Builder’s Risk Claims: Key Strategies for Preparing, Managing & Resolving Losses

Colin Daigle (00:09):
Welcome everybody to another episode of Imperium's Risk Brief. Thank you for joining us. Today's topic, we're going to talk about builder's risk claims and really focus in on the expertise of my colleagues and panelists on this podcast, Joe Stella and Frank Russo, both managing directors with extensive experience in builder's risk claims and construction. Welcome, Joe, and welcome, Frank.

Joe Stella (00:34):
Good afternoon.

Frank Russo (00:35):
Thank you, Colin.

Colin Daigle (00:37):
Jumping right into it, and I think what we want to do is extract what you guys have seen over doing hundreds of builder's risk claims. Starting from the beginning, and maybe Frank I'll start with you. A loss occurs on a project and the insured, whether that's the owner or contractor, they reach out to you and ask for help preparing the claim. From your experience, what's the best way to approach this? What kind of a methodology would you outline for people that has worked best in preparing these claims?

Frank Russo (01:07):
Sure, and thanks, Colin. Builder's risk claims are certainly unique and I think probably the most complex first-party insurance claims that are out there, others being property claims, for example. Unlike a property claim, which is static, it's a static event, builder's risk claims, something happens during the course of construction. It's much more complicated. As you kind of inferred, there are multiple stakeholders within a construction project obviously. If there's builder's risk insurance in place, there's normally multiple stakeholders that are tied to the same insurance policy. Whether it's the ownership, the general contractor or large subcontractors, everyone is a named insured under the builder's risk insurance program. That creates some opportunities and some challenges that we could talk about as we go through this discussion. You're right, the first thing really is to make sure, I like to say that we build a box around the event. Let's assume a loss happens 50% through construction. The project's not complete. Everyone on the project is working to finish the construction, and they may be distracted, likely distracted, from the loss event, depending on how severe it is. Sometimes a, albeit, smaller event may get overlooked. If it's not properly captured and isolated, say on a spreadsheet as a potential additional expense event, later on down the line, costs pile up and the contractor or the owner is saying, well, wait a second, where did all these costs come from?

The first thing that we recommend is, again, to build a box around the event, figure out where the project was prior to the loss event from a schedule perspective. Then start to create a code to capture all excess costs and incremental, extra expenses as related to the event, again, for all parties involved. Now with builder's risk claims that the construction or hard costs are usually the first costs, costs that are incurred, and the ownership costs may be much lesser in the beginning of the claims process. It's also important to understand from the ownership's perspective, will this project be delayed? If it's delayed, how will that affect some of our own costs, say for example, soft costs financing, which again we'll talk about later in in this discussion. Again, first thing we should be thinking about is how do we isolate the event? How do we create a code to capture all the costs related to the event? Then, how do we set up a clear response or structure on who's going to deal with the claim from an insurance claim perspective. A lot of times ownership or contractors will have risk managers that will come in and kind of lead the process from the insurance side. You'll certainly definitely need project staff folks involved that understand the costs and the scope of the damages.

There may be an insurance broker involved that can understand the policy and some of the coverage aspects, which I think we'll talk about as well. We highly recommend that experts for helping quantify and prepare the claim are brought in, a lot of times those costs are covered under the insurance policy, as well as forensic schedule experts, if there are delay components. The last thing I'll say in sort of this opening is the goal should be once it's isolated, once a team is in place and once the tracking is set to develop a rough order of magnitude for the particular event, what's our estimated ROM, rough order of magnitude, for this event 30 days out from the event? What do we think the scope of damages will be? That ROM does not need to necessarily be scientific. It could be based on estimates, high and low ranges around each item. That's an item that we're aware of that may be an impact from the event and even some other policy coverages that we know that we have, but we're not sure if we're going to realize as part of this claim. They could be included in that ROM as TBD, or to be determined. Why that's important, it helps everyone involved understand, again, the scope of the damage, what's the worst case scenario of the loss. Then lastly, and probably most important I would say, in the ROM process is when that claim is ultimately submitted to your insurance carrier and their carrier experts. You're not just saying, hey, we had a loss and we're gathering documentation. You're saying, hey, we had a loss. Here's our estimated impacts of that loss. It helps the insurers do their job quicker, more efficiently and helps them set up their loss reserve to make sure your loss is adequately funded.

Colin Daigle (05:12):
That's great. Joe, I think he did a great job covering that. What would you add, if anything, to what Frank has said about, just initial thoughts, getting involved with the builder's risk loss?

Joe Stella (05:23):
Frank mentioned the policy and coverage, and I think that's really critical. Depending on what the loss event is, it could be a very straightforward, maybe there's a broken plumbing pipe and it causes damage to a certain number of rooms, but it also could be complicated. It could be a weather event. That weather event may make a difference if it's a regular storm or a named storm, which could have an effect on how the policy treats that type of an event. The policy ultimately is the instructions in the guidebook that you need to follow. It's really prudent to get with your broker and their claim advocate to make sure that you truly understand where the nuance is in the coverage are. Every policy can be a little bit different. It's really important to understand that, so you know how costs may or may not apply, then developing that ROM. Identifying what you anticipate to be all of your potential exposure on the claim at least starts that thought process. Also, working with the claims advocate of where will these costs apply to the policy? Is this in fact a covered cost or not? How do we record and document those costs? I think it's critical to really understand that. Then Frank also mentioned starting the dialogue with the carrier team. Ultimately the best scenarios that I have been involved in, it has been a collaborative and a transparent process with the client, whether it's the general contractor and the owner, if they're involved, and the carrier team and their consultants. Everybody on the same page, moving in the same direction. You want to establish that relationship right from the very beginning.

Colin Daigle (07:04):
Maybe what we can touch on are some of the challenges, but I also want to touch on, Frank had mentioned, you have an owner, you have a contractor, you have subcontractors. I think we found each of those parties is going to have a different perspective about how a loss affects them. A contractor or a general contractor, a CM, is obviously looking at getting the project done, getting back as was the completion date, its cost, general conditions, maybe it's fee, managing some of the subcontractor costs. That owner is thinking about the soft costs, the delay related costs. Financing tends to be a really big number, but also owners might be thinking, I have this very important project and it's been damaged. That's going to affect a lot of things down the line, once they open, whatever it might be. Getting alignment on how those parties are thinking about the claim, and then also getting alignment on what coverage is there for those costs and managing expectations for both recovery of things like a contractor's general conditions or an owner's soft costs. All of that is key very early on, so those expectations are managed. Joe, starting going back to you, what are some of the other challenges that we see?

Joe Stella (08:14):
Just really picking up on that, understanding how those issues are affected really determines the course of action that you may be taking moving forward. Do you have delay coverage, or do you have expedited expense coverage? Do you employ mitigation efforts to reduce the time impact? Will you be compensated for that through the insurance or not? All of that needs to be understood, so again, you can set that path moving forward and try to address and satisfy the interests of the different parties that you know.

Colin Daigle (08:47):
Frank, what about you? What are some of the top challenges that you see once a claim gets going?

Frank Russo (08:52):
Again, building on what Joe just said, I think it's one of the most important points, the process of recovering on the front end. Let's say the general contractor is trying to get some expedited materials or wants to put in an extra shift, and that will save time on the backend. If that's not properly presented and communicated to the insurers, let's say a piecemeal claim. The contractor's talking about the excess costs and then the owner's having their own conversation, the overall story of a loss is not being optimized to the insurers. Why is that important? I mean, we all know insurance claims aren't easy. If they were, they would just get paid right away. The insurers are going to do their analysis, and they may have questions on why there are certain dollars being spent, why do we need to expedite? That's why the interplay between the front-end costs and the backend estimates are really important. Give you examples, we've had claims where we were arguing with insurers over a million dollars in expedited costs upfront to get repair panels, let's say on a curtain wall, into a priority bill at a plant. They were rightfully asking, why is this necessary? We had to show them, if we didn't do that on the backend, the ownership's soft-cost claim would increase by $5 million per month. I think it's more of an opportunity to tell the right story in a builder's risk claim, how everything can kind of play together, as opposed to doing a piecemeal. I think that's, what I would say is, how I see the best outcomes happen.

Joe Stella (10:12):
Right, and if you're going to tell the right story and have an accurate story, especially when you're talking about time-related impacts, it's critical that you have properly documented the status of the project at the time of the event. Where are you with your schedule updates? Are the schedule updates accurate or has it been completed? Do you want to capture that status at that point? Sometimes the schedules may not be up to date or accurate. You may need to start to look to other documentation, pay apps, other contemporaneous communications. Are the pay apps and the progress of the work that's recorded in the pay apps, is that really accurate and consistent with what's in the schedule update? All of that really needs reviewed and validated because that will be the benchmark and the measuring point for any of the time impacts moving forward. Then when you tie into the status of the project, are there other ongoing issues before the event, pending change orders, any other claims or disputes, subcontractor performance issues, that may start to overlap and intertwine into the repair and the replacement work that's related to the event. Then when you have those subsequent time impacts, is it because of a prior issue or is it because of the event? Those are the complexities that start to develop in some of these situations.

Colin Daigle (11:34):
How about, and to either of you, maybe Joe, I'll go back to you on it. For a more complex loss where we've all seen some of these, and so it's no longer a general contractor managing it. You have an owner having some representation on site, but enough of a significant loss where there's a lot of investigation, maybe remediation, debris removal, maybe it was a water leak and things need to happen very quickly within 48 hours or 24 hours of a loss event happening, there's a response. Then the carrier may have consultants out, there could be anybody from a clerk of the works, industrial hygienists, construction management oversight, but any number of people out there, while there's a quick response happening. I think we have seen claims where there's a question of are we able to do this remediation step or go in this direction? Do we need approval first? What do you see are some of the better practices to coordinate with the carrier, with its team, with the construction manager or general contractor and the owner, when a lot of decisions need to get made quickly, certainly having an effect on the overall outcome of the loss, but just that whole environment in the early stages of a claim?

Joe Stella (12:48):
It's identifying who the point person is or maybe different point people for the different teams. Ultimately if it's the carrier side and then the contractor and the owner side, there should be a point person on the carrier side and a point person on the contractor-owner side. Sometimes that may be touchy, working between the contractor and the owner, who that point person is, but the communication should be as funneled and focused as possible. You don't want six people running around with different impressions of what the expectations or the instructions are. They're going in different directions. Then subsequently somebody comes back and says, no, that's not the instruction that we provided, yet you went out and carried through a bunch of work where you're expecting to be paid and it becomes challenged. It's that communication right from the very beginning. If it's a significant event, like I said, maybe a water pipe that's impacted a bunch of rooms, you talk about bringing in the initial remediation, the hygienist and so forth, who is directing that work? As much as you can communicate with the carrier to get their acknowledgement of the steps that you are taking moving forward. It's one thing to talk about documenting and quantifying the efforts, but you don't want to go back in time and say, is that a step we should or should not have taken? Where did the instruction come from? Then you have a challenge there.

Colin Daigle (14:16):
Frank, I know you've been involved with some pretty high-profile losses, things that hit the news, so there's a lot of eyes on the claim and the recovery and the project itself. What do you find when there is a loss and the insured has a certain ROM that it's developing and the carrier isn't quite there agreeing with it right away? Maybe they agree or they start to see half of the claim, or you know there's a lot of sort of distance to cover between maybe what that ROM looks like and where the carrier is. Is that common and what do you do when you encounter that?

Frank Russo (14:52):
It's a very, very good question. I think most of the time it's the insurers, again, they'll have questions, they'll want to review information, they'll have their own RFIs. Sometimes the problems occur when that data is not transmitted to them as quickly as possible. We have to give the insurers their opportunity to do their analysis. Even with that said, even with that done, like you said, there could be differences in valuation. What we've always found is that most claims have differences in valuation, but it's never 100% differences. You focus on where the agreements can be made. That ROM process of estimating what the loss is early on, the next step after that is, working with the carriers team, is to have them on a line-by-line basis come up to their "undisputed amount" for those particular line items. The issues that require more in-depth analysis or maybe some dispute around coverage or quantum, you still work on those, but you work through the ones that are easy kind of agreements. Why is that important? Because a claim, any claim for that matter, but particularly on a builder's risk claim, it becomes more of a cash flow process. The more we can have our carriers agree on what they can agree on, and then provide advance and interim payments, it keeps the project liquid and not behind from a cash flow perspective. Like you said, along the way there's always normally going to be differences in opinions and scope. That's where, again, you have to sharpen your pencil, you have to work with, as a person on the project team or as the risk management department or as a consultant working for ownership and or the contractor, really just provide as much of an adequate layer of data to make the insurers come to where your view of the loss is. That still may not help them get over that hurdle, but I can tell you it whittles down the differences along the claims process. I'll go back to one last point on this topic. I'll go back to one of my opening comments. If it's done in a vacuum, meaning the contractors going back and forth on certain costs for weeks and months with carriers that can't get agreement, but not having a conversation how that affects the overall, say business interruption claim for the owner, it really is a lost opportunity. You want to make this a business case on why, as either the GC or the owner, you are mitigating your loss, you're making the best possible business decisions, forget insurance, but that's what you're doing. You're making the best possible business decisions and how that kind of all works itself out in the wash on an overall mitigation and what the loss could have been if you don't take those particular steps.

Colin Daigle (17:09):
Great. Those are great points. Maybe as we look to wrap this up, and I'll go back to Joe, just some recommendations based on what we've talked about here. As you think about being successful in builder's risk claims, what are some some of your top recommendations?

Joe Stella (17:24):
I think one, it's just your contract controls and management approach. It's making sure that your project team has the awareness and is properly educated. If an event occurs, let your risk management team be aware of that so that they can give the project team instructions. If it's a project team and they may have worked on many sophisticated projects, but have never encountered a complex builder's risk insurance claim, they may not really understand all the necessary steps. Like Frank had mentioned earlier, they may perceive an event to be something that's very small in the beginning and decide, hey, I can handle this on my own. Then months later they realize, oh, there's a bunch of activity here that I didn't anticipate that ties back to that event. If they haven't provided proper notices or let management understand what's going on, they can find themselves in a bind and not end up getting the coverage or the reimbursement that they should otherwise be entitled to. One, it's really a general awareness. Then it's, like we mentioned earlier, identifying a point person, somebody that can take control, or if it's a team of people, and have accountability. If it's a significant loss, one, you can't lose track of completing the construction on the project. The entire claim in the remediation and then the documentation and the quantification and the cost reimbursement can almost be another project within itself. Make sure that you apply the proper resources, whether that's internal resources, if you need external help. Treat that properly and don't let it drag behind and keep that process moving. That process should be collaborative and transparent with the carrier. Ultimately, costs should be agreeable. Cost is incurred, and it should be understood. It either belongs or it doesn't belong, and that's where that collaboration comes into play.

Colin Daigle (19:21):
I would agree with all of that. Frank, how about you? Maybe as we wrap this up, you can kind of cross the finish line for us here. What are your recommendations beyond what Joe's offered here?

Frank Russo (19:31):
Not really much. I think just the communication amongst the parties is important, GC ownership, subcontractors. As Joe said, understanding the policy. There are different sublimits that have particular max amount of recovery for each of those particular coverage sublimits. Which parties claiming against those sublimits, are we going to hit a max? Are there interrelated sublimits? Sometimes you might have a sublimit that's a percentage of another sublimits. How is that being tracked? Are we positioning the cost in the best possible light under the insurance policy?

Colin Daigle (20:01):
That's great. Thank you both, Joe Stella, Frank Russo, for joining me on this Imperium Risk Brief about builder's risk claims.

Frank Russo (20:10):
Thank you.

Joe Stella (20:10):
You're welcome.

Colin Daigle (20:11):
For more information about Imperium, you can find us on our website at www.ImperiumCG.com. Thank you for everybody that's listened in.