Builders Risk Coverage: General Conditions

General Requirements versus General Conditions

Both general requirements and general conditions are indirect costs of construction but are essential to the overall execution of a construction project. These are project-specific costs and are separate from general overhead or profit.

"General requirements" are detailed technical standards that must be met during construction. These relate to what must be provided for. Architects necessarily create detailed specifications for each construction project they work on. There are thousands of building components and materials involved in construction, and there must be a uniform system for organizing and communicating these. Such a system is required to provide guidance to contractors that eventually must build the project. The accepted industry standard for specifications relating to most types of construction projects is MasterFormat^®. ¹ The specifications are divided into 48 divisions. These follow the same sequence in which a building is built. For instance, "concrete" precedes "masonry" and so on.

Division 00 Procurement & Contracting Requirements is not part of the "specifications." It contains solicitation, instructions to bidders, bid forms, agreements, general and supplementary conditions, and related documents. Of particular interest to builders risk insurance professionals are subsections 00 73 00 Supplemental Conditions and 00 91 19 Proposal Revisions. The former includes requirements relating to insurance, bonds, and permits. The latter addresses change order procedures.

Division 01 General Requirements lays out specific administrative and procedural requirements for the project, and there are numerous subsections. Of particular interest from a builders risk insurance perspective are those that involve the following.

• 01 31 13 Project Coordination (management and support personnel)
• 01 32 16 Construction Progress Schedule (scheduling, planning, scope, means/methods, etc.)
• 01 50 00 Temporary Facilities & Controls (utilities, offices, fences, storage, scaffolding, etc.)
• 01 71 13 Mobilization (mobilization and demobilization)
• 01 71 23.16 Construction Surveying (testing, inspectors, security, surveys, photography, etc.)
• 01 81 13 Sustainable Design Requirements (rating system, unique features, etc.)

"General conditions" are the costs of managing and executing a construction project. These relate to how things will be done, and costs can be both on-site and off-site.

Most, but not all, contractors combine the costs associated with general requirements and general conditions together under a "general conditions" heading (for the balance of this article I treat both together as "general conditions").

Examples of expenses may include mobilization/demobilization, project management staff (including home office support staff for project dedicated work), third-party consultants and inspectors, office trailers and related office expenses (e.g., equipment, supplies, document reproduction, computer charges and software, or radios), storage, temporary utilities (e.g., electric, water, gas, telephone, or the Internet), temporary structures (e.g., stairs, barricades, doors, handrails, walkways, pedestrian canopies, or form work), equipment rental and operators (e.g., tower cranes, mobile cranes, or manlifts), equipment maintenance, permits, insurance, bonds, trash removal, debris chutes, site safety/security (e.g., first aid kits, fences, fire extinguishers, fire watch, or security personnel), vibration monitoring, water detection monitoring, cameras, dust and weather protection, pest control, toilets, signs, small tools, gas, fuel and oil, pest control, inspection fees, fuel, signage, winter protection and snow removal, jobsite cleanup, traffic control, street cleaning, photography, parking, and window washing.

Construction Contracts—Treatment of General Conditions

In many cases, general conditions costs are not specifically identified or grouped together in a construction contract. With larger projects, there is typically an exhibit attached to the contract that schedules individual general conditions items and associated costs.

Construction contracts generally identify important cost components surrounding the construction work, including changes to the work (change orders). These can be very important in the adjustment of a builders risk claim. For instance, the Standard Form of Agreement between Owner and Contractor AIA A102-2017 is a commonly used model construction contract. The following Articles are of particular interest.

Article 5 Contract Sum identifies the following.

• The contractor's fee
• Method of adjustment of the contractor's fee for changes in the work
• Limitations on a subcontractor's overhead and profit for increases in the cost of its portion of the work
• Unit prices

Article 6 Changes in the Work outlines change order procedures. Change orders for repairs following damage to a construction project often include specific references to general conditions cost components.

Article 7 Costs To Be Reimbursed specifically identifies many individual "general conditions" type items as being included in reimbursed costs.

Builders Risk Insurance—Coverage for General Conditions

It is important to be aware that general conditions costs are part of the property values that are submitted to builders risk underwriters. These values are subject to the same premium rates as the "sticks and bricks" that are incorporated into a construction project. This is reinforced by assorted provisions in design and construction contracts. ²

There is consensus in the insurance industry that additional general conditions costs that the insured incurs as part of the costs to repair insured damage to a project are recoverable under a builders risk policy. This makes sense as the repairs are a change in the scope of the work that is done. Where there is controversy are those instances when insureds claim general conditions costs unrelated to repairs/replacement of damaged property.

There are several cases where courts have sided with insurers by ruling that general conditions costs unrelated to repairs are not insured under the physical damage section of builders risk policies. This usually happens when (1) an insured calculates a daily general conditions rate and then applies that rate to the number of days a project is delayed (this inevitably leads to such costs being treated as a soft cost), or (2) general conditions costs are not broken down into those specific costs directly related to the repair/replacement versus unrelated costs.

A case that illustrates the above points is One Place Condo., LLC v. Travelers Prop. Cas. Co. of Am., No. 11 C 2520, 2015 U.S. Dist. LEXIS 56565 (N.D. Ill. Apr. 22, 2015). In late 2005, One Place (Owner) began constructing a 10-story mixed-use project. One Place purchased a builders risk policy from Travelers (Insurer). The physical damage section of the policy provided a $33 million insured limit, and soft costs were insured with a limit of $3.3 million. The term "soft costs" was defined as construction loan interest, advertising expenses, real estate taxes, and costs resulting from the renegotiation of leases or construction loans.

There were problems with the project foundation that resulted in insured damage, and the Insurer paid some of the repair costs. Both sides engaged experts and worked on the claim for 4 years without reaching a resolution. The Owner eventually filed suit against the Insurer.

While the Owner raised several coverage issues, one was the treatment of general conditions. The Owner claimed $1,215,707.70 for general conditions. It calculated this amount by taking its budgeted general conditions for the entire construction project and dividing by a 540-day assumed schedule and multiplying the number of days of repair. The Insurer denied coverage for general conditions under both the physical damage and soft costs sections of the builders risk policy.

The court agreed with the insurer. In simple terms, it reasoned that general conditions are recoverable under a builders risk policy if such costs are directly due to the insured damage to the project. (As with similar cases, ³ the court provided a road map to successfully claim general conditions as part of the physical damage part of the policy.) The court also ruled that there was no coverage in the delay section of the policy as general conditions were not included in the "soft costs" definition.

Following a loss, stakeholders would be wise to establish accounting procedures to identify and capture all claims-related costs. For instance, project management personnel usually make up a large percentage of general conditions. Those personnel should be required to segregate the time spent on claims-related activities versus normal project-related work.

Insureds should also review coverage extensions under the applicable builders risk insurance, such as expediting expense, extra expense, and unbuilt property.

When it comes to adjusting general conditions as part of a builders risk claim, it is important for the stakeholders to be flexible. After all, the purpose of any form of property insurance is to put the insured in the same position it would have been in had no loss occurred, which is a very important objective.

Builders Risk Insurance—Coverage for Extended General Conditions

"Extended general conditions" are additional costs incurred by a construction contractor when a project is delayed and the general conditions of the project must be extended. As previously discussed, when a delay is due to insured physical damage to the project, a builders risk policy will likely cover the direct charges associated with the repairs under the physical damage section. Other portions of extended general conditions may be insured as a soft cost under the respective delay section of the policy. One must be careful that the definition of "soft costs" is modified to include general conditions because insurer definitions normally do not include this cost as part of their "soft costs" definitions.

Also, insureds should be aware that the delay insurance section of a builders risk policy typically includes a provision that provides coverage for additional expenses incurred if such expenses reduce the delay loss. This is on a dollar-for-dollar basis. The applicable provision is usually located as part of the insuring agreement or additional coverages. Here is an example:

The Company will pay all expenses You incur that actually reduce the loss. But we will not pay more than the amount by which the loss is reduced.

What Happened to Zurich Am. Ins. Co. v. Keating Bldg. Corp.?

In Zurich Am. Ins. Co. v. Keating Bldg. Corp., 513 F. Supp. 2d 55 (D.N.J. 2007), Keating was the general contractor on a major expansion project at Aztar's Tropicana Hotel and Resort in Atlantic City, New Jersey. The contractor was responsible for a 27-floor expansion, followed by a 7-story parking garage and 17 floors of hotel rooms. The owner secured a builders risk policy from Zurich that provided coverage for accidental physical damage coverage to the project and delay in completion. The delay in completion endorsement insured the owner but not the contractor or its subcontractors. It insured against loss of gross earnings, rental income, and "soft costs/additional expenses."

In October 2003, portions of 6 floors of the garage collapsed, coming to rest on top of a 3-level retail, dining, and entertainment complex. The parties agreed that the contractor had to create a new construction schedule to dismantle, demolish, and then reconstruct the work in the damaged areas of the project while protecting and preserving the undamaged areas. The new schedule required the contractor to resequence the work, which resulted in significant additional contractor-related costs. The owner asserted claims for additional costs incurred to finish the project, including extended general conditions, contractors' delay charges, and increases in labor and material costs arising out of the delay.

Zurich declined the claims for the extended general conditions (i.e., administrative costs, trailers, and other costs that were not treated as direct charges), contractor delay charges (i.e., idle labor and equipment costs incurred before construction could begin), and storage and price increases (i.e., an increase in labor wages, building material costs, and storage costs that would not have otherwise been required). Zurich argued that (1) the scope of indemnity for repair costs applied only to the damaged portion of the project and not to the increased costs associated with the undamaged parts, (2) the delay losses were suffered by the contractor (not the owner) and were, therefore, not covered by the builders risk policy, and (3) the policy's consequential damages exclusion applied.

The court disagreed and ruled in favor of the owner in all three areas. The court reasoned that the policy did not restrict coverage to only that portion of the project where the accident occurred. Rather, coverage applied to the entire structure, not simply the location of the collapse. In addition, the court reasoned that if the insurer intended to limit its obligations to repair costs for the damaged portion, it could have used language imposing such a coverage restriction, noting that another coverage form used by Zurich limited coverage to only the repair or replacement of the damaged property. This decision caused ripples in the insurance industry because it essentially shifted costs that were historically treated by many as soft costs and covered these as part of the physical damage section of the builders risk policy.

Since the Keating decision was handed down in 2007, nearly all insurers have modified their builders risk policy forms in various ways to avoid a similar outcome. These include modifying insuring agreements, "covered property" definitions, and valuation provisions.

Takeaways

First, when seeking coverage for claimed general conditions as part of the physical damage section of a builders risk policy, insureds should isolate those costs that are incurred due to the physical damage. An insured should not calculate daily rates based on total general conditions costs for the project and then apply the rate to a delay period, which is an invitation for the insurer to exclude coverage. Focus instead on putting oneself in the same position it would have been in if the loss never happened.

Second, insureds should be aware that the delay insurance section of a builders risk policy typically includes a provision that provides coverage for additional expenses incurred if such expenses reduce the delay loss. This is on a dollar-for-dollar basis.

Finally, when designing a builders risk policy, the stakeholders and insurance broker should consider the implications of general conditions following a loss. Contractors would be wise to request coverage under the soft costs section for extended general conditions due to a project delay.