Builders Risk Occupancy and Completion Issue

Our insured had a completed value builders risk policy on a four-townhouse building under construction. Each of the townhouses was separated from the rest by a masonry fire wall extending to the roof rafters and each wall was higher than the roof of the next townhouse. The policy incorporates much of the ISO form CP 00 20, but uses the term “project” (defined as new buildings or new structures) rather than “building,” “structure,” or “property.”

The occupancy clause states, “the building or structure under construction (the “project” shown in this Coverage Part's Declarations) may not be occupied or put to any use without our written consent and an additional premium, if any, paid.”

One of the townhouses was completed, sold and occupied, and the company underwriter interpreted the occupancy clause as meaning the building was occupied, thereby terminating the insurance on the entire building. We think each of the units is a separate “building” because of the fire walls. The occupancy clause would apply only to the units which have been sold and occupied. What do you think?

Kentucky Subscriber

ISO's CP 00 20 04 02 specifies, “The insurance provided by this Coverage Form will end when one of the following first occurs:

a.            This policy expires or is cancelled;

b.            The property is accepted by the purchaser;

c.             Your interest in the property ceases;

d.            You abandon the construction with no intention to complete it;

e.            Unless we specify otherwise in writing:

(1) 90 days after construction is complete; or

(2) 60 days after any building described in the Declarations is:

(a) Occupied in whole or in part; or

(b) Put to its intended use.

Under the ISO form, if all four townhouses were listed on the Declarations as a single unit of construction, all coverage under the policy would end when any part is accepted by a purchaser.

As for your policy with reference to occupancy, you have indicated that the policy requires the company's written consent prior to occupancy. This did not happen. And, since the policy uses the all-encompassing term “project” instead of a more focused word like “building” or “unit”, the fact that the project was, in fact, occupied and put to use does allow the insurer the option to terminate the coverage. The insurer may have overreacted to just one unit being occupied, but the language of the policy supports the termination.

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