By: Gregory J. Spaun Published: March 2017

Does Your Builder's Risk Policy Really Cover What You Need to Build?

First party property insurance has been around for centuries, generally dating back to the aftermath of the Great Fire of London in 1666. Property coverage is a great way to cover a completed structure from the usual perils of fire and weather, et cetera. However, what if the property you wish to insure is an incomplete construction project? It is well known that construction is, by its nature, perilous. Further, a typical first party property insurance policy will not cover incomplete structures or construction activities. Enter, builder’s risk insurance.

Builder’s risk insurance is a specialty type of property insurance specifically designed to cover the extra risks that may befall a property under construction. Builder’s risk insurance is also available to a contractor. This is important because a contractor who is under an obligation to safeguard the property during construction (and is concomitantly liable for any damage that occurs to that property) does not have any traditional insurable interest in such property because it is not the owner.

Like many policies, builder’s risk policies are increasingly subject to exclusions. These exclusions have been created as carriers gain experience with the product and carve out. New York’s courts dealt with two of these exclusions in the recent case of Lend Lease (US) Construction LMB, Inc. v Zurich American Insurance Company (___NY3d___, 2017 WL 572478, 2017 NY Slip Op 01141 [February 14, 2017]). The facts of Lend Lease will be familiar to many in the Tri-State area, as they arise out of Superstorm Sandy and the crane which was left dangling over West 57th Street in its wake. The crane was erected in such a way that parts of the crane (where it was anchored to the building) would remain in place, as a part of the building, long after the crane was dismantled and the building was occupied. These elements would not have been designed into the building but for the plan to use this particular tower crane. Prior to construction and the erection of the crane, a builder’s risk program was put in place, with defendant Zurich American having the lead policy.

Immediately after the storm, a claim was placed against the builder’s risk policy to cover, amongst other things, the damage to the crane. Zurich denied the claim on two principal grounds: 1) that the crane was not a covered “temporary work”, as parts of that crane were designed into the building and were to remain after occupancy; and 2) the crane constituted a contractor’s tool, which was excluded from coverage. Lend Lease commenced a lawsuit, seeking a judgment declaring that Zurich had the obligation to cover this loss since the crane was neither designed to be a permanent part of the building, nor did it constitute a contractor’s tool. Zurich counterclaimed, seeking its own declaratory judgment to the opposite effect based on the reasons cited in its disclaimer.

Shortly after the lawsuit was started, motions and cross-motions for summary judgment were made. The contractors contended both that the crane was a temporary work and, therefore, covered under the policy, and that it did not constitute a contractor’s tool (which would remove it from such coverage). The contractors also argued that a finding that the crane was either a permanent work or a contractor’s tool would require reading those policy definitions so broad as to improperly render coverage illusory, in violation of public policy. The insurers countered that the policies were clear that as the components of the crane were (concededly) permanent, and that the crane constituted a tool, there was no coverage. The trial court ruled that the motions were premature, and that there were questions of fact, amongst others, as to whether the crane could be considered a permanent structure.

Both sides appealed the decision, redoubling their arguments to the Appellate Division. Unlike the trial court, the appellate court found that the crane was not a temporary structure, and that it was a contractor’s tool. As to the first ground, the Appellate Division held that the crane was not an incidental structure since the “‘[b]uilding was specifically designed to incorporate the Tower Crane during construction’ and the crane’s design and erection involved an ‘in-depth process’ that had to be approved by a structural engineer. Moreover, once it was integrated into the structure of the building, the custom designed tower crane, rather than serving a minor or subordinate role, was used to lift items such as concrete slabs, structural steel and equipment, was integral and indispensable, not incidental, to the construction of the 74–story high-rise, which could not have been built without it”. With regard to the second ground, the court not only relied on the contract defining the crane as “equipment”, it noted that “[t]he tower crane is assembled when the project starts, disassembled and completely removed when the project is complete, and then moved to the next job” and, thus, meets the definition of a tool. The Appellate Division’s holding, however, was not unanimous. Two dissenting judges found that the language in the policy was ambiguous. Accordingly, giving the insured the benefit of any doubts in the language, the dissenters not only found that the crane was, indeed, a temporary structure included in the ambit of coverage, but that the crane cannot be found to be both a temporary structure and a tool without improperly rendering coverage illusory. The importance of the two-judge dissent is that it not only showed the division on the issue, but it gave the contractors  the right to a further appeal without having to seek permission of the Court of Appeals.

Although the contractors did seek that further appeal, they did not fare any better. While the Court of Appeals found that the crane was not a permanent structure (and, therefore, coverable under the “temporary works” provision), such was not sufficient to salvage coverage from the Court of Appeals’ holding that the crane constituted a contractor’s tool. In so holding, the Court of Appeals noted that the language of the tools exclusion also included machines and machinery, and held that the crane clearly qualified as such. As to the argument that such a broad definition would impermissibly render coverage illusory, the Court of Appeals posited that since there was still coverage for items such as scaffolding, temporary buildings, formwork, shoring, fences and the like, the exclusion did not impermissibly “swallow the policy”.

This decision, which generated a vociferous dissent at the mid-level appellate court, leaves one to wonder the exact extent to which a construction project is actually insured under a builder’s risk policy. While the Court of Appeals was able to put together a short list of covered items—which was just long enough to get the policy beyond the “illusory” threshold—the important (and expensive) items would seem to fall outside of the ambit of coverage. Accordingly, contractors would be well advised to seek counsel of their attorneys and insurance professionals at the time insurance is procured to see to it that the items which the contractor needs insured actually are covered under their insurance policies.

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