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 then apply only to the units which have been sold and occupied. What do you think?

Kentucky Subscriber

A

We agree with you that the presence of the separate fire walls between the units has the effect of creating separate buildings in the traditional sense. However, the clause in question amends the concept of “building or structure” to mean “the project” shown in the declarations. Occupancy of one of the buildings in the project appears to be tantamount to occupancy of “the project.”

The same occupancy clause indicates that the insurance company may issue written consent to the occupancy and charge additional premium, as appropriate. This provision goes to the heart of the occupancy clause. It is not the occupancy that the insurance company ordinarily objects to but the continuation of coverage on a completed and occupied building at the builders risk rate, which is considerably less than the ordinary building rate. The discount contemplates that values gradually build from zero to the completed value, so the insurance company is never fully exposed until the structure is finished.

In a situation such as yours, as townhouse units in the project are completed and sold the passage of title ends the interest of the builders risk insured and effects a reduction in exposure for the builders risk company. With no request for a companion reduction in premium, that would seem to be a windfall for the insurer.