The disaster in Minneapolis has brought to the forefront the issue of risk of loss to property and the work in progress during construction. This is an opportunity for contractors to become more aware of the risks they are assuming. As this article is a general review of property loss risk principles, readers should draw no conclusions of liability of the parties involved in the I-35W project.
The first distinction that must be drawn is between damage to existing property and damage to the contractor’s work itself. If, for example, a contractor damages private property along the project right-of-way during construction, it will be held accountable to the landowner. Similarly, absent a contract provision to the contrary, a contractor working on a highway project will be liable to the DOT for damages it causes to existing infrastructure.
The key word is “cause.” The contractor must have acted negligently. If the contractor can show that it took reasonable precautions and was simply building the work in accordance with the DOT’s plans, it might succeed in passing the damages on to the DOT through the claims process. In the case of damage to existing DOT infrastructure, the DOT must show that the contractor was not acting reasonably under the circumstances in order to hold the contractor liable.
To offset some of this risk, contractors typically purchase commercial general liability (CGL) insurance. With some narrow exceptions, CGL insurance generally does not cover damage to the contractor’s own work in progress and is limited to damage to other property. CGL coverage would, however, come into play in an instance where a contractor is renovating an existing structure and damages a portion of the structure that does not consist of the work being performed. CGL policies, like most other insurance policies, contain deductibles and policy limits that come into play and therefore may not provide total reimbursement for the loss.
Liability for damage to work in progress is more problematic for the contractor because in most states, absent a specific contract provision stating otherwise, the risk rests with the contractor until the work is finally accepted by the owner. This risk exists regardless of whether the contractor is negligent and applies even where damage occurs through natural phenomena such as storms. Some owners, while not assuming the risk of loss to the work, agree to purchase builder’s risk insurance for the benefit of the contractor, subcontractors and others involved with the project.
Builder’s risk insurance is a property insurance policy that reimburses the insured for damage to, or destruction of, the project, regardless of whether the insured is at fault. Builder’s risk policies contain exclusions that limit or preclude coverage and also contain policy limits and deductibles. The two principal exclusions that come into play are for defects in workmanship and in design. The policy limits are typically equal to the original contract value for the project.
Heavy/highway contractors should be familiar with the laws in their state concerning who bears the risk of loss to the work prior to final acceptance by the owner. Furthermore, they must scrutinize the general provisions of the standard specifications as well as the special provisions issued in connection with each project to determine whether the owner has assumed the risk or has assigned it to the contractor. If this risk remains with the contractor and the owner is providing a builder’s risk policy, the contractor should review the policy to determine if it is adequate and possibly procure supplemental coverage if it is not. Finally, if the contractor bears the risk of loss and the owner is providing no coverage, it should strongly consider procuring a builder’s risk policy.