US District Court in California Holds Basic Builder’s Risk Coverage Inapplicable to Increased Cost Of Completing Portion Of Project Which Was Not Built At Time Of Failure – Rather Coverage of Such Losses Was Restricted to More Limited Additional Coverage Part

Oceanside Pier View, L.P. v. Travelers Property Casualty Co. of American
2008 U.S. Dist. LEXIS 37755 (S.D. Cal. May 6, 2008)

The U.S. District Court for the Southern District of California considered whether the basic coverage of a $28 million Builders Risk policy applied to the increased cost to complete construction of the unbuilt portion of a mixed use project attributable to delays which resulted from the failure of a shoring wall during construction. The court held that the basic Builders Risk coverage did not apply, and that coverage for increased costs of completing structures which were not under construction at the time of failure was subject to the $100,000 limit of “additional coverage” provided for “Expediting Costs and Additional Cost of Construction Materials and Labor”.

Oceanside Pier View, L.P. (Developer) owned and developed certain property, in Oceanside, California (the Property). In or around February of 2005, Developer began discussions with Travelers Property Casualty Co. of America (Insurer) regarding insurance for the Project. After a brief period of negotiation, during which Developer provided Insurer with the Project construction budget, Developer agreed to purchase an insurance policy from Insurer (the Policy). The Policy provided basic coverage for “Builders’ Risk,” “Soft Costs,” “Business Income,” and “Rental Value,” and additional coverage for “Expediting Costs and Additional Cost of Construction Materials and Labor,” among other things.

During construction, a shoring wall failed and caused damage to the Project. As a result of the shoring wall failure, “progress on the construction was interrupted, the critical path of construction was impacted, and the completion date for the Project was delayed.” Developer suffered losses as a result of the shoring wall failure, including “costs to redesign and repair the failed shoring wall, increases to the GMP pursuant to change order requests for Contractor, increased costs to protect the Property from further damage, increased costs of financing, increased fees and general conditions for the general contractor and project manager, and other soft costs and loss of business income.” Developer also determined that the shoring failure “caused a delay to the Substantial Completion date of 79 days.”

Developer promptly informed Insurer of its claim for losses relating to the shoring wall failure, and upon receipt of the claim, Insurer started an investigation. Plaintiff eventually submitted a claim seeking approximately $1.3 million in damages. Throughout 2006, Insurer met and corresponded with Developer regarding its claim. On June 5, 2006, Insurer sent a letter to Developer which provided in part, “[it is] our position that the cause of loss falls within the insuring agreement of the policy and coverage is afforded subject to all applicable terms, conditions and deductible(s).” Insurer subsequently issued several advances to Developer as partial payment on the insurance claim.

On March 22, 2007, Insurer notified Developer that portions of Developer’s insurance claim would not be covered. Among other things, Insurer informed Developer that Developer’s losses from increased labor and materials costs were not entirely covered under the Policy, and were subject to a $ 100,000.00 limitation. On June 28, 2007, Developer commenced an action against Insurer, seeking declaratory relief providing that Developer is entitled to coverage for “loss of income resulting from increased labor, materials, overhead, and general condition expenses due to delays caused by the Shoring Failure.”

Insurer sought summary judgment on Developer’s claim for the increased costs of construction materials and labor to complete portions of the Project which had not been built at the time of the failure. Insurer contended that the plain language of the Policy provided that Defendant was not obligated to pay more than $ 100,000.00 for the increased costs to construction materials and labor pursuant to the “Expediting Costs and Additional Cost of Construction Materials and Labor” provisions of the Policy. Insurer also contended that the “Builders’ Risk” and “Business Income” provisions did not provide coverage for the increased costs of construction materials and labor, particularly when those provisions were read in light of the entire policy.

The “Builders’ Risk” provisions of the Policy provided that Insurer “will pay for ‘loss’ to Covered Property from any of the Covered Causes of Loss.” The Policy defines “Covered Property” as “Builders’ Risk,” and “Builders’ Risk” as,

“Property described in the Declarations under “Builders’ Risk” owned by you or for which you are legally liable consisting of:

a. Buildings or structures including temporary structures while being constructed, erected or fabricated at the “job site”;
b. Property that will become a permanent part of the buildings or structures at the “job site”:
(1) While in transit to the “job site” or temporary storage locations;
(2) While at the “job site” or at a temporary storage location.”

Reading the Policy as a whole, the Court concluded that the “Builders’ Risk” provisions of the Policy provided coverage for losses resulting from the direct physical loss of buildings or structures being erected on the Property, but did not include coverage for the increased costs of construction materials and labor to construct never-before constructed portions of the Project. The Court further held that the plain language of the “Builders’ Risk” provisions protect only those buildings, structures, or portions of buildings and structures under construction at the Project, and do not protect against the unforseen costs to construct never-before constructed buildings or structures which may arise as a result of delays. Accordingly, while the “Builders’ Risk” provisions covered–and Insurer paid Developer for–the cost to replace the failed shoring wall in this case, including any increased costs to construction materials and labor which were necessary to reconstruct or replace the shoring wall to its original condition, the “Builders’ Risk” provisions did not cover the increased costs of construction materials and labor which Developer incurred to complete portions of the Project which were not yet under construction at the time that the shoring wall failure caused the delay.

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