The facts
Henry, the owner of LIC Construction Group and Deborah, an insurance broker at Smith Insurance Agency met to discuss builders risk coverage for a renovation project. Though LIC Construction Group had been building ground-up new custom homes for several years, this was their first renovation project. Deborah reviewed the standard builders risk coverages with Henry, but unfortunately, she did not mention that in the standard coverage form there is no coverage for existing structures. Victor's builders risk policy specifically states in the property not covered section that there is no coverage for existing buildings or structures to which improvements, alterations, repairs or additions are being made unless specified otherwise in writing. Henry had clearly stated that this was a renovation project with $500,000 in renovations being made to a $500,000 existing structure.
Nine months later with the project close to completion, a fire started on the second floor of the structure. The fire was caused by a plumber who was welding on-site on a Friday afternoon. Unfortunately a hot spot went undetected, and the fire ensued two days later causing devastating damage to the structure which resulted in a total loss. Henry reported the incident and an adjuster for the carrier opened a claim.
The result
Deborah had the project written as ground-up new construction and thus there was no coverage for the existing structure. This resulted in a large uncovered claim which could have been avoided by classifying the risk as a renovation project whereby the policy would have been endorsed to cover the existing structure. Whether a project is either renovation work or an addition to an existing structure, the correct classification needs to be applied when issuing a policy to ensure all existing and renovation values are covered.
Risk factors
Risk factor #1
Always carefully listen to contractors and verify the project as either ground-up new or renovations/remodeling, alterations or additions to an existing structure. The project must be classified correctly in order to make sure values at risk are covered.
Risk factor #2
Awareness and understanding of what is and is not covered under a policy is vital. The value of the existing structure and renovations is paramount in taking care of the property/inland marine needs of contractors.
