Key Takeaways:

  • There is an increased frequency of denial of coverage for builders risk claims based on failed subjectivities and the more onerous nature of the subjectivities.
  • To avoid this issue, those in the construction industry should: (1) confirm that all policy subjectivities can be complied with; (2) confirm each subjectivity is clear and readily understood; (3) develop procedures to confirm compliance with each subjectivity and monitor that compliance throughout the project; and (4) build in a contingency plan for things that go wrong.

Builders risk policies are a key component to a construction professional’s risk management program. These policies protect owners and construction professionals from losses arising from unexpected events such as fire or storms which cause substantial damage to a project during construction. In doing so, builders risk policies help protect a construction professional’s investment in a construction project and, hence, the construction project’s bottom line.

Recently, insurance professionals have seen an increase in builders risk denials from insurers based on the construction professional’s failure to comply with policy subjectivities or special conditions. Insurer challenges to builders risk claims are not new. What is new is the increased frequency of denials based on failed subjectivities and the more onerous nature of the subjectivities. Subjectivity denials are, in large measure, avoidable through a little diligence by the construction professionals. However, many times construction professionals either are unaware of policy subjectivities at the time they purchase a builders risk policy or simply forget about the subjectivities during the course of the project as conditions change. Those that fail to pay attention to, and comply with, policy subjectivities run the risk of an unnecessary claim denial – which, in turn, can turn a project’s financial picture upside down.

Other times, the subjectivities are simply unclear or of a type with which the construction professionals cannot comply because they are not available or are inconsistent with municipal or other codes.

Simply put, subjectivities are the requirements a builders risk insurer imposes on a policyholder as a condition of coverage. Many subjectivities are safety driven – such as maintenance of security guards, security cameras and active monitoring, fencing, sprinklers, and lighting, etc. Others are more substantive – such as ongoing testing and confirming construction in conformance with geotechnical reports or satisfactorily completing insurer questionnaires.

Subjectivities can be found in a variety of insurer-provided documents, but typically are found first in the policy proposal or binder. Thereafter, insurers often incorporate them into a policy endorsement (the “protective safeguard” endorsement is one such endorsement). If any of these documents are included, but blank, it is important to get the list of subjectivities from the insurer before binding.

To avoid unnecessary (and expensive) subjectivity denials, construction professionals would be well served to do the following four things.

1. The construction professional should confirm that all policy subjectivities can be complied with. For example, an insurer may require project lighting from sunset to sunrise. In some circumstances, local ordinances may preclude projects from being lit at night. The construction professional should seek the removal of any such subjectivities.

2. The construction professional should confirm each subjectivity is clear and readily understood. While most subjectivities are easy to understand, some subjectivities could be vague or otherwise unclear. For example, one insurer included the following subjectivity in a proposal: “satisfactory and timely cooperation with the potential installation of complementary water-flow detection devices.” This clause raises several questions not the least of which are what is a “complementary water-flow detection device” and what type of cooperation would be satisfactory and timely? Insurers can use an unclear subjectivity to deny coverage to the unsuspecting construction professional by interposing an interpretation which the construction professional may not have understood at policy inception. Get clarification in writing before binding.

3. The construction professional should develop procedures to confirm compliance with each subjectivity and monitor that compliance throughout the project. This effort likely will require advising the general contractor of those subjectivities over which the general contractor has primary control (such as any safety measures) and requiring active monitoring, such as including a notation of compliance in the daily logs. To that end, it may be prudent for project owners to include a clause in their general contracts requiring the general contractor to be familiar with policy subjectivities and comply with those subjectivities throughout the project.

4. Build in a contingency plan for things that can go wrong. For example, the following could result in temporary interruption in adhering to the contingencies and cause coverage problems: a power outage, security wiring, or equipment getting accidentally cut or damaged during construction; or fencing going down by wildlife or other causes. Have a plan to address these issues and build into your policy a timeframe for curing any non-compliance before coverage gets impacted.

Compliance with subjectivities often carries an increased cost and logistics, which can be a surprise to unsuspecting construction professionals. A qualified construction insurance broker and insurance coverage lawyer with builders risk experience can help a construction professional find and identify policy subjectivities and develop a plan to comply with those subjectivities and assist with the four steps outlined above.

Taking these four steps – eliminating subjectivities which cannot be complied with, clarifying any unclear subjectivities, developing processes to confirm compliance throughout the life of the project, and developing a contingency plan – should help construction professionals avoid unexpected costs and unnecessary claim denials which, in turn, will help protect the profitability of the construction project.