Soft Cost or Delay in Opening: Insure for the Potential Exposure



...delay period, there are many costs that will continue to be incurred that would have otherwise ceased had the project been completed on schedule.

Examples of these costs are: interest on loans, real estate taxes, builders risk insurance, legal and accounting fees, contractors’ general conditions, developers’ fees, inspection fees, and consulting and marketing fees. The key to writing a comprehensive builders risk policy is to identify these potential costs and the extent to which they will continue during a potential delay. Additionally, there is the matter of lost income from operations and/or rental value. These exposures are typically part of delay in opening coverage and we will deal with such exposures separately in the latter portion of this article.

Understand Project Economics

So, how does one go about the task of writing comprehensive soft cost coverage so that it will not be the source of adjustment problems in the event of an insured loss? First, it is imperative to fully understand the economics of the project. Typically, the potential exposure could be assessed by reviewing development and operational budgets that were established for the project. Such budgets or pro forma statements will provide a snapshot of the type of costs expected to be incurred as well as the amount of such costs over a given period of time. Having identified the scope of such costs, an assessment must then be made as to which expenses would continue in the event of a delay and to what extent.

The type of expenses that are typically incorporated into the basic soft cost endorsement are: real estate taxes, interest, insurance premiums, legal, accounting, architect and engineering fees. However, will this basic scope of soft cost expense cover the full exposure of costs that will be incurred during a delay period? Usually not. As a matter of fact, we have seen many soft cost endorsements that are limited to taxes and interest, or one or two other items. This begs the question as to why soft cost endorsements, more often than not, fail to come even close to covering the full range of the exposure.

With soft cost coverage, what you see is what you get. In other words, the soft cost endorsement will apply only to those items that are specified in the body of the policy. Quite often you will see a provision added to a very short list of soft costs that reads: “and others as accepted by the company.” This is often mistakenly interpreted to give a blanket catch-all for all other types of delay expenses that are not listed or specified. This misunderstanding can create very contentious issues following a loss. Many policies contain fine print that states these “other costs” must be delineated in the policy or declarations and often there is no additional coverages delineated. In the absence of such language, the company adjuster may interpret this provision to mean that the insurer has the sole discretion as to whether or not there is coverage for a given cost.

The lesson is to be certain that the entire range of potential delay expenses should be specified in the soft cost endorsement. It is not advisable to leave the question of whether or not an expense is covered...

With soft cost coverage, what you see is what you get. The soft cost endorsement will apply only to those items that are specified in the body of the policy.