General conditions and general requirements are terms of art in the construction industry that describe the indirect costs necessary to complete a construction project. After physical loss or damage to a project, the following question often arises: Are “general conditions” and “general requirements” covered under a builder’s risk policy?
General Conditions vs. General Requirements
General conditions are usually described as the cost of managing a construction project. Examples include salaries for personnel like project managers, supervisors, engineers, field office staff, as well as the cost of field trailers, office equipment and supplies, and anything necessary to support the staff.
General requirements are the non-management indirect costs of executing the project, including items such as pre-development costs, permits, security, dumpsters, fences, temporary lighting, worker amenities, and clean-up costs.
These costs may be distinguishable from the costs of labor and material that directly goes into the completion of a construction project, but they are still necessary costs required to complete the work. These hard costs are often referred to as “brick and mortar” costs because they include tangible elements that are physically part of the project and other essentials. While coverage for hard costs are clearly included by a builder’s risk policy, sometimes it may be less than clear whether the general conditions are covered, and if they are covered, whether they qualify as a “hard cost” or a “soft cost.”
Builder’s Risk and Hard Costs
Builder’s risk policies are designed to cover damage to the project itself, including materials, supplies, fixtures, machinery, and equipment being used in connection with the project. For example, builder’s risk covers all physical loss or damage resulting from events such as fire, vandalism, hurricanes, and other perils. Property typically covered under builder’s risk policies includes buildings, structures, materials that will form a permanent part of a structure, materials in transit, materials in storage, foundations, excavations, permanent fencing, and permanent fixtures.
Depending upon the language in the particular insurance policy at issue, other hard cost expenses may also qualify for coverage. The problem is that many builder’s risk policies do not define covered hard costs or soft costs in a clear and unambiguous way. They often do not define or identify “general conditions” The specific language of a policy can determine what costs are considered covered losses, and the cases involving these issues are very fact specific.
The distinction can be important even if general conditions are clearly covered because different sub-limits and deductibles can apply to coverage for different categories such as repair costs, expediting expense, contractors extra expense, and delay in completion.
Two Different Outcomes from Two Cases
In Zurich Am. Insurance Co. v. Keating Bldg. Corp.,1 the contractor sought coverage under an all-risk builder's risk policy for increased cost of completing the project after a collapse. Zurich refused to pay for (1) "Extended General Conditions" (e.g., administrative costs, trailers, supplies and other costs that are not captured as direct charges, (2) “Contractor's Delay” charges (e.g., costs and expenses such as idle labor and equipment, that was incurred before construction could begin); and (3) "Storage, Price Increased, Etc." (e.g., increases in labor wages and building material costs, as well as storage costs that would not have been needed but for the collapse). Zurich argued that these “additional costs” were not covered by the policy, and even if they were covered, were excluded by the provision addressing “consequential losses, damages and expenses.”
The Court ultimately found all three categories of additional costs were covered by the all-risk builder’s risk policy, which covered “all fortuitous losses that an insured peril proximately causes unless an exclusion applies.” In construing the policy language, the court held that the term “property lost or damaged” referred to the entire structure, not simply the location of the collapse. As a result, the grant of coverage was not limited to repairing the collapsed portion, but also included the increased costs to construct the remainder. The court noted that other Zurich policies refer to losses required to “rebuild, repair, or replace such part of the property . . . as has been damaged or destroyed” but the policy in question did not contain similar limiting language.
By way of contrast, in the 2008 case of Oceanside Pier View, L.P. v. Travelers Prop. Cas. Co. of Am.,2 the United States District Court for the Southern District of California held that increased costs of construction were not included in the grant of coverage. The court based its decision on the language of the policy which said the insurer “will pay for ‘loss’ to Covered Property from any of the Covered Causes of Loss.” The policy defined “Covered Property” as “Builders Risk,” and defined “Builders Risk” as:
Property described in the Declarations under “Builder’s 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.
The Oceanside court held the “Builders Risk” provisions plainly 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 increased costs of construction materials and labor to construct never-before constructed portions of the project.
In reaching its conclusion, the court also relied on the policy’s description of how to value covered property. The policy stated: “Covered property is valued as the least of (a) the cost to replace the covered property with other property, (b) the cost of reasonably restoring the property to its condition immediately before loss, or (c) the cost to replace the covered property with substantially identical property.” The court pointed out that this description did not contemplate coverage for increased costs of constructing buildings or portions of buildings which were not yet constructed at the time of delay.
The Bottom Line
The conflicting results in the Keating and Oceanside decisions can be explained by the differing language in the policies. While Keating’s grant of coverage did not contain limiting language on the types of risks covered by the policy, Oceanside’s did. The Oceanside policy only covered loss to buildings or structures while being constructed.
In contrast, the Keating policy covered “risks of direct physical loss . . . from perils not otherwise excluded.” Increased costs of construction for structures not yet completed at the time of the loss, though not a “loss to” “Buildings or structures while being constructed,” are a “risk of direct physical loss from a peril not otherwise excluded.” The language of the respective policies likely drives the opposite conclusions.
Policyholders should carefully review their policies when submitting a claim. They should be sure to consider whether general conditions are covered, and under what section of the policy they are covered.
1513 F. Supp. 2d 55 (D.N.J. 2007)
22008 WL 7822214 (S.D. Cal. 2008)