20.4 BUILDER'S RISK POLICIES
20.401 General Scope. In contrast to CGL policies, which insure against liability to third parties, builder's risk policies are first-party policies that insure the interests of owners or general contractors, or both, in buildings under construction. Builder's risk policies typically insure against the risk of accidental damage to buildings or structures under construction and materials that are installed during the construction process. As with CGL polices, builder's risk policies may contain exclusions providing that they do not insure against the risk of loss due to defective work, design, or materials.
20.402 Property and Risks Covered. The property that is covered under a builder's risk policy is usually the specific building or structure listed in the declarations, while under the course of construction. 156 Covered property may also include equipment, fixtures, materials, and supplies that are intended to become a permanent part of the building or structure. Covered property typically does not include the land on which the building or structure is located. 157
There are two basic types of insuring agreements found in builder's risk policies. One type of policy, sometimes referred to as a "named peril" policy, covers loss to covered property that is caused by specified risks. Typical language for a named-peril insuring agreement is:
We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss. 158
"Covered causes of loss" under such a policy may be defined to include risks such as fire, lightning, explosion, windstorm or hail, water damage, falling objects, or sprinkler leakage, among others.
Another type of builder's risk policy is referred to as an "all-risk policy." As a general rule, this type of policy insures against all risk of accidental physical loss or damage, except for specific excluded causes of loss
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set out in the policy. 159 Common exclusions for both types of policies are discussed below.
20.403 Additional Losses Covered. In addition to physical loss or damage, builder's risk policies may provide coverage for certain additional types of loss that result from a covered physical loss. These may include costs incurred as a result of debris removal, costs necessary to move covered property to preserve it, and costs for service charges incurred as a result of calling the fire department to respond to a covered loss, among others. 160 Builder's risk policies may also include coverage for business interruption losses associated with damage to the covered property.
20.404 Fortuity Requirement; Known Loss. Though most builder's risk policies do not expressly limit coverage to losses caused by "occurrences," losses must nevertheless be accidental to be covered under a builder's risk policy. In Virginia, insurance is defined by statute as "the business of transferring risk by contract," 161 and losses are insurable only if they are fortuitous, or "dependent on chance insofar 'as the parties to the contract are aware.'" 162 Fortuitous losses are those that are accidental and do not result from an "inherent defect in the property insured, ordinary wear and tear, or intentional misconduct." 163 Known losses, or losses that are certain to occur, are not fortuitous. 164 It is the insured's burden to prove that its loss was fortuitous. 165
Virginia applies the concept of known loss fairly narrowly, so that a loss will likely be considered "fortuitous" unless the insured, at the time it entered into the insurance contract, knew that the loss was inevitable. 166 Even
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if an event is certain to occur, it may still be fortuitous if it is not certain that it will occur within the policy period in question, or if it is not certain that it will cause damage. 167
20.405 Exclusions.
A. General Exclusionary Language. Like other types of policies, builder's risk policies exclude from coverage certain specified causes of loss. Exclusionary language can take a variety of forms that vary in breadth and application.
One very broad form of exclusion that is often found in builder's risk policies provides that there is no coverage for loss or damage caused "directly or indirectly" by an excluded cause, "regardless of any other cause or event that contributes concurrently or in any sequence to the loss." 168 The effect of this broad language is to exclude completely a loss that is caused in part by an excluded cause, even if the loss is also partially the result of a covered cause. 169
A narrower exclusion may simply provide that there is no coverage for loss "caused by or resulting from" an excluded cause. 170 Unlike the broader exclusion discussed above, this language would not necessarily exclude a loss that results in part from a covered cause.
The following are some specific excluded causes of loss commonly found in builder's risk policies. As with CGL policies, the insurer on a builder's risk policy has the burden to show that exclusions apply. 171
B. Faulty Workmanship or Design. Like CGL policies, builder's risk policies often provide that there will be no coverage for loss due to various forms of faulty workmanship or design, or "defects or errors in
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design, development, distribution, processing, manufacturing, workmanship, testing, installation, alteration, or repair of covered property." 172
The majority view is that "faulty workmanship" exclusions preclude coverage for costs to correct the defective quality of a finished product. 173 In National Housing Building Corp. v. Acordia of Virginia Insurance Agency, Inc., 174 for example, the Virginia Supreme Court held that a general contractor could not recover from its insurance agent for the agent's alleged negligence in failing to add the contractor as a named insured on a builder's risk policy. 175 The contractor sought to recoup costs it had spent to repair a retaining wall that it had defectively designed and built, but the policy contained an exclusion for loss resulting from "defective materials or poor workmanship, error, omission or deficiency in designs, plans, or specifications." 176 Because of this exclusion, the contractor would not have been entitled to recoup its remediation expenses even if it had been a named insured under the policy. 177
Some courts outside Virginia have distinguished between faulty workmanship, which is within the scope of the exclusion, and damage to a contractor's work caused by events extraneous to the construction process, which may fall outside the scope of this exclusion and potentially be covered by a builder's risk policy. 178 For example, in U.S. Industries, Inc. v. Aetna
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Casualty & Surety Co., 179 the Fifth Circuit held that the wrinkling of the metal skin of a steel tower due to uneven heating during the construction process was excluded "faulty workmanship" because the problems that caused the wrinkling occurred during, and as an integral part of, the construction of the tower. 180 On the other hand, if a contractor's employee had negligently run a truck into the tower during construction and knocked it over, the resulting damage likely would not have been excluded because it would have been fortuitous damage extraneous to the construction of the product itself. 181 In City of Barre v. New Hampshire Insurance Co., the Vermont Supreme Court held that the collapse of several wooden arches, which were blown down by the wind because they were secured by an insufficient number of guy wires, was not "faulty workmanship." 182 Though the inadequate number of guy wires was due to the contractor's negligence during construction, the court found that both the wind and the supporting cables were external to the structure itself, and that "[i]t is the quality of the product which is excluded from coverage, and not damage to the product caused by negligence during the construction period." 183
Once again, because there is limited Virginia authority on the subject, the outcome of any particular case may be difficult to determine. As with other inquiries, the language of the particular policy must be closely examined together with the underlying factual circumstances to determine whether coverage exists.
C. Pollution. Builder's risk policies often contain pollution exclusions similar to those found in CGL policies. Common pollution exclusion language provides that there will be no coverage for loss caused by the "discharge, dispersal, seepage, migration, release or escape of 'pollutants.'" 184
D. Earth Movement. Builder's risk policies may exclude loss caused by earth movement, such as "an earthquake, landslide, or earth sinking, rising, or shifting." 185 In Sentinel Associates v. American Manufacturers
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Mutual Insurance Co., the Eastern District of Virginia held that this language applied to earth movement resulting from natural forces, but not earth...
