to the sole discretion of the insurance company. Having said this, what are examples of soft cost items that are frequently overlooked and that lead to significant gaps in the coverage?
Contractors’ extended general conditions or additional contractors’ costs and developers’ fees top the list. If a project is delayed for 10 months, as an example, the contractor will be on that project for an equivalent period of time or longer and will be incurring essentially the same general conditions for that period of time. The extended general conditions can only be covered if they are so itemized in the soft cost endorsement. The same situation applies to a developer. The developer continues to incur costs such as office overhead, salaries, travel and other related developmental “soft costs.” Again, these costs can be substantial and will be covered if and only if it is specified in the soft cost endorsement.
One might counter with the argument that these costs are part of the property damage and thus should be compensable in conjunction with the repairs to the sticks and bricks. There is an element of accuracy to this, however the amount compensable under the property damage coverage is limited to the amount of general conditions or developers’ costs that can be allocated to the repair of the physical damage and not to any costs which are a result of the delay in completing the project. Again, it is important not to lose sight of the distinction between the costs to perfect the repairs and the costs incurred as a result of the delay in completing the project. Failure to recognize this distinction is the leading cause of significant deficiencies in the builders risk program, not to mention problems in the adjustment process.
There may be other potential exposures based on the nature of the project that may have to be contemplated. This is why developing a comprehensive understanding of the project and identifying all potential exposures that could occur in the event the project is delayed is so critical to the development of the builders risk program.
There are other key issues that must be considered when developing a comprehensive soft cost coverage program. Let’s start with the duration of the project. Quite often, we will encounter soft cost policies that provide for a period of indemnity that is significantly shorter than the time frame for the completion of the project.
For example, a project may have a three-year construction period; however, the period of indemnity for purposes of the delay coverage is limited to 12 months. So what happens when a project that takes almost three years to complete is destroyed by fire a month before its anticipated completion date? Needless to say, there will be significant uninsured losses as the time needed for the adjustment of the loss and the time to rebuild this project will go well beyond the 12-month limit.