Covid-19 Insurance Issues For The Real Estate and Construction Industries – Part 2 - Avoiding Secondary Insurance Pitfalls
Covid-19 Insurance Issues For The Real Estate and Construction Industries
Part 2 - Avoiding Secondary Insurance Pitfalls
We reported in Part 1 of this Client Alert that prudent real estate and construction companies are actively studying potential insurance coverage for the losses, damages and claims they face involving Covid-19. Beyond those foundational issues, insureds also must consider policy conditions and potential renewal issues.
We expect insurers to assert that failure by the insured to satisfy technical requirements in the policies may result in impairment or even denial of an insurance claim. We address below three areas that deserve particular focus: policy conditions, the policy coverage period and notice to the insurer.
Insureds should also consider the impact of reductions and other changes in their operations on their insurance program renewals. We recommend early discussions with their insurance brokers.
Policy Conditions
Property, builder’s risk and commercial general liability (CGL) policies include various conditions and so-called subjectivities. We recommend an early compliance review to reduce the risk that an inadvertent alleged breach by the insured compromises its claim. Some examples:
- Property policies may provide that coverage is reduced or excluded if the asset is vacant beyond a prescribed time period. The policies also typically provide that the insurer may audit the insured’s books and records relating to a loss for a defined time period that often extends beyond the policy expiration date.
- Builder’s risk policies may treat abandonment of the project as an event resulting in termination of the coverage. In addition, the policies often contain “protective safeguards” mandates for specific on-site security measures, lighting, fencing and access limitation.
- CGL policies include a provision stating that the insured will not make “voluntary payments” or assume certain obligations without the insurer’s consent.
The Policy Period
Even in jurisdictions where “stay at home” orders exempt construction, many projects still face severe schedule impacts. Builder’s risk coverage for delay in completion is tied to the policy’s stated Scheduled Date of Completion which may now be unachievable.
CGL coverage under owner controlled (OCIP) or contractor controlled (CCIP) insurance programs sometimes requires that the covered project be “completed” (as defined by the policy) during the policy period. Similarly, homebuilders’ CGL programs may require that a home or condominium unit close escrow during the policy period in order to enjoy completed operations coverage.
Given Covid-19 schedule impacts, compliance with such metrics may no longer be realistic. Accordingly, insureds are advised to discuss policy term extensions with their brokers as early as possible.
Notice to the Insurer
Policy notice requirements vary widely and therefore need careful attention. Depending upon the line of coverage, the policy may require notice “immediately”, “as soon as practicable”, “promptly” or other formulations. The required content of the notice differs as well by policy type and sometimes by the nature of the claim.
Practical Insurance and Risk Management Tips For Insureds
In addition to analyzing their policies for potential coverage and providing notices to insurers, real estate and construction insureds should take other steps to protect and enhance their insurance rights and risk management programs.
Important practical tips include:
- Keep detailed records of information such as staffing on a construction project, schedule impacts and costs that may qualify as covered “extra expense”, “expediting expense”, expenses for protection of insured property or loss mitigation costs.
- Position the company to support its claims with comprehensive, contemporaneous data, such as costs of investigation, response and mitigation, loss of productivity and loss of business income. Such amounts may serve to erode or satisfy policy deductibles and self-insured retentions. Likewise, document the presence of infected individuals at or in the vicinity of an insured property as well as the facts relating to building or facility closures.
- Understand how changes in operations may impact the insured’s risk profile. Business slowdown or complete closures of insured properties may reduce certain exposures and introduce others. For example, companies must consider the effect of delay in delivery of building materials and products, especially long lead time items. And where facilities or project sites are vacant, there is greater potential for loss and damage from theft, vandalism and other incidents such as water damage due to delayed discovery.
- Begin an early dialogue with insurance brokers to plan for renewals. Changes in an insured’s operations, business locations and even number of employees will be part of the conversation, as will changes to coverage the insurers may propose. Given the uncertainties created by Covid-19 in an already hard insurance market, real estate and construction insureds will want additional time to evaluate their options and craft the best programs possible in the current environment.
The Firm’s Risk Management and Insurance Coverage Practice Group is applying its depth and expertise to address proactively our real estate and construction clients’ critical insurance issues associated with Covid-19. Members of the Group have long experience collaborating with our clients’ insurance brokers in pursuing coverage claims. The Group also works with our clients’ forensic accountants, schedule impact consultants and public adjusters to efficiently resolve complex commercial coverage issues and disputes.
The Group handles issues spanning multiple lines of coverage, including commercial property, builder’s risk, CGL, umbrella and excess liability, contractors pollution liability (CPL), pollution legal liability (PLL), professional liability, and management liability coverages such as directors & officers (D&O).