Soft Costs and Rental Value Coverages Denied for Additional Named Insured

Facts of the Case

BCC Partners, LLC ("BCC"), contracted with Ben F. Blanton Construction, Inc. ("Blanton"), to build a seven-building apartment complex ("Project") in Creve Coeur, Missouri, for $24,461,157. Blanton was contractually required to secure and maintain a builders risk policy on the project. It secured a policy from Travelers Property Casualty Company of America.

Blanton was the sole named insured listed in the policy declarations. Other persons or organizations qualified as being additional named insureds if Blanton agreed to in a written contract, executed before a loss, to name such persons or organizations as additional named insureds but only to the extent of their financial interest in the "covered property."

In late December 2015, because of significant rainfall at the Project location, a retaining wall failed. Blanton submitted a claim for the physical damage, and Travelers paid $1,317,080 after the application of a $50,000 deductible. Blanton filed suit against Travelers, alleging that the costs associated with removing and replacing the wall were not paid in full.

A jury awarded an additional $331,868, and Blanton filed for bankruptcy in July 2020.

BCC submitted a claim for loss of income and soft costs on June 29, 2016. Travelers issued an advance payment of $200,000 on December 15, 2016. On March 21, 2019, Travelers denied any additional payment to BCC and indicated that the previous $200,000 advance could represent an overpayment that Travelers reserved the right to fully recover. Ultimately, BCC demanded the remaining policy limits for soft costs ($100,000) and rental value $1,300,000 ($1,500,000 limit less the $200,000 advance payment).

Travelers again declined any further payment, and BCC filed suit in August 2022.

Significant Policy Coverages and Limits

The policy term began on June 25, 2015, and ended September 30, 2016. The physical damage insurance limit was $24,461,157. Various sublimits, coverage extensions, and additional coverages applied. Notably among these was a "soft costs" limit of $100,000.

The policy was modified to include a declarations for the Construction Pak—Builders' Risk Special Time Element Form. This provided a $1.5 million per-occurrence limit for "business income," "rental value," and "soft costs," subject to a 21-day waiting period.

The policy defined soft costs to consist only of the following.

• Advertising and promotional expenses
• Architect, engineer, designer, and consultant fees
• Costs resulting from the renegotiation of the sales contract, leases, or construction loans
• General overhead and administrative expenses, other than legal, accounting, and professional fees
• Insurance premiums
• Interest on money borrowed to finance construction
• Legal and accounting fees and other costs to renegotiate and prepare revised contracts and other documents (excluding expenses used for preparation of claims or to establish liability for loss)
• Permit and inspection fees
• Realty taxes and realty assessments

The policy premium was $92,027. This included $86,710 for physical damage and $5,317 for the coverages provided by the time element form.

The Reasoning of Travelers for Its Claim Denial

While Travelers contended that BCC failed to establish recoverable damages resulting from the project delay caused by the failed wall, it denied coverage for rental value and soft costs because BCC was not an insured under the Special Time Element Coverage Form or Soft Costs Coverage Extension. BCC was an additional named insured only for its financial interest in "covered property"—and then only if Blanton agreed in a written contract or agreement, executed prior to loss, to name BCC as an additional named insured.

The coverage for rental value was limited to loss of rental value that "you" sustain. Similarly, the coverage for soft costs was limited to "your" soft costs. The policy defined "you" and "your" as only the named insured shown in the declarations. The only named insured listed in the declarations was Blanton.

As part of its arguments, Travelers relied on Downtown Lofts LIHTC LLLP v. Travelers Prop. Cas. Co. of Am., Civil Action No. 19-cv-3295-WJM-SKC, 2020 U.S. Dist. LEXIS 245103 (D. Colo. Dec. 31, 2020). This case is very similar to the facts and issues of this case.

There, the Travelers builders risk policy was secured and maintained by the general contractor, FCI Constructors, Inc., where a covered loss caused water damage to the insured project. FCI presented a claim for physical damage in the amount of $3,079,519 and its soft costs of $238,897, which Travelers paid. Downtown Lofts was the project owner, and it also presented a soft costs claim for $657,211.

Travelers denied coverage for the same reasons: The project owner was not the named insured under the $1 million soft costs coverage extension. The soft costs coverage applied solely for the general contractor entities listed as named insureds in the policy declarations. (Downtown Lofts was not listed in the policy declarations as a named insured, but the parties stipulated that, for purposes of this litigation, Downtown Lofts was an additional named insured solely for their financial interest in the "covered property.")

The district court held that the soft costs coverage extension applied only to the named insureds listed on the declarations and not to the project owner.

BCC v. Travelers District Court's Findings and Reasoning

BCC was not entitled to coverage for soft costs under the Travelers policy. The district court agreed with the arguments by Travelers that coverage for rental value was limited to loss of rental value "you" sustain and the coverage for soft costs was limited to "your" soft costs. The policy defined "you" and "your" as the named insured shown in the declarations. BCC was not listed as a named insured in the policy declarations.

BCC was an additional named insured, but this applied solely to its financial interest in "covered property." Its status as an additional named insured did not extend to rental value or soft costs. "Covered property" referred to "permanent works" (i.e., materials, equipment, machinery, supplies, and property of a similar nature that will become a permanent part of the project) and "temporary works" (i.e, cofferdams, construction forms, cribbing, falsework, hoarding, scaffolds, fencing, signs, office trailers and their contents, and similar temporary buildings or structures incidental to completion of the project). Simply put, the financial interest of BCC applied to the hard costs of the project but not to rental value or soft costs.

The parties could have drafted the builders risk policy so that the Soft Costs Coverage Extension and Builders' Risk Special Time Element Coverage Form applied to both the named insureds and additional named insureds together. The court concluded that since the parties did not alter the builders risk policy to cover both the named insured and the additional named insured for rental value and soft costs, the court must enforce the builders risk policy terms.

The Travelers builders risk policy was not ambiguous. BCC argued that the builders risk policy was ambiguous in various areas. However, the court concluded that the phrases "covered property," "rental value," and "soft costs" were defined in the Travelers policy and, as such, worked together to exclude BCC's claim from the scope of the policy's coverage for additional named insureds.

Coverage was not illusory. The court rejected any attempt to argue that the Travelers policy coverage was illusory because it did not afford an additional named insured the same coverage as the named insured. The fact that an insurance policy limits recovery of certain types of loss to named insureds only does not render an insurance policy illusory. Likewise, an initial partial payment does not create coverage where no coverage exists.

My Opinions and Commentary

When issued to a contractor, the Travelers builders risk policy is inherently flawed. The policies issued to both Blanton and BCC contain the same standardized policy form: Construction Pak—Builders' Risk Coverage Form (Form No. CM T2 21 04 13). This policy form contains the provisions addressed in the cases (e.g., additional named insured meaning, definitions of "you," "your," "covered property," and "soft costs").

When a Travelers builders risk policy with this same policy form is issued to contractors, the contractors are the named insureds, and the project owner should anticipate additional named insured status (assuming the contractor contractually agrees to name the project owner as such). This means owners will not be insured for loss of revenue or soft costs. This is completely opposite of the approach taken by other builders risk insurers and project stakeholders.

When considering loss of revenue and soft costs loss exposures, it is principally the project owners (and its lenders) that need/require these coverages. A contractor does not have "business income," "rental value," or "soft costs" exposures like a project owner has; it will not sustain a loss of revenue or rents due to a project delay or many of the types of soft costs (as defined in a builders risk policy).

The project owner pays for these coverages directly or reimburses the contractor. For instance, in the Travelers policy issued to Blanton, the premium for the Builders' Risk Special Time Element Form was $5,317. The owner reimbursed the contractor for the cost of this insurance premium but was denied coverage for the very protection it believed it bargained for. ¹

It is for this reason, and in keeping with the custom and practice of the insurance industry, that builders risk insurers utilize time element coverage forms that contain a space to insert the named insured parties for that coverage, and this is typically filled in with the owner's name. The contractor is normally not listed because the owner does not want to compete with the contractor for the insured limits.

The Travelers Builders' Risk Special Time Element Coverage Form does not have a space to fill in who the named insured is. Therefore, the coverage reverted to the named insured listed in the policy declarations.

When issued to a contractor, the Travelers builders risk policy puts both contractors and project owners at a greater risk of breaching contracts. The contract documents may include specific builders risk insurance requirements for loss of income and/or soft costs. Lenders often require a project owner to secure and maintain (or have the contractor secure and maintain) such coverages in financing agreements. Project owners may require these coverages in the construction contracts with contractors. If there are insurance requirements and these are not fulfilled by the builders risk policy, someone is needlessly in breach of their contractual obligations.

The additional named insured condition, as currently constructed in the Travelers Construction Pak—Builders' Risk Coverage Form (Form No. CM T2 21 04 13), is problematic. The additional named insured Condition reads as follows:

E. Additional Conditions

1. Additional Named Insured

   The following persons or organizations are included as Additional Named Insureds when you have agreed in a written contract or written agreement, executed prior to loss, to name such persons or organizations as an Additional Named Insured, but only to the extent of their financial interest in the Covered Property: [Emphasis added.]

   1. Owners of Covered Property;

   2. Mortgagees or loss payees;

   3. Contractors, subcontractors and sub-subcontractors; and

   4. Lessors or lessees.

The problem I see with this approach is that insurance requirements in contract documents do not normally require "additional named insured" status. The American Institute of Architects (AIA) produces the most popular model contracts used in the United States, and its current builders risk insurance requirements mandate that this insurance "include the Owner, Contractor, Subcontractors, and Sub-subcontractors in the Project as insureds." ² [Emphasis added.]

If builders risk insurance requirements in a contract require "insured" (as with AIA) or "additional insured" status but not "additional named insured" status, will Travelers deny coverage to such parties because "additional named insured" status was not required in the financing or construction contracts?

Takeaway

If an owner is to be insured by this Travelers builders risk policy form, the owner should require that it be the named insured listed in the policy declarations. For the reasons mentioned in this article, the owner should avoid being an additional named insured when it desires or is contractually required to secure and maintain "business income," "rental value," and/or "soft costs" coverages.