(June 2019)
The Additional Coverage–Collapse wording in the Insurance Services Office (ISO) CP 10 20–Causes of Loss–Broad Form or CP 10 30–Causes of Loss–Special Form provides collapse coverage when the collapse is the result of defective building materials and construction methods. However, in an unusual twist in policy construction, CP 00 20–Builders Risk Coverage Form includes Additional Conditions 3. Restriction of Additional Coverage–Collapse that looks more like an exclusion than a condition. This additional “condition” eliminates all coverage for collapse due to defective materials. This is a serious restriction of coverage. The good news is that an endorsement is available to provide this coverage subject to a substantial additional premium charge. It is CP 11 20–Builders Risk–Collapse During Construction.
Note: This analysis does not apply when CP 10 10–Causes of Loss–Basic Form is used because it does not provide specific collapse coverage.
This endorsement modifies the coverage CP 00 20–Builders Risk Coverage Form provides in two ways.
1) Additional Conditions 3. Restriction of Additional Coverage–Collapse is eliminated in its entirety.
2) The Additional Coverage – Collapse in CP 10 20–Causes of Loss–Broad Form and CP 10 30–Causes of Loss–Special Form is altered as follows:
Coverage is broadened because collapse due to the use of defective materials or construction methods is covered along with collapse due to faulty design, plans, specifications, or workmanship in construction, renovation, or remodeling. This broadened coverage applies only while construction, remodeling, or renovation is taking place.
The rate and premium charge for this endorsement is relatively high, especially if the named insured is one of the parties which could be held responsible for the collapse.
The rating rule in the ISO Commercial Lines Manual (CLM) for this coverage states that the builders risk rates that apply must be multiplied by five if the named insured or an additional insured is one of the following entities:
The last category may apply if the named insured is the building owner and not a contractor. This is because construction contracts that many contractors use require that the named insured waive its rights of subrogation or recovery against the contractor. In other cases, the contractor requires that the named insured name the contractor as an additional insured under the builders risk policy. The insurable interests of every entity to be included as an insured under the policy with respect to application of this coverage and the method used to determine the rate and premium must be examined carefully. There is a small increase in the multi-state rates for any other insured not indicated above.
The rates are considerably different for a very good reason. If the named insured is the building owner and the building collapse is due to a construction defect, the insurance company pays the named insured and then subrogates against the builder. In these cases, the premium charge can be lower because the potential for recovery is high. On the other hand, the potential for a subrogation recovery may be low or not exist at all if the named insured is the builder. In those cases, the premium charge for the exposure must be considerably higher because there are few, if any, other sources of recovery.
This coverage is clearly a very expensive option. However, an uncovered collapse loss is also very expensive. The agent or broker should always offer this coverage if the insurance company that writes the builders risk coverage offers it and gives the named insured the option to purchase or reject it. If the named insured rejects the coverage, the rejection should take the form of a written document or agreement that the named insured signs and dates. The insurance agent or broker should retain that document or agreement in its records.
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Example: Mary and John decide to completely renovate their home and add a third floor at the same time. They purchase an unendorsed builders risk policy and sign all the necessary contracts. They receive a discount on the construction costs because they purchased their own builders risk coverage and waived their rights of subrogation against the contractor. The roof collapses just as a cupola is placed on it and the cupola falls all the way down to the basement. The insurance company denies Mary and John's builders risk claim because of Additional Conditions 3. Restriction of Additional Coverage –Collapse. As a result, they must pay for the loss out of their own funds. They then turn around and sue their insurance agent for not completely explaining the coverage condition. The loss would have been covered, the insurance company would have paid the loss, and Mary and John would not have had a reason to sue their insurance agent if they had purchased CP 11 20–Builders Risk–Collapse During Construction. |