Co-authored with Dillon Fontaine - Sales Executive, Specialty Risk Division at Marshall & Sterling Insurance
As if COVID-19 shutdowns and reopenings weren’t enough to keep contractors up at night now, add riots, looting and vandalism to the list. You may be asking yourself who is responsible if a project or work site suffers damages from those causes and is it covered by insurance.
Any construction project in progress is exposed to the risk of property damage from fire, wind, flood, collapse, theft, vandalism and other unexpected perils. Less common would be damages from riots or terrorism. Generally, unless specific contract provisions provide otherwise, contractors, subcontractors and suppliers are responsible for their work and materials until they complete performance and the work is accepted. That means they must replace what is damaged or lost. Builder's Risk Insurance, often referred to as "All Risk Property Insurance", is the form of property insurance designed to protect all parties involved against this loss by shifting the risk to an insurer.
However, Builder’s Risk, assuming it has been purchased, only covers damages to the work itself. Depending upon the nature and extent of the physical damages the project may be impacted in other ways as well; ways that insurance does not cover. For example, if a piece of equipment or long lead time item is damaged the project may be caused to suffer significant delays. Sometimes the project may be impacted by civil unrest without any physical damage occurring at all. Consider situations where a project is shut down for safety reasons or due to the imposition of a governmental curfew. There are almost countless permutations as to how civil unrest can affect a project even indirectly. For example, a supplier may not be able to deliver materials because of riots happening in a state other than where the project is located.
To determine who is responsible in these situations we must look to the parties’ contract to determine how the particular risk has been allocated. When it comes to civil unrest one might argue that none of the contracting parties are at fault and you’d probably be right. But, fault and responsibility are not necessarily the same thing.
You’ve probably heard the term force majuere more often than you’d like over the past couple of weeks, but this is where such a clause might come into play. We’ve already shared articles discussing this type of clause so that analysis won’t be repeated here. Another more common clause that your contract may contain is the “no damage for delay clause”. If your contract contains such clause then likely, the sole remedy will be an extension of the project schedule. Each contract and each project are of course unique and would require individual analysis by qualified construction counsel to provide definitive guidance.
During this trying time, one of the most common question being asked from an insurance standpoint is “Do I need Terrorism coverage”? The fact that President Trump has labeled Antifa a terrorist group does not trigger coverage, as two things need to happen for coverage to be triggered:
1. The event has to be certified an Act of Terrorism, which is defined as “any act certified by the Secretary of the Treasury, in concurrence with the Secretary of Homeland Security and Attorney General, to be an act that is dangerous to human life, property, or infrastructure and to have resulted in damage within the U.S. It must be committed as part of an effort to coerce U.S. civilians, or to influence either policy or conduct of the U.S. Government through coercion.” The definition includes both foreign and domestic terrorists.
2. It must be proven that it was Antifa that damaged your business.
Keep in mind that despite everything that has gone on in the United States since 9/11 (Boston Marathon Bombing, shooting rampages at US Military Facilities, etc.) the Secretary of the Treasury has never declared those events, or any others, to be a Certified Act of Terrorism.
Well-reported incidents of rioting nationwide have resulted in extensive damage to business premises, inventory and other property. In addition, government-instituted curfews or shutdown orders have interrupted businesses, causing businesses to lose income.
Many assume their insurance policies exclude riot-caused damage. Typically, this is not the case. Insurance coverage for property damage and lost income due to riots or civil commotion should be available under most commercial property insurance and business owner insurance policies. Absent special exclusions, these forms of property insurance provide coverage for a variety of losses, including destruction to store fronts and interiors, broken windows, stolen property, graffiti damage and, in most cases, the cost of debris removal.
In addition to property damage coverage, businesses forced to close as a result of riot damage may have coverage for business interruption. Likewise, lost income as a result of curfews should be available under the civil authority extension of coverage. While insurance companies so far have resisted paying for losses resulting from COVID-19, business interruption caused by physical damage to property during riots is in a more conventional, and thus clearer, category of coverage.
Typically, commercial policies contain coverage limitations regarding business income coverage. Many require a “waiting period” of a certain amount of hours before a policyholder can begin claiming the benefits of coverage. The first three days of business shutdown, constraint of access by barricade, or limited operation because of other civil authority, such as curfews that shorten business use or hours, usually are excluded from coverage. Policies also might limit interruption coverage to short durations of, for example, monthly limitations.
Insurers might assert several exclusions. Additionally, some might try to assert a terrorism exclusion. Moreover, for damaged buildings empty for more than 60 days, insurers might raise vacancy exclusions — most notably, an exclusion for vandalism. Or for buildings under construction, some insurers may try and exclude coverage for pre-existing structures. Finally, insurers might assert overlapping virus exclusions as a bar to full loss-of-use restrictions from rioting.
It's incredibly important to review your policy. Analyze coverage and applicable exclusions. An experienced insurance professional, or insurance coverage lawyer can help harmonize claims and exclusions, especially surrounding the complicated area of business interruption losses. Track all damage, expenses and lost income. Insurers will require detailed proof of loss as soon as practicable in a business interruption or property damage claim. Policyholders should take reasonable steps to reduce damages — including installing new doors and windows (or boarding up windows). Damages enhanced by inattention at the site can limit coverage.