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

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.