A Landmark for Builder's Risk Insurance Policies

By Warfel, William J.; Asperger, Jeffrey J. | Risk Management, February 2008 | Go to article overview

A Landmark for Builder's Risk Insurance Policies


Warfel, William J., Asperger, Jeffrey J., Risk Management


In the 2007 case, Liberty International v. the Weitz Company et al., the Weitz Company was the general contractor for a project to erect four dormitory buildings at Arizona State University. Consistent with the custom and practice and Occupational Safety and Health Association (OSHA) fire safety requirements, the applicable builder's risk policy contained several protective warranty endorsements (e.g., maintain adequate fire extinguishers on site conduct a fire watch during all welding operations or other hot processes, inspect for fire hazards at the end of the work day, etc.). A breach of a protective warranty automatically renders the coverage null and void. In this particular case, a subcontractor's employee was performing "hot work" operations using a blowtorch to cut and weld structural steel supports for " the roof of a dormitory building. As a result of the cutting and welding, the combustibles in the immediate area were ignited and spread to destroy the entire dormitory building and caused damage to adjacent property.

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According to a written statement provided by the subcontractor's employee subsequent to the fire, he was performing this "hot work" alone, there was no one providing a fire watch for his work, and he did not have a fire extinguisher either with him or in the vicinity. The subcontractor's employee attempted to extinguish the fire with a jug of water, but this attempt was unsuccessful. A co-worker summoned by the subcontractor's employee after the fire started ran to another floor of the building to find a fire extinguisher, but the fire spread unchecked, destroying the dormitory building and causing damage to the adjacent property. Several protective warranties contained in the applicable builder's risk policy clearly were breached.

In contending that coverage was available under the policy, the Weitz Company challenged the legal validity of the protective warranties. It contended that the policy constituted property insurance as opposed to inland marine insurance, in which case the policy must be consistent with the standard fire policy (SFP). Arizona is one of about 29 states that are SFP jurisdictions. It contended that a protective warranty conditions coverage on compliance with terms and conditions not found in the SFP and, thus, is inconsistent with it, detracting from the coverage provided by the SFP.

Hence, they contended that Liberty could not rely on the breach of a protective warranty to defeat coverage otherwise provided by the builder's risk policy Liberty contended that the policy constituted inland marine insurance as opposed to property insurance, in which case the issue concerning whether the policy conflicts with the SFP becomes moot. In all SFP jurisdictions, an inland marine policy is statutorily exempted from complying with the terms of the SFP.

[ILLUSTRATION OMITTED]

Without engaging in any factual analysis concerning whether the policy was consistent with inland marine insurance as opposed to property insurance, the trial court summarily ruled that the policy is not an inland marine policy In a landmark decision filed on March 27, 2007, the Arizona Court of Appeals, Division One, overturned the trial court decision and ruled that the policy constitutes an inland marine policy.

A Landmark Decision

Like virtually all states, Arizona has adopted the nationwide inland marine definition. This definition includes four general classes of property, one of which is "Commercial property floater risks covering property pertaining to a business ... Builder's risks and/or installation risks covering interest of ... contractors, against loss or damage to machinery, equipment, building materials or supplies, being used with and during the course of installation, testing, building ... Such policies may cover at points or places where work is being performed, while in transit and during temporary storage or deposit, of property designated for and awaiting specific installation, building. …

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