...indemnify the owner, contractor or subcontractors, and lender for losses as a result of a delay in the completion of the project.
However, despite the development and enhancements in the delay in start up coverage, it is surprising how frequently we encounter policies that are extremely deficient in terms of the coverage relative to the exposure of the project. Years of experience have indicated that the vast majority of the adjustment issues encountered in a builders risk loss arise from policies that are woefully deficient in terms of the scope of coverage. The million dollar question and sometimes the multi- million dollar question is, “Why?”
First, it is important to understand exactly what soft costs are within the context of a builders risk exposure. In the developer/contractor world, soft costs are those costs incurred to perfect a construction project other than labor and material (which are commonly referred to as hard costs). Examples of such soft costs are architect and engineering fees, permits and certain general conditions. In the context of builders risk insurance, soft costs are related to those costs arising from a delay in the completion of the project.
While the type of soft costs incurred in connection with the construction of the project may correspond to a certain extent to the types of costs that will be incurred as a result of a delay in the completion of the project, there is a significant distinction between the two for purposes of writing a comprehensive builders risk policy. This distinction is often misunderstood by risk managers, agents and brokers, and this translates into policies that do not adequately indemnify against the loss associated with the delay of the project. Again, the question is, “Why?” And the answer is that the risk manager or broker often perceives these soft costs to be covered under the property damage policy, or what is commonly referred to as “hard costs,” and thus fails to insure these costs against the risk of delay in the completion of the project.
To the extent that the contractor/ developer costs are incurred directly in connection with the restoration of the physical damage, such costs are properly covered under the property damage element of the coverage. However, in the event of a loss, the contractor/developer will in most cases be on the project for an additional period of time. That additional time period may affect the anticipated completion date, thus necessitating the need for soft cost coverage. If repairs take an additional 10 months, the anticipated completion date is typically set back by at least the equivalent period of time. During the...