Real Case, Real Lessons: Understanding Builders’ Risk Insurance Limits

In the recent case of 5333 Mattress King LLC v. Hanover Insurance Company, the United States District Court for the District of Colorado provided significant insights into the limits of builders’ risk insurance policies.  Mattress King LLC, a warehouse owner, faced a substantial loss when a subcontractor drove a crane over and damaged the warehouse’s concrete floor slab during construction.  Despite having a builders’ risk insurance policy with Hanover Insurance Company, coverage was denied, leading to litigation.

Applicable Policy Provisions

The policy in question was a Commercial Marine/Commercial Lines Builders’ Risk insurance policy.  Builders’ risk insurance is designed to cover direct physical loss to covered property during construction unless the loss is excluded or limited by the policy.  Key exclusions of the policy at issue included losses caused by faulty, inadequate, or defective:

• Planning, zoning, surveying, or development
• Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, or compaction
• Materials used in construction or renovation
• Maintenance of the covered property

The policy also required the insured to provide prompt notice of any loss or damage.

Court’s Findings and Rationale

The court held that the policy’s faulty workmanship exclusion barred coverage for the damage to the concrete slab.  It was established that the subcontractor and general contractor drove the crane onto the slab with the knowledge that it could not support the load without additional reinforcement.  The damage was therefore not considered an “accident” as it resulted from intentional actions, and thus, did not constitute a direct physical loss under the policy.

Additionally, the court ruled that Hanover Insurance did not breach its duty of good faith and fair dealing.  The denial was based on an engineering report indicating that the slab was not designed to support construction loads and that the contractors were aware of the slab’s deficiencies.

Lessons for Builders and Owners

This case underscores the importance for builders and owners to thoroughly understand the exclusions and limitations of their builders’ risk insurance policies. Here are some critical takeaways:

Awareness of Policy Exclusions: Builders must be aware that policies often exclude coverage for damages resulting from faulty workmanship, design flaws, inadequate planning, and construction.  It is crucial to review these exclusions and understand their implications.

Proper Planning and Execution: Proper planning and adherence to construction guidelines are essential.  In this case, failure to reinforce the slab to support the weight of the crane, especially knowing that the slab, as designed, could not support the weight, led to the denial of the claim.  Ensuring that construction practices align with policy requirements can prevent coverage issues.

Prompt Reporting: The policy required prompt notice of any loss, which was not adhered to in this case.  Timely reporting of incidents is vital to avoid disputes over coverage.

Risk Management: Builders should implement robust risk management practices to mitigate potential damages that might not be covered by insurance.  This includes regular inspections, adherence to construction standards, ensuring that all parties involved are aware of and follow the project’s specifications, and properly evaluating and mitigating the risks of chosen means and methods.

Conclusion

Builders’ risk insurance policies are not a catch-all solution for construction-related damages.  Understanding the scope and limitations of coverage is crucial for protecting your investment.  By taking proactive steps to comply with policy requirements and implementing sound construction practices, builders and owners can better navigate the complexities of builders’ risk insurance and safeguard their projects.