Builder’s Risk Insurance Coverage for $3 Million Loss Denied Due to Failure to Adequately Secure Construction Site

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A recent Federal Court summary judgment decision provides a stark warning for contractors and owners to adequately secure their construction sites, or risk denial of insurance coverage.  See Praetorian Ins. Co. v. Axia Contracting, LLC, No. 17-CV-2034-WJM-KLM, 2019 WL 1002939 (D. Colo. Mar. 1, 2019).  In Praetorian, the Court ruled that the failure of an owner and its contractor to adequate secure the jobsite was a breach of the Builder’s Risk policy, thus preventing the owner and contractor from securing coverage for a $3 million fire loss.

Blackhawk Hospitality LLP  ("Owner") and Axia Contracting LLC ("Contractor") obtained a builder’s risk insurance policy from Praetorian Insurance Company ("Insurer") for the construction of a hotel in Aurora, Colorado.  Owner and Contractor received a 10 percent reduction on the policy premium in exchange for agreeing to a Protective Devices Schedule requiring certain "Protective Safeguards" on the jobsite, including a six foot fence around the job site, locks on all gates during non-working hours, and illuminating the jobsite from sunset to sunrise.  Importantly, the policy contained an exclusion under which Insurer would not pay for a fire loss if the Owner and/or Contractor failed to maintain the Protective Safeguards.  

On June 19, 2017, a fire caused an estimated $3 million in damages to the unfinished construction of a hotel.  The local fire department concluded that the fire was caused by arson.  The Owner and Contractor admitted to failing to fully enclose the jobsite with a 6 foot fence.  As a result, the Insurer denied coverage and filed a declaratory judgment action seeking approval of its coverage decision.  The Court viewed this as a clear-cut and relatively easy decision in favor of the insurer – the Owner and Contactor materially breached the insurance contract by failing to enclose the job site with a 6 foot fence, and therefore the insurer had no obligation to provide coverage for the fire loss.

This case stands as a cautionary tale for procurers of Builders Risk policies.  While it may be appealing to save money by agreeing to certain conditions for a Builder's Risk policy, the conditions must be satisfied or risk loss of coverage.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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