...have an interest in the operation of the completed project, he does have an interest in the expected earnings from building the project for the owner. In this loss scenario, the construction contract required the contractor to affect all repairs and assume the cost for same, all of which would not necessarily be reimbursable under the builders risk policy.
In this example, there were many uninsured costs during the delay period, the most substantial being the contractor’s extended general conditions. So how could the contractor’s interests have been protected? One method, of course, would have been to include general conditions in the soft cost coverage; or the policy could have been written to include gross earnings coverage in addition to the rental value coverage. To the extent that the contractor incurred extra costs that were not insured under the policy, the profit margin that would have otherwise been earned was reduced. This reduction or margin erosion may have been compensable under a gross earnings coverage form had it been included in or in conjunction with the delay coverage.
In today’s world, there are many substantial mixed-use projects being developed that entail office space, residential, retail, or condo components. In many cases, the owner/developer will operate a business that is part of the development. Under these circumstances, the owner’s interest in the project is not limited to rental income but also includes earnings from the operation of the business. The contractor also has an interest in the earnings that they expect to generate. In view of this, gross earnings coverage should be contemplated along with rental value in the development of the builders risk policy to cover all exposures for all parties to the contract.
By properly quantifying the full scope of the losses that could be incurred as a result of a delay in the completion of the project due to a fire, collapse or some other peril, one might think that all of the bases are covered. There is yet another potential gap in coverage that is often overlooked mainly because of a misunderstanding in the application of soft cost coverage.
The coverage period for soft costs commences with the anticipated completion date subject to a waiting period that is typically 14 or 30 days. For example, a major loss occurs to a building at a time when it is approximately 50% complete and a year away from its anticipated completion date. A significant delay in the completion date is expected and there will be a substantial loss associated with soft costs incurred during the delay period. However, as in many cases, the owner and/or contractor begins to incur many expenses immediately after the loss. The typical expenses are for emergency services, clean up and protection of property.