Who Needs Builder’s Risk Insurance?

By: Geoff Bryce, Managing Partner

Empress Casino Joliet Corp. v. W.E. O’Neil Construction, et al; 2016 Ill.App (1st) 151166 and 151184, November 16, 2016

This case demonstrates that regardless of whether you are building something new or making a substantial remodel of an existing building, builder’s risk insurance is an important part of your overall insurance plan for the project.  In this case, Empress Casino hired W.E. O’Neil as a general contractor who in turn hired several subcontractors to perform work for a substantial remodeling project at the Empress Casino.  The Casino also hired a company to perform routine cleaning and maintenance.  During the course of the remodeling, a welder generated sparks near the kitchen and started a grease fire.  A substantial amount of damage was suffered.  According to the case, $81,150,000 was paid by the various insurance companies for the damage.

There were several issues regarding builder’s risk insurance.   As is typical in most industry standard contracts, there is a builder’s risk requirement on behalf of the owner.  Essentially these provisions provide that all parties to the construction project, and perhaps others, waive all rights against each other for any kind of claim involving fire, flood and pestilence during the time of construction.  All parties also agree that the insurance proceeds under the builder’s risk policy shall be shared on a prorata basis for the damages incurred.  This provision is enforceable in Illinois and many other states.

In this case, the first issue addressed by the Court was whether the owner’s existing property policies were also subject to this waiver of subrogation.  The Court held they were.  This meant that the Empress Casino’s property policy carriers could not subrogate against any of the construction parties for damages incurred as a result of the welding spark.

A second issue was whether or not the cleaning company hired by the casino was subject to the wavier of subrogation.  The cleaning company argued they were, otherwise they would be subject to a suit for $81,150,000.  The Court held that based on the language of the waiver of subrogation clause, the cleaning company was not a party to the wavier of subrogation and therefore was exposed to a claim in that amount.

Another issue raised was whether the insurance companies who issued the builder’s risk and property policies could make a claim outside the waiver of subrogation for willful and wanton negligence against the construction parties who caused the initial spark.  The Court held the willful and wanton count was not sufficient to go outside the waiver of subrogation clause based on the language of the clause.

A final attempt was made on the grounds that the construction parties committed a material breach of the construction contracts and therefore the subrogation clause should not be enforced.  The Court rejected that claim as well.

Ultimately, the Court held that the owner, Empress Casino, as per the language in the contract, was responsible for the deductible prior to the insurance payoff.

As you can see in this particular case, having an appropriate level of builder’s risk insurance and property insurance is key when you have a catastrophic loss such as this.  Further, in the drafting of these contracts, care should be taken as to how you approach the waiver of subrogation for builder’s risk insurance.

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