July/August 2007

Builder's risk claims are among the most complicated losses to measure. Physical damage arising from a covered peril can often cause a delay in the completion of a project, thereby causing the project to realize additional expenses (soft costs) and loss of income (business interruption or rental value loss). But because the period of restoration and period of delayed completion do not necessarily run concurrently (as they do in almost all other types of losses) the measurement of whether and how much a loss may delay a project can be an extremely difficult and time consuming task.

Builder's risk insurance covers properties in the course of construction and/or renovation. In large projects, in addition to coverage for physical damage due to all risks of loss, owners often procure "time element" coverage to reimburse them for delays to the insured project which are caused by a loss. The universally accepted measurement of delay requires a determination of two dates, the first being to establish the date on which the project would have completed had there been no loss. The second is the date that the project will actually complete after the loss, with the caveat that the delay must be due to the covered loss. The "period of indemnity", therefore is the number of days that the project is actually delayed by the loss, and is measured by taking the difference between the two dates noted above.

Of course, the definition of completion is not always clear. Is it substantial completion, final completion, obtaining either a temporary or final certificate of occupancy or some other measure? Regardless of how completion is defined, the "delay" must be measured by the same criteria used to determine the "completion" date in the first place. The task of determining the completion date "had there been no loss" may often require an exhaustive retrospective look at the project from commencement to loss date. The most important question is: Was the project proceeding on the planned schedule on the date of loss? If not, it is vital to determine why the project was delayed, and whether the planned pre-loss completion date was accurate.

At a minimum, a review of the project's schedule from the original "baseline" schedule through the last pre-loss schedule is required. A review of the project's history will usually require a review of pre-loss change orders and pay requisitions as well. Since a change order is an instrument used in the construction contract to record changes to both the contract price and contract time, it goes without saying the pre-loss history of changes is vital to understanding the accuracy of the planned pre-loss completion date. In many cases, determining the accuracy of the pre-loss completion date will also require a review of daily superintendents reports, applications for payments, requests for information progress photos, correspondence, weather reports and other documents that will help shed light on whether the planned pre-loss completion was achievable.

After the loss, determining the "period of restoration" and how it will be absorbed into the ongoing construction project is vital to determine how long the delay period will be. It is also a necessary prerequisite to making the critical decision of if, and how to go about mitigating the impact of the delay, thus reducing the anticipated delayed completion loss. In that regard, it is generally accepted that "the show must go on", and the overall project should almost always commence as soon as possible after a loss. However, it is important to note that the delay in completing the project should not be longer than the "period of restoration".

Only after the completion date and period of delay caused by the loss is determined can the period of indemnity and the amount of time element loss be determined. Therefore, knowledge of what elements cause delay, and how to determine the loss related delays is the key to accurately determining period of indemnity in builder's risk losses.

About the Author:
Lisa Enloe is the managing member of Held Enloe & Associates, LLC, and a consultant to J.S. Held, Incorporated, both of which are construction consulting companies. Lisa has worked as an expert in many large complex builder's risk delay claims. She has more than 25 years experience in all aspects of complex high value construction projects, and has successfully completed more than $1.5 Billion in projects for a top 10 nationwide contractor, where she was also a Vice President and executive in charge of the scheduling department. Lisa can be reached at lenloe@heldenloe.com.