Blueprints and Blind Spots

On construction projects, insureds often purchase project-specific general liability, builder’s risk, or professional liability policies, assuming that everything that happens during the job will be covered.

However, even small coverage gaps can lead to significant uncovered claims.

One common example is a cross-suits exclusion without proper carve-backs for lawsuits involving the owner or general contractor. While these exclusions typically apply to suits between named insureds, on controlled insurance program (CIP) placements all contractors are considered named insureds. If a worker is injured and files an action-over claim against the general contractor for faulty supervision, the claim may be denied without the appropriate carve-back. Additional challenges include strict reporting requirements in builder’s risk or professional liability policies, or a course of construction (COC) exclusion in the general liability policy.

The Liberty Surplus Insurance Corp. v. Kaufman Lynn Construction, Inc. federal lawsuit in Florida illustrates the risk of coverage misalignment, particularly in phased projects insured under a CIP. Kaufman Lynn Construction was building a large, multiphase corporate campus when Tropical Storm Eta in 2020 caused water damage to several completed and occupied buildings. Kaufman submitted a claim under its general liability CIP, but Liberty denied coverage under the course of construction exclusion, which barred coverage for property damage until the entire project was substantially complete. The court upheld the exclusion, finding that since parts of the project remained under construction, the policy did not apply, despite the damaged building being finished and in use.

This case highlights how CIPs must be carefully aligned with builder’s risk and permanent property policies to avoid unintended gaps, especially on phased construction projects.

Fortunately, not all policy forms are the same. Certain carriers have amended the standard course of construction exclusions to apply building-by-building. In this instance, the exclusion wording reads that once a particular building is complete, the COC exclusion no longer applies for that building, while remaining in effect for buildings under construction.

Other carriers have taken the standard amendments to the ISO J property damage exclusion seen on most CIP placements, changing the endorsement so that the exclusions do not apply during the products-completed operations coverage period. This is important because completed operations can be triggered at various stages, in contrast with requiring the entire project to be completed, as seen in the above-mentioned suit. In addition to the property damage amendment, it is important to ensure that any policy that redefines the completed operations trigger coincides with amendments made to property damage.

These seemingly minor changes can mean the difference between a covered loss and a costly denial. Let’s examine other ways thoughtful amendments can close coverage gaps.

Builder’s Risk: Structuring Appropriate Coverage

When structured correctly, a builder’s risk program is the first stop for risk transfer during construction. Should the builder’s risk policy not adequately account for phased turnover to permanent property coverage or include permission to occupy, identifiable coverage gaps can easily form.

A robust program should:

• List the property owner as the first named insured and extend automatic insured status to the general contractor and all subcontractors;
• Include waivers of subrogation across the board;
• Be written on an all-risk basis with named windstorm and flood coverage; and
• Align with the full project timeline.

For phased developments, underwriting must capture the whole picture. That doesn’t mean insuring one building at a time. Instead:

• Include all phases in the project description and maintain seamless coverage across the entire term;
• Build in a full permission-to-occupy clause so coverage continues after each certificate of occupancy; and
• Evaluate the “when coverage ends” language to avoid a drop-off in protection between handover and the start of property coverage.

Once it’s time to move to a property policy, timing is everything. The new policy, also written on an all-risk basis, should activate after final handover and include:

• Adequate sublimits and deductibles for water and wind damage;
• Coverage for building envelope failures; and
• A plan to onboard each building after the certificate of occupancy.

Professional Liability: Rectification

Rectification is an often-misunderstood feature of liability coverage that allows contractors to fix issues before they escalate into third-party claims. But it’s only helpful if it’s understood and reported correctly to the carrier.

For this discussion, these reporting requirements are broken into three categories:

• Prior to incurring any rectification expense: This category is the most restrictive of the three provisions and requires an insured to receive approval from the carrier prior to incurring any expenses for rectification. There is often a coverage provision for emergency expenses for professional or pollution claims, but it is limited to a number of days and the term “emergency” is often undefined.
• Prior to incurring any rectification expense, not reasonably withheld: While slightly broader, this provision still mandates the client report a circumstance prior to incurring expenses but provides leeway if a carrier fails to respond to the client’s request in a timely manner. 
• Incurred without prior notice to us: This is the broadest provision and allows the contractor to report after the fact, like a standard professional claim, during the policy period and within a reasonable amount of time. This provision is not available from most carriers and often comes with stricter underwriting guidelines or higher premiums than for coverage that relies on one of the previous two reporting requirements.

Broker teams often assume “fix it and tell them later” is safe. However, it’s important for clients to understand their policy and have a clear plan for when and how to report potential issues.

Other Ways to Minimize Coverage Gaps

There are various ways to minimize coverage gaps in placements. First, coordinate across lines to ensure that your general liability, property, and professional liability policies work in conjunction with each other. Collaboration is key. Next, understand that not all projects are created equal, and negotiate for coverage terms that fit the specific needs of your project, similar to the phased project example previously mentioned. Lastly, call in counsel early. Coverage attorneys can flag problem areas before placement, not after loss.

The real risk isn’t always what’s in the blueprints; it’s what’s in the fine print. Aligning forms, strengthening language, and coordinating across policies build a stronger insurance structure as solid as the project it protects.