How to Manage Risk Using Construction Insurance & Bonds – Part 5: Loss of Use, Business Interruption, and Delay in Completion Insurance

By AIA Contract Documents

January 11, 2023

One of the best ways to manage risk on construction projects is through insurance and bonds. Throughout the next several weeks, the AIA Contract Documents Program is going to release a series of articles pertaining to construction insurance. This is Part 5: Loss of Use, Business Interruption, and Delay in Completion Insurance.

What are Loss of Use, Business Interruption, and Delay in Completion Insurance?

Of the many types of insurance that an owner or contractor can purchase, they can consider these three: loss of use, business interruption, and delay in completion coverage.

Loss of use insurance is a type of property insurance. “There are two basic kinds of ‘loss of use’ property damage: (1) loss of use that results from physical injury to tangible property and (2) loss of use of tangible property that is not physically injured. All loss of use where no physical injury exists shall be deemed to occur at the time of the “occurrence” that caused it. Where loss of use results from physical injury to tangible property, all such loss of use shall be deemed to occur at the time of the physical injury that caused it.”[1]

Business interruption insurance covers business income due to a suspension in operations while the premises is being restored. “This coverage is secured in connection with a first-party property policy insuring against physical loss to covered premises. The coverage is usually an endorsement subject to the policy’s description of ‘causes of loss’ and exclusions. While policy language can differ (and the differences can be important), there are common elements to all business interruption insurance. In general, the insured needs to establish:

  1. Physical damage resulting from a covered cause of loss to covered property;
  2. An actual and necessary suspension or interruption of the insured’s business caused by the physical damage to the covered property;
  3. The existence of actual loss resulting directly from the covered interruption; and
  4. Loss must be incurred within the stated indemnity period.”[2]

Business interruption insurance has received a lot of attention in recent years with COVID shutdowns. Courts seem somewhat split on whether they will permit business interruption coverage for COVID-related shutdowns, with decisions hinging on that jurisdiction’s precedent, the insuring agreement’s language, and the facts of the case.

Delay in completion coverage “is intended to supplement the risk of loss an insured may incur as a result of completion delays not the result of ‘causes of loss’ otherwise covered under the builder’s risk policy. Delayed completion coverage provides a vehicle for transferring otherwise uninsured risks to an insurance company. The risks transferred can include losses resulting from strikes and labor disputes, changes in law (e.g., safety codes or emission standards), acts of God, trade embargoes, adverse weather conditions, and off-site physical damage to materials or equipment. If the insured is the owner, the policy extends to the owner’s consequential damages. On the other hand, if a contractor is the insured, it will respond to liquidated damages. However, most such policies do not respond to risks or loss resulting from faulty design or insolvency.”[3]

Contract provisions related to both business interruption and delay in completion coverage let the owner opt to purchase insurance that protects the owner against loss of use of its property due to fire or other causes of loss. Additionally, this provision contains a waiver by the owner against all rights of action against the contractor and architect for loss of use of the owner’s property, due to fire or other hazards, however caused.

Do AIA Contracts Contain Insurance Requirements Related to Loss of Use, Business Interruption, and Delay in Completion Insurance?

Yes. Article 11 of the A201-2017 General Conditions document contains language related to these types of coverages. Specifically, Section 11.4 says:

  • 11.4 The Owner, at the Owner’s option, may purchase and maintain insurance that will protect the Owner against loss of use of the Owner’s property, or the inability to conduct normal operations, due to fire or other causes of loss. The Owner waives all rights of action against the Contractor and Architect for loss of use of the Owner’s property, due to fire or other hazards however caused.

Stay tuned for Part 6!

[1] Loss of use injury, 4Pt1 Bruner & O’Connor Construction Law § 11:230.

[2] Traditional business interruption coverage, 4Pt2 Bruner & O’Connor Construction Law § 11:490.

[3] Delayed completion and force majeure insurance, 4Pt2 Bruner & O’Connor Construction Law § 11:578.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.