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Risk Management Installation floaters Avoid forms that make coverage contingent on external cause or risk By Donald S. Malecki, CPCU Some contractors, particularly subcontractors and sub-subcontractors (i.e., of all tiers), seldom know whether or not they are covered by a course of construction policy issued to a project owner or a general contractor. In fact, many of these contractors not only do not know if a property policy exists to cover their interests, but also seldom inquire about it. Considering that builders risk policies are generally intended for new construction, and to a lesser extent for renovations, these types of policies may be entirely inappropriate when a contractor’s work does not involve either work on new construction or renovations. What some of these subcontractors of all tiers generally do, sometimes only after prodding by insurance agents/brokers, is to purchase a policy of their own covering their work. The type of coverage commonly suggested by producers is the installation floater. An installation floater is an inland marine-type coverage that can be defined as insurance purchased by contractors to cover not only their own property but also property of others that is to be installed into a building or structure. This floater covers the risk of loss while in transit and in the process of rigging, often with some limitations. An example is rigging through the use of a helicopter or other aircraft. Those contractors who commonly purchase the installation floater are referred to as artisan contractors, because they generally are skilled manual workers—electricians, plumbers, heating and air-conditioning contractors, and roofers—who usually perform small or routine type of work on existing buildings or structures. This is not to say that the installation floater cannot be relied on for more complex jobs, because this floater also is available to those who install elevators, pipelines, underground and above the ground tanks, high tension poles and communication towers. Although the installation floater is commonly used by contractors, it can also be an ideal solution for manufacturers and distributors of—for example—heavy machinery, who also agree to install it. In addition, the building or structure on which work is to be performed can be either one in the process of construction or an existing one that requires an addition, or major renovation, repair, or improvement. While the initial insurable interests of contractors in property will be personal in nature, an installation floater may need to cover the real property, to the extent that coverage needs to continue after the personal property has been incorporated into the building or structure. As was mentioned earlier, it is not unusual for contractors not to know if they are protected by a builders risk policy. Even if they were to know that a builders risk policy had been issued covering them, they still would not know if coverage was sufficient, short of having the opportunity to read these builders risk policies—and they seldom have that chance. This makes a strong case for producers to suggest the purchase of an installation floater. Take, for example, an ISO-type builders risk policy. Not being an inland marine-type of policy, its coverage is site-specific. On the other hand, many installation floaters cover not only at the site of construction but also while the property to be installed is in transit. In some cases, therefore, the installation floater may cover a gap that otherwise exists if the builders risk policy relied upon does not cover the transit exposure. In the worst case scenario, coverage may be duplicative with both the installation floater and the builders risk policy applying in a given case with the adjustment on a pro rata basis. This is a lot better than being faced with no coverage. Coverage caveats Installation floaters are similar to inland marine-types of insurance, providing coverage for materials, equipment, and personal property while in transit, while being installed, and until coverage terminates according to the terms of the floater, but the coverage varies. Therefore, producers cannot simply select an installation floater from among the insurers they represent and hope it will meet a contractor’s needs. Producers do not have to conduct a full-scale risk management analysis, particularly when the artisan contractor performs the same day-to-day mundane type of work. But producers should be cognizant of the fact that some installation floaters are “mine fields” and should be avoided whenever possible. For example, like property policies, installation floaters, are intended to cover against direct physical loss or damage to covered property from a covered cause. What confuses the situation is when an insurer also makes coverage contingent on an external cause or for external risks. The following are provisions from actual installation floaters that include those terms:
These provisions referring to external cause or external risks, which are also found in some builders risk policies, are not defined and do not have a precise meaning. Therefore, when an insurer relies on such a provision to deny a claim, whether or not it knows its meaning in relation to the facts, it will likely generate a dispute and litigation. All of this begs the question of what these provisions mean. In Contractors Realty Co. v. Insurance Company of North America, 469 F. Supp. 1287 (S.D. N.Y.1979), which involved a builders risk claim, the court held that the requirement of an external cause was intended to exclude losses resulting from (1) negligent acts of the owner or master, (2) normal wear and tear, and (3) internal decomposition or deterioration of insured property. With property forms, in general, excluding such causes of loss as wear and tear and internal decomposition, such as inherent vice, and covering losses caused by negligence, one may wonder, legitimately, why it is necessary to repeat this intent through the reference of external cause or external risk. In N-REN Corp. v. American Home Assurance Company, 619 F.2d 784 (U.S. Ct. App. 8th Cir. 1980), the dispute involved a difference in conditions (DIC) policy, which covered against “all risks of direct physical loss or damage occurring during the period of this policy to the insured from any external cause.” The dispute was over design error, which was excluded, but by exception covered ensuing loss by collapse or a part thereof. In rendering its decision in this case, the court took into consideration the foregoing Contractors Realty Company case and held that a design error was an external cause because the loss resulted (1) neither from negligence of the owner, nor (2) wholly as a result of normal wear and tear. The court also stated that this was not a case where the insured property internally deteriorated or decomposed. The court therefore held that while error in design was excluded, coverage applied to the ensuing partial collapse as a result of design error, which was an external cause. In the case of ABCD … Vision, Inc., et al. v. Fireman’s Fund Insurance Co., 734 P.2d 1376 (Ct. App. OR 1987), which was reversed in part in 744 P.2d 998 (Sup. Ct. OR 1987), the dispute was over the meaning of “external cause” in relation to damage to a television transmitter resulting from arcing, fire, smoke, and soot damage. The insured’s claim was denied by the insurer, which maintained that its policy covered loss caused only by external causes, that is, a loss from an outside origin, which would preclude, for example, the insured’s negligence. The court disagreed. It held that “external cause” also encompasses any fortuitous event, including negligence, a position supported by a number of other cases cited by this court, some of which involved builders risk policies. It would appear, based on the preceding court cases, that reference to “external cause” or “external risk” is superfluous, given that property policies, including builders risk: • commonly cover physical loss or damage through negligence; • commonly exclude physical loss or damage from design error, faulty workmanship and faulty materials, but make exception for the resulting physical loss or damage not otherwise excluded; and • commonly exclude physical loss or damage from wear and tear, gradual deterioration, decomposition, and inherent vice. It may be a good idea for producers who are selecting installation floaters for their insureds to avoid those floaters (and builders risk policies for that matter) that make coverage contingent on an external cause or risk. Doing so will deny to insurers wanting to exclude coverage the opportunity to do so, and it also will help insureds avoid costly litigation. Other points to consider Producers need to review these floaters to determine if the property covered will encompass what artisan contractors or other prospects for this floater require. While many of these floaters cover materials and supplies, coverage may fall short of the mark if what the contractor installs is fixtures or equipment. For a manufacturer of machinery, it may be worth the effort to see that the floater specifically includes machinery coverage. Some floaters include coverage for some of the same incidental coverages found in builders risk policies, such as temporary structures, cribbing, false work, and scaffolding. Some even include contractors’ equipment and tools for a sub-limit. If the rate is reasonable, this broadened coverage may save the contractor from having to purchase a separate contractors’ equipment floater, except for heavy mobile equipment. Most of the floaters reviewed include coverage for property of others in the insured’s care, custody, or control. Some, however, are more restrictive from the standpoint that they provide coverage only when the insured is legally liable for such property. It might be better to consider a floater that does not have this contingency on coverage. One way for producers to determine how serious an insurer of the installation floater might be in providing coverage for more complex coverages, is to see how many additional coverages are available for an additional cost. Some floaters, for example, include coverage for collapse of a building or structure, which is a definite plus, particularly for contractors involved in the repair or refurbishing of television or communication towers. Some floaters also provide coverage for testing, debris removal, pollution cleanup, soft costs, such as delay in completion of work, loss of use, and extra expenses. At what point coverage ends under an installation floater also is an important consideration. It is not unusual for coverage to end when construction by others continues for long periods. As has been repeated many times in this column, selecting from among policies is not an easy task because coverage will not fit perfectly in every instance. Nonetheless, every possible effort should be made to balance coverage while keeping the prospective insured’s needs and priorities in mind. * The author |
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