Without Reservations: Fourth Circuit Affirms That Vague Reservation of Rights Waived Insurers’ Coverage Arguments

Lara Degenhart Cassidy and Matthew J. Revis | Hunton Andrews Kurth

The Fourth Circuit recently affirmed insurance coverage for a South Carolina policyholder based on the “axiomatic principle” that an insurer which fails to fully and fairly articulate its potential coverage defenses in a reservation of rights letter loses the right to contest coverage on those grounds. Stoneledge at Lake Keowee Owner’s Assoc. v. Cincinnati Ins. Co., No. 19-2009, 2022 WL 17592121 (4th Cir. 2022) (quoting Harleysville Group Insurance v. Heritage Communities, Inc., 803 S.E.2d 288 (S.C. 2017)). More particularly, in Stoneledge, the Fourth Circuit affirmed per curiam a South Carolina District Court’s grant of summary judgment in favor of a homeowners association that had successfully sued its general contractors for construction defects and was seeking to recover the damages owed from the contractors’ insurers. The Fourth Circuit agreed that the insurers’ vague reservation of rights letters failed to reserve the defenses on which the insurers purported to deny coverage.

The question before the court in Stoneledge was whether the two insurers that had each agreed to defend their respective general-contractor insureds in the homeowner association’s underlying litigation had sufficiently informed their policyholders of their coverage positions. Specifically, the court considered whether the insurers provided notice of their intention to challenge coverage on specific bases and explained why those bases applied in their respective reservation of rights letters. Both of the insurers’ letters followed the typical approach of identifying various policy provisions and exclusions and outlining the general mechanics of those provisions, but they fell short of applying the provisions or exclusions to the facts in the case at hand. Further, the letters stated that the insurers would reevaluate how the provisions applied as the underlying case progressed. One of the insurer’s letters expressed doubt as to coverage but did not offer any analysis on the reasons for the prospective coverage denial.

The Fourth Circuit concluded that the insurers in Stoneledge had not sufficiently reserved their rights to deny coverage because their reservations of rights letters were simply copy-and-paste documents employing wait-and-see tactics. Adopting the “axiomatic principle” of insurance law from Harleysville, 803 S.E.2d 288, that “an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage,” the court agreed that “generic denials of coverage coupled with furnishing the insured with a copy of all or most of the policy provisions (through a cut-and-paste method) [are] not sufficient.” Id. at 297. The court also confirmed that an insurer saying “we will let you know later” does not constitute a valid reservation of rights. Id. at 299. Simply put, the Stoneledge court reaffirmed that the onus is on the insurers to show their work when writing their reservation of rights letters.

The Fourth Circuit also rejected the insurers’ contention that the court was creating coverage where none existed by finding that the insurers had waived defenses unarticulated in their respective reservation of rights letters. Looking to settled South Carolina law, the court concluded that an inadequate reservation of rights letter operated as an implied waiver of defenses and prevented a later coverage denial, even if the insurer disputed whether a covered event ever occurred. Ex parte Builders Mutual Insurance Company, 847 S.E.2d 87, 94 (S.C. 2020).

The Fourth Circuit opinion highlights that policyholders should evaluate reservations of rights from their insurers as comprehensive statements of the grounds on which the insurers intend to challenge coverage, and that the following shortcomings in reservation of rights letters may limit the insurer’s ability to pursue unarticulated or ill-defined coverage defenses down the road:

  • mere identification of policy information and policy terms without substantive analysis;
  • no discussion of the insurer’s position as to the relevant policy provisions mentioned;
  • no explanation of reasons for potentially denying coverage; and
  • failure to reserve rights on specific issues.

In sum, policyholders should be mindful to scrutinize reservation of rights letters and consult coverage counsel if faced with insurers employing claims-handling strategies that leave open questions about the scope of the insurer’s reservation of rights.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Whose Burden is It Anyway: All Risk vs. Covered Peril Policies

William S. Bennett | SDV Insights

First-party insurance coverage is typically structured on the basis of one of two types of insuring agreements: “All Risks” and “Covered Peril.” While the difference may seem innocuous, the ramifications of having one versus the other can be monumentally important in a disputed claim scenario. For the reasons discussed in this article, we recommend that, in almost every situation, the insured should aim to secure an “all risks” policy form.

What is the difference?

In an “all risks” policy form, the insuring agreement of the policy’s main coverage will typically state something to the effect of, “this policy insures all risks of direct physical loss or damage, except as excluded herein.” In other words, the insurance company is assuming “all risks” of physical loss and is not outright limiting the coverage to specific causes of loss.

In a “covered peril” policy form (sometimes called a “covered causes of loss” form), the insuring agreement will typically state, in effect, that it covers those covered perils identified in the form. In this situation, the policy’s coverage is conditional on the cause of loss falling within those defined perils. Note that, although not especially common, some policy forms will say that they cover those covered perils identified in the form but then defined “covered perils” or “covered causes of loss” as “all risks of direct physical loss or damage except as otherwise excluded.” This effectively converts the policy form back to an “all risks” policy form.

Why does the distinction matter?

The answer is a product of common law approaches by courts to policy interpretation and application in insurance coverage disputes. In nearly every jurisdiction in the country, burdens of proof in insurance disputes are clearly defined. Generally, the insured has the first burden in the dispute and must establish that the loss giving rise to the insurance claim triggers the policy’s insuring agreement. In a first-party insurance dispute, this means the insured will usually have the initial burden to establish that the loss was caused by either “all risks of direct physical loss or damage” or a “covered peril.” Which of these insuring agreements is in the policy greatly affects the standing of the insured in that coverage dispute.

If the policy has “all risks” language, the insured must merely show that the loss is a direct physical loss. If, on the other hand, the policy has “covered peril” language, the insured must now show that the loss is, in fact, caused by a specific peril – i.e., a named storm, wind-driven rain, or flood. In a situation where the facts of the loss involve multiple contributing causes or other issues of causation, especially, the insured can face a significant amount of legwork in that case to meet its initial burden of proof, creating an unnecessary disadvantage. Further, where the loss comes from an unusual cause, the insured almost certainly will not be able to trigger the insuring agreement, because the list of covered perils probably will not account for it.

Equally as important as the shifted burden to the insured with the “covered perils” language is the shifted burden away from the insurer. In insurance law, once the insured has established that the policy’s insuring agreement is triggered, the burden shifts to the insurer to demonstrate that an exclusion applies to prevent coverage. In an “all risks” situation, it may very well be that the policy is written to account for covering most of the same perils. However, by writing the limitations into the policy as an exclusion, rather than as an unlisted peril, the burden to demonstrate that the claim is not covered has been shifted to the insurer. Where the claim involves complicated causation issues, this distinction can be the difference between the insured securing coverage and the insurer avoiding it, especially taking into consideration other common law factors like the efficient proximate cause doctrine and rules regarding concurrent causation issues.

Since “all risks” policies are more comprehensive than named peril policies, include broader coverage, and are generally more favorable to the insured in a disputed claim scenario, they are also often more expensive in the market. Based on these considerations, insureds should carefully consider the type of policy they are considering purchasing. If it is a covered peril policy, any loss which is not caused by a peril expressly named in the policy would be excluded. However, if the insurance coverage is under an “all risks” policy, an insurer would need to demonstrate that the peril which led to the damage was specifically excluded under a policy limitation or exclusion.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Understanding Liability Insurer’s Two Duties: To Defend And To Indemnify

David Adelstein | Florida Construction Legal Updates

A liability insurer has two duties that are the crux of a liability policy: the duty to defend the insured in legal actions and the duty to indemnify the insured from losses covered under the policy.  Many times, policyholders (insureds) do not fully understand or appreciate these two important duties. They need to and this is why having private counsel assist with coverage-related considerations is an absolute must.

An insurers’ duty to defend is separate from its duty to indemnify.  A recent opinion out of the Middle District of Florida in Progressive Express Ins. Co. v. Tate Transport Corp., 2022 WL 16963815 (M.D.Fla. 2022) clarifies the distinction between these duties with a focus on an insurer’s initial duty — the duty to defend.  Please read below so you can have more of an appreciation of these duties.  The court does a good job discussing Florida law with the emphasis on when an insurer’s initial duty to defend kicks-in:

Duty to Defend

Under Florida law, “an insurer’s duty to defend its insured against a legal action arises when the complaint alleges facts that fairly and potentially bring the suit within policy coverage.”  The duty to defend is a broad one, broader than the duty to indemnify, and “[t]he merits of the underlying suit are irrelevant.”  We determine whether an insurer has a duty to defend its insured based only on “the eight corners of the complaint and the policy,” and only as the complaint’s alleged facts are “fairly read[.]” The “facts” we consider in evaluating the duty to defend come solely from the complaint, regardless of the actual facts of the case and regardless of any later developed and contradictory factual record.  “Any doubts regarding the duty to defend must be resolved in favor of the insured,” and “where a complaint alleges facts that are partially within and partially outside the coverage of an insured’s policy, the insurer  is not only obligated to defend, but must defend that entire suit[.]” But of course, because the lawsuit must be for something covered by the insurance policy, “the insurer has no duty to defend” when “the pleadings show the applicability of a policy exclusion.”

An insurance policy can, without creating a conflict or ambiguity, both provide coverage and exclude some things that might otherwise fall within that coverage.  On the other hand, an insurance policy’s coverage becomes illusory if it grants coverage in one provision and completely takes it away in another provision. 

Because [insurer] relies on an exclusion to deny coverage, “it has the burden of demonstrating that the allegations of the complaint are cast solely and entirely within the policy exclusion and are subject to no other reasonable interpretation.” 

***

An insurer’s duty to defend an insured in a legal action under Florida law “arises when the complaint alleges facts that fairly and potentially bring the suit within policy coverage.”  Even if the allegations in the complaint are meritless, the duty to defend nonetheless arises. All doubts about whether the duty to defend applies are resolved in favor of the insured.  “If an examination of the allegations of the complaint leaves any doubt regarding the insurer’s duty to defend, the issue is resolved in favor of the insured.” 

Progressive Express Insurance, supra, at *3-5 (internal citations omitted).

Duty to Indemnify

“While the duty to defend is broad and based on the allegations in the complaint, the duty to indemnify is determined by the facts adduced at trial or during discovery.” 

Therefore, unlike the duty to defend, the trial court must look beyond the allegations in the underlying complaint to decide whether an insurer has a duty to indemnify. The duty to indemnify arguably may not become fully ripened until the merits of the underlying litigation are resolved.

Progressive Express Insurance, supra, at *6 (internal citations omitted)


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Florida Begins New Era with Major Property Insurance Reforms

John David Dickenson and Chad A. Pasternack | Property Insurance Law Observer

For the fourth time since 2019, the Florida Legislature has enacted property insurance reforms aimed towards stabilizing a beleaguered insurance market. The bill, S.B. 2-A, creates a reinsurance assistance program, establishes additional oversight for insurers with high volumes of hurricane claims, and reforms many aspects of the claims process, including the timing for paying and adjusting claims. The reforms further eliminate one-way attorney fee awards to policyholders and ban assignment-of-benefits agreements.  In this article, we will focus on the changes to the claim adjustment process and coverage and bad faith litigation.

In the first round of property insurance reforms in 2019, the Legislature established a pre-suit notice process and two-way attorney’s fee shifting in assignment of benefits (AOB) litigation against admitted carriers. In the second round of property insurance reforms, the Legislature established a procedure requiring pre-suit notice for policyholders. The second round of reforms also set stricter time limitations for giving notice of claims. In the third round of property insurance reforms, the Florida Legislature took a more direct shot at the problem and eliminated statutory attorney fee shifting in suits brought by assignees, created a statutory presumption against attorney’s fee multipliers, and established a requirement that claimants prove a breach of contract in order to prevail on a claim for statutory bad faith against a property insurer.  The new fourth round of reforms is discussed in detail below.

No Statutory Attorney’s Fee Shifting in Property Insurance Litigation

The prior reforms attempted to curb frivolous and excessive litigation by establishing a pre-suit notice process and a sliding scale for attorney’s fee awards based on success in the lawsuit. But even with a diminished prospect for an award of attorney’s fees, policyholders still had the leverage of asymmetric litigation. Giving a litigation advantage to one party encourages more litigation.

The Florida Legislature has now eliminated the statutory attorney’s fee shifting in residential and commercial property lawsuits for both admitted and surplus lines carriers, adding the following language to both Sections 627.428 and 626.9373: “In a suit arising under a residential or commercial property insurance policy, there is no right to attorney fees under this section.” The fee-shifting statutes remain in effect for other types of insurance, and there is still potential that policyholders recover attorney’s fees through sanctions motions or proposals for settlement.

Adjustment of Claims

The new reforms reduce the time for insurers to issue undisputed payments. Section 626.9541, unfair methods of competition and unfair or deceptive acts or practices, has been amended to reduce the time for which undisputed payments should be made. Undisputed payments must now be paid within 60 days, down from 90 days, unless payment of the undisputed benefits is prevented by factors beyond the control of the insurer as defined in Section 627.70131(5).

The Florida Legislature also made further amendments to Section 627.70131, which will take effect on March 1, 2023. Changes include:

  • Reducing the time from 14 calendar days to 7 calendar days for insurers to review and acknowledge receipt of communications, unless payment is made within that time or unless the failure to acknowledge is caused by factors beyond the control of the insurer.
  • Reducing the time from 14 days to 7 days after the insurer received proof-of-loss statements for the insurer to begin such investigation as is reasonably necessary, unless otherwise provided by the policy or by law, or unless the failure to begin such investigation is caused by factors beyond the control of the insurer.
  • Reducing the time from 45 days to 30 days after receiving proof-of-loss statements for the insurer to conduct a physical inspection of the property.
  • Permitting insurers to use electronic methods to investigate losses. Such electronic methods may include any method that provides the insurer with clear, color pictures or video documenting the loss, including, but not limited to, electronic photographs or video recordings of the loss, video conferencing between the adjuster and the policyholder which includes video recording of the loss, and video recordings or photographs of the loss using a drone, driverless vehicle, or other machine that can move independently or through remote control. The insurer also may allow the policyholder to use such methods to assist in the investigation of the loss. An insurer may void the insurance policy if the policyholder or any other person at the direction of the policyholder, with intent to injure, defraud, or deceive any insurer, commits insurance fraud by providing false, incomplete, or misleading information concerning any fact or thing material to a claim using electronic methods. The use of electronic methods to investigate the loss does not prohibit an insurer from assigning a licensed adjuster to physically inspect the property.
  • Requiring the insurer to send the policyholder a copy of any detailed estimate of loss within 7 days after the estimate is written by the insurer’s adjuster, removing the requirement that the policyholder first request a copy of the estimate.

Section 627.70131(4) has been amended to require insurers to maintain certain records, including dates of:

  • Any claim-related communication made between the insurer and the policyholder or the policyholder’s representative;
  • The insurer’s receipt of the policyholder’s proof of loss statement;
  • Any claim-related request for information made by the insurer to the policyholder or the policyholder’s representative;
  • Any claim-related inspections of the property made by the insurer, including physical inspections and inspections made by electronic means;
  • Any detailed estimate of the amount of the loss generated by the insurer’s adjuster;
  • The beginning and end of any tolling period provided for in subsection (8) of Section 627.70131; and
  • The insurer’s payment or denial of the claim.

“Factors beyond the control of the insurer” means:

  • The Office of Insurance Regulation issued an order finding that all or certain residential property insurers are reasonably unable to meet the time requirements of the statute in specified locations and ordering that such insurer or insurers may have additional time as specified by the Office.
  • Actions by the policyholder or the policyholder’s representative which constitute fraud, lack of cooperation, or intentional misrepresentation regarding the claim for which benefits are owed when such actions reasonably prevent the insurer from complying with any requirement of this section.

This definition of “factors beyond the control of the insurer” is important because it is also used in the section requiring timely payment of claims. The reformed statute now requires coverage determinations within 60 days:

 (7)(a) Within 60 days after an insurer receives notice of an initial, reopened, or supplemental property insurance claim from a policyholder, the insurer shall pay or deny such claim or a portion of the claim unless the failure to pay is caused by factors beyond the control of the insurer…. Any payment of an initial or supplemental claim or portion of such claim made 60 days after the insurer receives notice of the claim, or made after the expiration of any additional timeframe provided to pay or deny a claim or a portion of a claim made pursuant to an order of the office finding factors beyond the control of the insurer, whichever is later, bears interest ….

Accordingly, the exception to the interest payment requirement has been limited to instances where the Office of Insurance Regulation determined that there are factors beyond the control of the insurer. An insurer can no longer make that determination. However, the time requirements of Section 627.70131 are tolled if a policyholder or a policyholder’s representative fail to provide material claims information requested by the insurer within 10 days after the request, if the request is made at least 15 days before the insurer is required to pay or deny the claim.

The time requirements are also tolled during any statutory mediation proceeding of any alternative dispute resolution proceeding provided for under the policy.

Deadlines for Notice of Claims

The Florida Legislature has again amended Section 627.70132, which is applicable to both admitted insurers and surplus lines insurers and applies to claims arising from any peril. The amended statute reduces the time to report a claim or reopened claim from 2 years after the date of loss to 1 year. The time to report a supplemental claim is reduced from 3 years after the date of loss to 18 months.

Pre-Suit Notice Process

The parts of Section 627.70152 pertaining to attorney’s fees have been removed. The pre-suit notice and resolution process have otherwise been left intact.

Assignments of Benefits

At the end of 2022, assignments of benefits to service providers will be prohibited:

Except as provided in subsection (11), a policyholder may not assign, in whole or in part, any post-loss insurance benefit under any residential property insurance policy or under any commercial property insurance policy as that term is defined in s. 627.0625(1), issued on or after January 1, 2023. An attempt to assign post-loss property insurance benefits under such a policy is void, invalid, and unenforceable.

This prohibition will apply to admitted carriers only.

Breach of Contract Necessary for Bad Faith

Florida Statutes Section 624.155 permits claimants to file bad faith claims under first-party property insurance policies. Before a claimant can file a bad faith suit, the existence of coverage and the extent of damages, the amount of loss, must be determined. Over the past decade, numerous Florida courts have held that an appraisal award is a sufficient determination of coverage and amount of loss to permit a bad faith suit. Therefore, even if an insurer properly issued payment under the terms of the policy, and had not been found to have breached any part of the policy, it could still face a bad faith suit if an appraisal award resulted in any additional payment to the insured. Consequently, appraisals have become a popular tool for bad faith setups.

The Florida Legislature attempted to fix this issue in its third round of reforms, but the language in the new Section 624.1551 was too vague as to what it means to establish a breach of contract. The Legislature has now replaced Section 624.1551 with more precise conditions for asserting a bad faith claim against a property insurer:

624.1551 Civil remedy actions against property insurers.—

Notwithstanding any provision of s. 624.155 to the contrary, in any claim for extracontractual damages under s. 624.155(1)(b), no action shall lie until a named or omnibus insured or a named beneficiary has established through an adverse adjudication by a court of law that the property insurer breached the insurance contract and a final judgment or decree has been rendered against the insurer. Acceptance of an offer of judgment under s. 768.79 or the payment of an appraisal award does not constitute an adverse adjudication under this section. The difference between an insurer’s appraiser’s final estimate and the appraisal award may be evidence of bad faith under s. 624.155(1)(b), but is not deemed an adverse adjudication under this section and does not, on its own, give rise to a cause of action.

With this amendment, the Legislature has ended the “appraisal to bad faith” setup, and made clear a simple, reasonable proposition—an insurer that has abided by the terms of the insurance policy should not have to defend a bad faith suit.

Offers of Judgment

The Florida Legislature amended Section 768.79, the offer of judgment statute, to permit the making of joint offers that are conditioned on mutual acceptance. This amendment eliminates the “spousal loophole,” which allows spousal co-plaintiffs, and other closely related policyholders, to avoid offers of judgment conditioned on their joint acceptance.

Submission of Claims to Appraisal as a General Business Practice

The bill amends Section 624.418, which provides grounds for the suspension or revocation of an insurer’s certification of authority, to include instances where an insurer, as part of a general business practice, without cause, compels insureds to participate in appraisal in order to secure full payment of their claims. Appraisal is a mechanism for resolving genuine disputes over the amount of loss for a given claim, and the decision to invoke appraisal should be made based upon the facts and circumstances of a particular claim. This amendment to Section 624.418 should alleviate concerns about appraisal being used as a means for avoiding bad faith liability as a result of the breach of contract requirement added to Section 624.1551.

Flood Insurance is Encouraged

The Legislature amended the warning language required in homeowner’s insurance policies that do not provide flood coverage. Instead of advising homeowners that they “may also need to consider” flood coverage, the new disclaimer will advise policyholders that they “should consider” flood coverage.

Mandatory Binding Arbitration Endorsements Authorized

The new law creates Section 627.70154, which codifies that insurers can issue optional mandatory binding arbitration endorsements. The policyholder must sign a form electing binding arbitration, and the premium for the policy must include an actuarially sound discount for the mandatory binding arbitration endorsement. But, insurers must also offer the policyholder a policy that does not require participation in mandatory binding arbitration.

Effective Dates

These statutory reforms became effective upon being signed into law by Governor DeSantis on December 16, 2022, which means the changes apply to policies issued after that time. The amendments to Section 627.70131 take effect on March 1, 2023. Because the old laws will apply to policies that have already been issued, we anticipate a high volume of litigation on older claims, and of claims for damage from Hurricane Ian and Hurricane Nicole. Following the third round of reforms, we saw an uptick of litigation from assignees hoping to litigate under the older, more favorable laws.

Assignments of benefits will be prohibited on January 1, 2023, but this prohibition will likely only apply to admitted carriers. 

Closing Thoughts

These reforms represent the most significant changes to Florida’s current Insurance Code since its inception in 1982. In particular, the elimination of attorney’s fee awards has been on the radar of the Office of Insurance Regulation for a number of years now. These insurance reforms benefit both policyholders and insurers. Policyholders will receive quicker claim decisions and payments, and insurers should eventually see fewer abusive lawsuits. The Florida Legislature is encouraging prompt and open adjustment of claims, while discouraging attorneys and contractors from abusing the insurance claim process. We believe these reforms will have a positive impact on the insurance market in Florida, but it will take at least a few years before we see the true impact of this legislation on the volume of property insurance litigation.  


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

What To Expect In Builder’s Risk Insurance Claims In 2023

Jane Warring | Zelle

With interest rates on the rise, sticky inflation, few signs of a cooling labor market, and continued instability in Russia, China and beyond affecting energy prices and exports, the builder’s risk insurance industry is in store for more complex claims in 2023.

Builder’s risk insurance may be purchased by owners and contractors to insure against physical loss or damage to a project during construction. This type of insurance can include coverage for hard costs, soft costs and time element loss — lost income or rent due to physical loss or damage.

Hard costs, or repair costs, may be relatively easy to calculate depending on the scope of damage. Soft costs, on the other hand, can be more complicated and often include a variety of expenses associated with project delay, such as additional taxes; architect, engineer or consultant fees; permitting costs; insurance premiums; and interest on construction loans.

The policy language drives whether and to what extent soft costs will be insured. Project administrative costs, extended general conditions or management fees paid to a related entity may or may not be insured. Soft costs, as well as lost income or lost rent calculations, require the parties to determine the appropriate delay period, which in turn can require expert analysis.

So what can we expect in 2023 given the current economic and trade environment?

First, loan costs will comprise an even larger portion of builder’s risk claims.

Construction delays frequently cause increased interest expense, but with rising interest rates, such costs are growing. We expect to see claims for further downstream impacts such as claims for higher interest rates on variable rate loans or higher rates on permanent financing. A four-month delay between July and November 2022 is the difference of over 2 percentage points at prime.

The new landscape may also complicate refinancing arrangements that further slow completion of construction or drive indirect effects on project capitalization.

This was the situation in Indianapolis Airport Authority v. Travelers Property Casualty Co. of America, where the court held that bond interest paid from a capitalized account instead of revenue constituted a “soft cost” because the unanticipated draw-down left the insured with less money to spend on other endeavors.[1] This was despite the fact that the total interest paid did not exceed the budget. Creative financial solutions to deal with rising rates may lead to creative arguments from policyholders.

Second, labor and materials volatility will continue complicating project scheduling in 2023.

All builder’s risk claims involve a large degree of forecasting. Indeed, most of the time, the repair period is not coextensive with the delay period. The repair period can be shorter than the delay period, such as when a subcontractor leaves a job during repairs to take other work and is not available when the repairs are complete. The repair period can be longer than the delay period, such as when the contractor is able to resequence the work to avoid some or all of the loss-related delay.

In calculating the appropriate delay period, the parties must examine whether the existing construction schedule was reasonable. Project schedules have required frequent adjustment recently due to supply chain issues and labor shortages. When thousands or millions of dollars of insurance delay damages are on the line, any subjectivity in forecasting the “but for” date of completion can lead to disputes.

Third, a variety of externalities will increase the risk to both insurers and insureds.

An externality is an event or condition that affects the project schedule or conditions of the project itself unrelated to the loss event. Determining whether the policyholder or the insurer bears the risk of an externality is a key issue in builder’s risk claims. Unforeseen costs beyond the insured’s control and directed at effectuating repairs are typically insured risks. However, additional costs to complete work on undamaged portions of the project are born by the insured.

Rising interest rates’ effect on pricing is sure to challenge project budgets prepared before the interest rate hikes started. Moreover, the threat of a looming recession, if it were to materialize, may degrade demand characteristics for a project. Heightened consideration of externalities is likely to persist in builder’s risk claims through 2023.

Fourth, in a period of volatility both from a construction scheduling perspective and loss exposure perspective, it may be more difficult for the parties to judge whether expediting costs will ultimately result in a reduction in the delay damages. Spending $1 million to expedite repairs to one portion of the project may have no effect on the final completion date if other portions of the project are delayed due to material shortages.

Policy language may affect this analysis. Pure extra expense provisions or expense to reduce loss provisions may limit insurance recovery to the amount by which income loss was actually reduced. Other provisions may reimburse for expediting costs or other extra expenses if they were directed at reducing the loss.

Finally, we may see more frequent or more contentious litigation over builder’s risk claims in the coming year. Indeed, gaps in coverage and the application of exclusions can lead to coverage disputes, particularly in challenging financial times.

Building industry reports indicate that the U.S. has a housing deficit at the same time major builders are scaling back new home construction in the face of falling prices due to higher interest rates. A long-term recession could cause the construction industry to shift to less expensive multifamily builds. Some suggest vacant office space is also ripe for residential conversion. More construction, longer construction periods and complicated conversions likely spell more builder’s risk claims.

Meanwhile, sources estimate the need for millions of new workers to meet construction demands in the coming years.[2] The industry is offering higher wages to fill positions.[3] This may mean the entry of newcomers and an increase in errors. While most builder’s risk policies exclude the cost of correcting faulty workmanship, many have exceptions for ensuing loss — when the excluded peril causes a separate ensuing loss that results in damage to other property.

Moreover, exclusions for loss caused by cessation of work or interruption of operations may become applicable as work is paused due to financial issue or increased lead times. The industry saw this during COVID-19 when job sites were abruptly shut down.

The expectation of continued inflation means contractors are pre-purchasing materials and storing them off-site for longer periods of time. Builder’s risk policies generally insure materials temporarily off site. This could be another area where we see more disputes due to a lack of appropriate coverage for this longer-term storage.

In summary, the builder’s risk industry will continue to encounter challenging and unique issues in measuring delay claims in 2023.

[1] Indianapolis Airport Auth. v. Travelers Prop. Cas. Co. of Am. , 849 F.3d 355 (7th Cir. 2017).

[2] CRC Group – https://www.crcgroup.com/Tools-Intel/post/carriers-shift-more-risk-onto-builders-for-multi-family-frame-projects; McKinsey – https://www.mckinsey.com/industries/public-and-social-sector/our-insights/will-a-labor-crunch-derail-plans-to-upgrade-us-infrastructure.

[3] https://www.wtwco.com/en-US/Insights/2022/12/insurance-marketplace-realities-2023-construction.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.