Originally published from Risk Management, October 2009 issue issue, page 60. Copyright 2009 Risk and Insurance Management Society, Inc. All Rights Reserved. www.rmmagazine.com
Builders risk, general liability and workers compensation coverage are indispensable when managing the risks of a construction project. One set of exposures that sometimes goes unrecognized, however, is the risk of moving materials and equipment from a remote location, such as a factory or port, to the site and incorporating them into the work. Sometimes, these exposures are covered by the builders risk insurance, and sometimes not.
The gaps result from a variety of sources. Commercial property forms of insurance do not cover materials and equipment until they arrive at (or close to) the site. Inland marine forms are usually more generous, but it is not often available for interior projects.
Insurance policies that address these exposures are generally inland marine floaters, and include transit, storage and installation floaters. The term "installation floater" is sometimes used as a label for transit coverage that is built into a builders risk policy, and the frequency of that usage leads to confusion about what coverage applies and under which policies. It is not unusual to encounter a so-called "installation floater" in which coverage ceases upon arrival of the shipment at the worksite. The risk of loss during the actual installation of the equipment might not be found in every installation floater.
From the time that a shipment of goods leaves the seller's facility, the risk of loss is almost always allocated to the purchaser, regardless of when title to the goods is transferred. If the purchaser does not take steps to procure floater coverage at that point, there might not be any first party coverage on the shipment until it arrives as the construction site. Common carriers owe an elevated duty of care, and most claims for lost, damaged or misdelivered goods are honored, but "most" is not the same as "all," and a claim under a liability policy—even one as broad as a carrier's legal liability policy—is never as simple as a first party claim.
If the purchaser's sole concern is the transit risk, then insurance coverage can be put in place by calling for the contract to contain a "CIF" term. This means that the invoice price includes the cost of the goods, freight to the destination and inland marine insurance covering the goods while in transit. If the job site is unable to accept the goods when they arrive—usually because the work is behind schedule and there is nowhere on site to store them—then the goods will usually end up in a warehouse. The transit floater will not cover these goods unless is it endorsed to cover the storage risk. Before incurring the cost of that endorsement, purchasers should inquire of the warehouse keeper about the cost of purchasing first party coverage through the warehouse: it may be more economical.
One risk that is often overlooked is the peril of introducing bulky shipments into the construction site. Construction sites are typically fenced and gated in the interest of security. Certain shipments are sometimes too large to be brought through the gate. The solution may be to hoist the equipment over the fence, often employing a hydraulic boom crane. If there is an upset during the hoisting process, the owner of the project may find that insurance coverage is problematic. If the builders risk policy excludes "mechanical breakdown" as a covered cause of loss (and many of them do), then the insurance company may resist making payment, even though the property is close enough to the site to qualify as "covered property."
Even after the property is onsite, problems can occur during the installation, testing and commissioning process. For equipment that uses electrical, thermal or compressed gas as a power source, this is when failures are most likely to happen, and that is why many insurance policies exclude or limit coverage.
The solution to these problems, especially when the objects involved are valuable or sensitive to mishandling, may be to secure a true installation floater policy. This is a dedicated inland marine policy that covers the materials or equipment from the time it is shipped to the site until it is installed, tested, commissioned and accepted for service. This avoids problems due to property not being covered, excluded causes of loss, and problems about which of several policies will be primary. The installation floater is not required for every project, but risk managers at high-value installations should always consider this specialized kind of coverage.
Robert M. Horkovich is a shareholder in Anderson Kill's New York office and is co-chair of the firm's insurance recovery group. Mr. Horkovich, a trial lawyer with substantial experience in trying complex insurance coverage actions on behalf of corporate policyholders, has obtained over $5 billion in settlements and judgments from insurance companies for his clients over the past decade.
Kevin J. Connolly is an attorney in the New York office of Anderson Kill. Mr. Connolly's practice concentrates on providing legal services to clients involved in construction projects. In addition to representing owners and developers of significant commercial, industrial and educational projects, he also represents contractors, construction managers and design professionals.
About Anderson Kill & Olick, P.C.
Anderson Kill & Olick, P.C. practices law in the areas of Insurance Recovery, Anti-Counterfeiting, Bankruptcy, Commercial Litigation, Corporate & Securities, Employment & Labor Law, Real Estate & Construction, Tax, and Trusts & Estates. Best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes, with no ties to insurance companies and no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Greenwich, CT, Newark, NJ, Philadelphia, PA, Ventura, CA and Washington, DC. For companies seeking to do business internationally, Anderson Kill, through its membership in Interleges, a consortium of similar law firms in some 20 countries, assures the same high quality of service throughout the world that it provides itself here in the United States.
Anderson Kill represents policyholders only in insurance coverage disputes, with no ties to insurance companies, no conflicts of interest, and no compromises in it's devotion to policyholder interests alone.
The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations
