As federal, state, and local regulations and orders continue to be issued, amended, and extended to contain the spread of the COVID-19 virus, many of those governmental actions directly impact construction projects. One critical and evolving question on these impacted construction sites is who bears the risk of financial impact and losses related to project shutdowns, suspensions of work, labor inefficiencies, or delays arising from the pandemic-related government actions. On many projects, the parties themselves agree to bear financial risk through contractual clauses such as force majeure (where acts of God and other risks not the fault of either party give rise to potential excused performance by the Contractor), no-damage-for-delay (where Contractor’s remedy for delay is an extension of time to the contract schedule without compensation for delay damages), and required completion dates with liquidated damages (where, absent excused performance or extensions to the construction schedule, the Contractor agrees to pay liquidated damages to Owner for delays beyond the contractual completion date).
However, project participants also shift specific categories of risk to insurance companies by requiring one or more project participants to purchase and maintain insurance policies for bodily injuries, property damage, worker’s compensation, and professional liability claims. The penultimate question is: Do any of these contractually required insurance policies apply to cover losses or damages related to the COVID-19 situation?
There is no one size fits all answer. All participants on impacted construction projects must review not only the contract requirements but the language of the applicable insurance policies as well. By way of example, parties utilizing the American Institute of Architects (AIA) family of contracts should review their contracts and insurance coverages for potential areas of insurance coverage for a COVID-19 related disruption or delay.
The AIA A101-2017 Exhibit A (Insurance and Bonds) document outlines a list of both required and optional insurance coverages for the Owner and Contractor. In the Owner’s insurance section, potential insurance coverages that the parties should investigate include the optional extended property insurance policies outlined in §A.2.4, including:
- §A.2.4.1 Loss of Use, Business Interruption, and Delay in Completion Insurance, “to reimburse the Owner for loss of use of the Owner’s property, or the inability to conduct normal operations due to a covered cause of loss.”
- §A.2.4.2 Ordinance or Law Insurance, “for the reasonable and necessary costs to satisfy the minimum requirements of the enforcement of any law or ordinance regulating the demolition, construction, repair, replacement or use of the Project.”
- §A.2.4.5 Civil Authority Insurance, “for losses or costs arising from an order of a civil authority prohibiting access to the Project, provided such order is the direct result of physical damage covered under the required property insurance.”
- §A.2.4.7 Soft Costs Insurance, “to reimburse the Owner for costs due to the delay of completion of the Work, arising out of physical loss or damage covered by the required property insurance; including construction loan fees; leasing and marketing expenses; additional fees, including those of architects, engineers, consultants, attorneys and accountants, needed for the completion of the construction, repairs, or reconstruction; and carrying costs such as property taxes, building permits, additional interest on loans, realty taxes, and insurance premiums over and above normal expenses.”
Despite the broad-sounding coverages suggested in the names of these types of insurance policies, the reality is that the specific coverage available may vary widely from policy-to-policy. It is also very possible that despite the existence of these insurance policies, there will be no insurance coverage for the specific COVID-19 event affecting a particular construction project. For example, these coverages are often tied to property insurance or builder’s risk insurance for the property, where the underlying trigger for coverage is some event of property impairment or damage. However, parties involved with these contractually required insurance policies should conduct initial inquiries and reviews of the contract language and policy documents to explore the possibility of potential coverage.
Analysis of potential insurance coverage under these policies requires multiple steps. First, was the Owner or Contractor contractually required to purchase these insurance policies? Second, did the Owner or Contractor comply with the contractual requirements and obtain the required insurance coverages? Third, what do the specific insurance policies state in terms of events given rise to coverage and the scope of covered losses? Fourth, what parties are covered under the insurance policies? Fifth, does the policy language cover the specific events related to a COVID-19 related event? Sixth, does the policy contain language that expressly excludes coverage even if the event is otherwise covered?
Further, the location of the specific project is critical, in terms of identifying the applicable government regulations, rules, orders, limitations, and restrictions. Did a government agency restrict all access to the construction project for a time period, or did government action merely impose recommendations on social distancing that impacted the project? Separating governmental “guidelines” or “recommendations” from “requirements” and “prohibitions” will require identification of each of the applicable governmental regulations to assess the causal relationship between the government action and the impact to the construction site.
For questions regarding contractual insurance requirements and coverage, please contact your DSV attorney or William E. Kelley, Jr at firstname.lastname@example.org.
***The information contained on this website is for informational purposes and is not intended as formal legal advice and cannot be relied upon as such. No attorney client relationship is established or intended as a result of the information contained on this website.***