To say that we are expecting a wet winter in Southern California is something of an understatement. In the last full El Nino of 1997-1998, we experienced average rainfall of 20 inches in just one month. That was an average El Nino, the one we are expecting this winter may very well bring us the type of rain Santa Cruz experienced in 1983 when 24 inches of rain fell in a 36-hour period.
However, while construction executives are aware that rainfall, flooding, surface water intrusion, and mud flow pose great risks to ongoing construction projects few understand the contractual obligations involved in rectifying the damage or the large variation in Builder’s Risk coverage forms that are meant to insure it.
The American Institute of Architects A201 General Conditions contain two important provisions that come into play when a construction project is damaged by a storm and can be best understood in laymen’s terms as protecting the work and insuring against natures perils. The first is clearly the responsibility of the Construction Team, they are charged with protecting the project in process, the materials on the site, and any partially completed work that has not been accepted and put to use by the owner. The second obligation to insure the work is explicitly and the Owner’s and the mandate is broad …in simple terms the Owner is to cover all the work, including work partially performed, the labor component, and materials on site, from a whole array of dangers including Earthquake, Flood, Fire, Vandalism etc. And the policy the Owner buys must include the Construction Team as insureds and waive any rights of recovery against them. The AIA section goes on to say the owner has to assume responsibility for deductibles and notify the Construction Team if they have not purchased the required coverage and allow the construction budget to assume the cost of buying the replacement coverage.
So What Could Go Wrong? The Answer is …Plenty.
First the Owner’s insurance provisions of the construction contract could have been amended from the standard AIA wording. Sometimes perils such as Earthquake and Flood are stricken as a cost savings measure, sometimes the Waiver of Subrogation language is removed, and sometimes the obligation to insure is reversed or deductible responsibility is deleted.
Second, the Owner might have failed to follow the wording and insure the correct perils.
Third, the Owner might think that they have insured the correct perils but have purchased a policy where dangers such as surface water, water pressing underground into basement and foundations, rain falling through incomplete building envelopes, mudflow and mudslide are excluded. Many insurance buyer labor under the misconception that because their project is not in a high-hazard Flood Zone, they have no need for Flood Coverage. The sad fact is that many Builders Risk policies contain a “Water Damage” exclusion that includes Flood….and several other potential perils as well involving water.
Finally, the General Contractor buying a Builders Risk Policy (on a project specific or blanket) basis or the Subcontractor buying an Installation Floater to cover just its own material and labor cost risk could have made similar coverage buying mistakes.
So What Should You Do?
- Get help. You need someone who understands these issues to help you determine your contractual risk and examine the insurance coverage that is currently in place. At Internet Marketing Agencies – High Ground we have just completed that process for our clients and a ready to help others.
- Read your contracts. If you are an owner, you should revisit the decisions previously made about buying Water Damage and Flood coverage. It is not too late to re-adopt the “all in one boat” approach AIA uses in meeting the danger of damage to the construction project. Builders Risk coverage is relatively inexpensive and at present Flood coverage is still available. If you are a Contactor, then you need to see what obligations the owner has retained or what language has been changed from the original AIA approach. Far better to address this with Owners now than after damage has been sustained.
- Consider your own “fall back” coverage. Difference in Conditions – Flood – Water – and Mudflow policies are still available. Consider buying one with a substantial deductible that covers all your work and can be used to remedy a catastrophic situation on one or more projects.
Finally, take a proactive approach. If the contractual responsibilities don’t seem clear, or if the insurance coverage seems to be lacking, address the problem now rather than face an unfunded contractual battle in the likely to be wet, near future.
Greg Martin CIC
Senior Vice President
Construction Practice Leader
United Agencies – High Ground Insurance Services