Property Insurance and Builder’s Risk Policy Claims Attorneys

Builder's Risk insurance protects the substantial financial investment that developers, owners, general contractors, subcontractors, and construction lenders each have in a project before it is complete. Because a project under construction is especially vulnerable to fire, theft, vandalism, windstorm, and water damage, a single loss can erase months of work and millions of dollars in value. A properly structured Builder's Risk policy pays the cost to repair or replace damaged work and materials so that the project can move forward and, if endorsed for soft costs and delay, can also cover the carrying costs and lost income that result from a covered delay in completion. Construction contracts, such as the widely used AIA A201 General Conditions, typically specify which party must purchase the policy (often the owner), which parties must be insured, and the required limits. Since coverage generally terminates when the project is completed, accepted, occupied, or put to its intended use, project owners must also coordinate the transition to permanent property insurance to avoid any gap in coverage.

Insurers may deny Builder's Risk claims by asserting that a loss was caused by faulty design or workmanship, but such a denial is not necessarily the final word. Under California law, the policyholder must show that the loss falls within the policy's coverage grant, but the insurer bears the burden of proving that an exclusion applies (Aydin Corp. v. First State Ins. Co. (1998) 18 Cal.4th 1183), and exclusions are interpreted narrowly against the insurer. (MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635.) California also follows the efficient proximate cause doctrine, under which a loss caused by a combination of covered and excluded perils is generally covered if the predominant, or most important, cause is a covered peril. In addition, many defect exclusions contain an "ensuing loss" or "resulting loss" exception that preserves coverage for damage to other, non-defective property caused by the defect, even if the cost to correct the defect itself is excluded. Policyholders facing a denial of coverage should request the insurer's complete claim file including any expert reports, and consult experienced coverage counsel promptly to ensure their interests are protected.

A Builder's Risk policy generally covers physical damage to the project, but financial losses caused by a delay in completion can be covered if the policy includes a "soft costs" or "delay in completion" endorsement. When such coverage is included, it typically applies where a covered direct physical loss delays the project beyond its scheduled completion date, and it reimburses the additional costs and lost income attributable to that delay, such as extended construction loan interest, additional real estate taxes and insurance premiums, additional architectural, engineering, and legal fees, rental income that would have been earned, and, for owner-occupied projects, lost business income. These coverages are usually subject to a waiting period expressed in days (which functions as a time-based deductible), a defined period of indemnity, and separate sublimits. Because insurers frequently dispute how much of the delay is actually attributable to the covered loss, documentation is critical. Policyholders should maintain the original baseline construction schedule and all schedule updates, and they may need a construction expert to perform a critical path analysis that isolates the delay caused by the loss. Promptly notifying the carrier is critical, and coverage counsel can help ensure that the insurer does not improperly shorten the delay period or undermine the value of the claim.

Valuing damage to a partially completed structure presents unique challenges, and insurers sometimes undervalue these claims by limiting the scope of repair, applying improper depreciation, or ignoring the additional cost of tearing out and redoing work in progress. Most Builder's Risk policies value covered property at replacement cost at the time of loss, which should include the full cost of labor, materials, equipment, general conditions, contractor overhead and profit, and any demolition, debris removal, and rework needed to restore the project to its pre-loss condition. Disputes commonly arise over whether damaged components can be repaired rather than replaced, whether undamaged adjacent work must be removed to complete repairs, whether additional costs required by building codes are covered, and how to value materials and work that had not yet been invoiced. Policyholders can support their position with detailed documentation, including the schedule of values, payment applications, subcontractor invoices, change orders, and independent estimates from qualified construction professionals and forensic engineers. If disagreement remains, many policies contain an appraisal provision under which each side selects a competent and disinterested appraiser, and an umpire resolves any differences. In California, appraisal decides only the amount of the loss, not disputes over coverage or causation, so it is best suited to pure valuation disputes. If the insurer fails to conduct a full, fair, and thorough investigation of the claim, the policyholder may have claims for breach of contract and bad faith. Experienced coverage counsel can help evaluate whether appraisal, negotiation, or litigation is the most effective path to a full recovery.

California's insurance bad faith law applies fully to Builder's Risk policies, and a commercial policyholder has the same right as a homeowner to expect that its insurer will promptly and fairly investigate and pay a covered claim. Every policy contains an implied covenant of good faith and fair dealing, and an insurer that unreasonably delays or withholds benefits due under the policy may be liable in tort for bad faith. Common forms of unreasonable conduct include failing to promptly retain qualified experts, repeatedly requesting duplicative documentation, refusing to make partial payments on undisputed portions of the loss, relying on a one-sided or incomplete investigation, and allowing the claim to languish in a way that jeopardizes the project. Because construction projects depend on predictable cash flow, delayed payments can cause cascading harm, including stalled work, increased costs, loan defaults, lost tenants, and construction liens. A policyholder that proves bad faith may recover damages in addition to the unpaid policy benefits, including consequential damages proximately caused by the insurer's conduct, the attorney's fees incurred to obtain the policy benefits (Brandt v. Superior Court (1985) 37 Cal.3d 813), and punitive damages where the insurer acted with oppression, fraud, or malice. (Civ. Code § 3294.) Developers and contractors facing an unjustified delay should document its impact on the project and promptly consult experienced coverage counsel.

Soft costs coverage reimburses the additional expenses a project owner incurs because a covered physical loss delays completion of the project. The key principle is that the coverage generally pays the costs caused by the delay. For example, construction loan interest is typically calculated as the additional interest that accrues on the outstanding loan balance during the period of covered delay, beyond the interest that would have accrued had the project been completed on schedule. Similarly, real estate taxes, insurance premiums, permit renewal or reissuance fees, additional construction expenses, architectural and engineering fees, legal and accounting fees, loan extension or refinancing fees, and additional marketing and leasing expenses are recoverable to the extent they increased because of the delay. Many policies specifically define the covered categories of soft costs, require a waiting period before coverage begins, and impose sublimits for each category or in the aggregate, so the policy language controls. Calculating soft costs generally requires establishing the length of the covered delay and then documenting each category of expense. Because insurers frequently dispute coverage for these losses, consulting with experienced counsel is often necessary to obtain a full recovery.