Alternative approaches to structuring insurance coverage on a combined basis. 5. Managing potential claims and coverage complications arising from multi use projects. 6. Insuring frequently uninsured or unique exposures. 7. Insuring pure economic loss. 2
I. OVERVIEW OF SIGNIFICANT COVERAGE RESTRICTIONS A. General Liability Insurance 1. Recent Insurance Industry Coverage Changes: a. Several restrictive coverage endorsements have been introduced by the Insurance Services Office (ISO), an insurance industry organization that provides standard policies and endorsements. b. ISO now caps the limit of coverage extended to another party as an additional insured to the limit agreed to in the contract between an owner and general contractor or by a subcontractor to a general contractor. c. ISO now also limits contractual liability coverage extended to another party in accordance with state anti-indemnity statutes. 3
I. OVERVIEW OF SIGNIFICANT COVERAGE RESTRICTIONS A. General Liability Insurance d. Some insurance companies may limit their coverage for a specific contractor working on new mixed use projects such as: i. Excluding coverage for structural alterations. ii. Excluding coverage for demolition work. iii. Not covering residential projects particularly condominiums or for sale townhomes. iv. Not covering work in the five (5) boroughs of New York City. v. Imposing a height limit on work done. vi. Excluding or limiting coverage for claims for injuries of an employee of a subcontractor. 4
2. Insuring Construction Defects a. Coverage is largely dictated by state law as it interprets whether a general liability policy will cover all or part of loss due to defective workmanship. b. In most cases, coverage only applies for property damage caused by work performed by a subcontractor on the insured’s behalf or the defective work of the insured contractor itself. c. Coverage for ensuing loss to other property due to defective work may be covered. d. In PA the courts have specifically stated that loss due to defective work including related consequential loss, even if caused by another contractor, are not considered an occurrence and so not insured (see Kvaerner and Gambone court decisions). 5
e. Fixing this gap in liability coverage by adding a specific endorsement: i. “Kvaerner” Endorsement; or ii. Amended definition of occurrence endorsement. iii. Need to add a similar endorsement on any Umbrella or Excess Liability Policy. f. Always need to determine what and when is an occurrence: i. Impact of a loss taking place after construction is complete. ii. Will there be coverage in place for a loss that occurs at some point in the future? iii. Including contractual language requiring future continued insurance coverage and indemnification. 6
g. Optional approach is for the Owner/Developer to purchase a project specific general liability and umbrella liability policy on the project to cover its interest on future claims including: i. Dedicated limits of coverage for the entire project construction period. ii. Fixed premiums and coverages over the entire construction term - as long as two (2) years or more. iii. Construction defects coverage can then be included for an extended period of time after construction is completed up to the shorter of the applicable state statute of repose or twelve (12) years. 7
h. Complications of Mixed Use Projects i. Construction defects claims continue to be a persistent problem in condominium projects such as from: - Bursting pipes or leaking sprinklers in upper residential floors causing damage to contents and improvements and betterments of office or rental tenants on lower floors. - Increased claims complications when other condo unit owners and tenants are insured with different insurance companies. - A small fire or water damage claim in a single residential condo unit or apartment can cause significant damage including loss of use to a commercial condo unit owner or another commercial tenant in the building. 8
ii. Solutions can include: - Requiring a waiver of subrogation endorsement on the property insurance for each condo owner or tenant to eliminate various property cross claims. - Including a waiver of subrogation endorsement on the General Liability policies for each owner and/or commercial tenant to avoid conflicts and extensive litigation. - Need to require and verify that any contractor working in any area of the project has adequate job site and construction defects coverage so that any ensuing losses are covered to protect each tenant or unit owner. 9
3. Avoiding Other Gaps in General Liability Coverage a. Need to avoid any limitations on type, location or scope of work. b. No limitations or exclusions regarding claims. i. By employees of contractors on the job. ii. For claims arising from uninsured or underinsured subcontractors. Potential for additional premiums that may be payable by a general contractor or project developer in the event its subcontractor’s are not adequately insured; or Potential for a deductible or increased deductible to be payable by a general contractor (or owner) for claims against them due to gaps in a contractor or subcontractor’s liability policy. 10
B. Property Insurance Including Installation Floater and Builder’s Risk Coverages 1. Basic Form of Coverage a. Installation Floater – Covers interior work or additions to a building. b. Builder’s Risk – Covers new ground up construction and renovations to a building shell plus coverage on the new work or renovations. c. Need to coordinate property coverage during construction or renovations to cover the interests of all owner(s) and tenant(s). 2. Valuation a. Coverage can be for full replacement cost – new for old. b. Actual Cash Value = Replacement Cost less depreciation. c. Stated Value – Specific agreed limit such as for existing old building shells. 11
B. Property Insurance Including Installation Floater and Builder’s Risk Coverages, Continued 3. Covering Broad Insured Perils a. All Risks or so called Insured Perils – specific coverage may still not cover: - Backup of sewers and drains. - Underground water damage. - Flood and Earthquake. - Full Collapse vs. “Imminent” Collapse Coverage. 12
B. Property Insurance Including Installation Floater and Builder’s Risk Coverages, Continued 4. Limits of Coverage Needed a. Building shell. b. All improvements including equipment to be installed under the direction of the owner / property developer. c. Property while in storage and transit. d. All additional furniture and fixtures and other equipment. e. Covering tenant or condo unit owner(s) custom upgrades. f. Covering potential additional costs due to building code upgrades that may apply to repairs after a fire or other insured loss. 13
B. Property Insurance Including Installation Floater and Builder’s Risk Coverages, Continued 5. Covering Other Related Economic Loss a. “Soft costs” following a physical damage to the building during construction including: i. Additional construction loan costs and interest payments. ii. Additional architect or engineering fees. iii. Additional insurance premiums, property taxes, utilities and other operation costs. iv. Additional marketing, legal, accounting and other fees. 14
B. Property Insurance Including Installation Floater and Builder’s Risk Coverages, Continued 5. Covering Other Related Economic Loss, continued b. “Prospective loss of rents” or “delay in completion” costs. i. Foregone rents reflecting signed leases or expected signed leases and loss of income during repair or rebuilding period. c. Extra expenses incurred to get back on schedule after a property loss. d. Special additional financing related exposures such as for any historic tax credits. e. Coverage for LEED and other Green Building Certification Expenses. f. Need to project, quantify and then insure prospective income losses for each distinct area of a mixed use project. 15
II. POTENTIAL COVERAGE AND CLAIMS RELATED ISSUES ARISING FROM MIXED USE PROJECTS A. Town Center Project 1. Combined condo structure with ground floor retail set up as a commercial condo unit. 2. Upper floors – Set up as a second residential condo association with its own policy and each condo unit owner buying a condo homeowners policy. 3. Possible property insurance solution by having all risk property coverage written in one policy for all building structures and including commercial tenants alterations and additions and common elements of the residential condominium association. 16
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