The insured will also incur architectural and engineering expenses to evaluate the damage, make recommendations for stabilizing the project and prepare plans for the rebuild. There should not be a coverage problem in connection with these expenses as they relate to the restoration and repair of the physical damage. Therefore, the coverage for the property damage also known as “hard costs” should respond and indemnify the insured for such costs.
However, there may be other costs that are incurred immediately after the loss, such as marketing, public relations, legal and accounting services that are required, but not necessarily related to the costs of the restoration of the damaged property. Insomuch that these types of expenses do not relate to the replacement or repair of the damaged property, they do not fall within the purview of the property damage coverage or hard costs.
Moreover, as the delay period does not commence until the anticipated completion date, these expenses may not be indemnified as a soft cost either, since technically they are not a function of delay and were not incurred in the delay period. Hence, a potentially significant gap in coverage exists.
A similar situation exists where a project is being completed in phases and permission to occupy is granted under the policy. Take, for example, a situation where tenants take possession of a completed phase of a project while the balance of the project is still under construction and a loss occurs causing the occupied space to be untenable. How would the ensuing income or extra expense losses be covered? Or would they under a builders risk policy?
Probably not, although, the placement of a property policy carrying business income and extra expense coverage would fill the gap, as such coverage would commence at the date and time that the loss occurred. All resulting income losses and expenses covered by the policy would be compensable, thus making the insured whole.
It is important to keep in mind that where business income is written into the builders risk policy, as an element of the delay in opening endorsement, it too will be subject to the terms of the delay in opening endorsement. Thus, as indicated, coverage for the income loss will not commence by definition until the anticipated completion date; subject to the applicable time deductible. Hence, the need for a permanent property policy with time element coverage to fill the potential coverage gap resulting from a situation where an income exposure may exist before the entire project is completed.
In the absence of a property policy, the aforementioned gap can be minimized by utilizing the expense to reduce the loss coverage which most builders risk policies contain. This provision will provide coverage for extra expenses that are incurred post-loss; however, the amount payable for these expenses will be limited by the amount to which such expenses actually reduce the soft cost and/or income loss that would otherwise have been incurred as a result of a delay in the completion of the project. This is obviously more restrictive than “pure” extra expense coverage, however, such coverage will apply to expenses incurred immediately following the occurrence and may reduce otherwise uninsured losses in part if not in whole. It is necessary under this type of scenario to calculate a pro forma loss exposure to establish the recovery limit for such expenses.