An insured owns an old building, on which they have liability coverage. The insured has hired a construction company to tear the building down but is wondering if there is any coverage they should purchase to cover any loss to buildings next to the old building. The building being demolished has a common wall with the property next door.

Q: The construction company doing the demolition should have insurance coverage for their risk, but should the insured also obtain any coverage for damage to surrounding buildings?

Response 1: Your insured would not be able to purchase property coverage on the neighboring building as there is no insurable interest. Your insured's liability coverage may apply if the neighboring building is damaged. 

This assumes, of course, that your insured's commercial general liability policy doesn't have any exclusions that would remove coverage for this operation. This also assumes that whatever is damaged would not be considered a part of real property on which the demo operations are being performed—a potential issue if work is being done on the common wall. 

Some insurers include minimal amounts of coverage in enhancement forms to cover some of that exposure. As to the contractor your insured hired, make sure the contractor has included your insured as an additional insured on its policy and has also agreed to indemnify your insured. 

Response 2: First, your client needs to make sure they have solid risk transfer mechanisms in place within the construction contract. A carrier's loss control department, or an attorney, should be able to give them some guidance on this. They also need to ensure that the contractor lists them as an additional insured on the contractor's CGL. It would be good to include all the bells and whistles with this, such as a waiver of subrogation and the policy being primary and noncontributory.

Your client should also consider an owners interest policy. This type of policy is designed specifically to protect property owners during construction activities, including demolition in some cases.

Response 3: Purchasing first-party coverage on the adjacent building will raise the question of insurable interest. Your customer would only have an insurable interest in the building if they are liable for damage for which they already have liability insurance. For this reason, it is unlikely that an insurer would offer coverage. 

For any non-owned building, it would be possible for your customer to enter into an agreement with the owner to purchase insurance on the building with any loss payable to the building owner and a stipulation that the insurer would not seek recovery from your customer.

Response 4: Demolition coverage is usually available through the wholesale market. Common wall issues are usually addressed in state law with a measure of clarity. Your insured would be well served to discuss the project with an attorney. 

Response 5: You didn't say what kind of liability coverage they have, but if it's an unendorsed CGL, they already have coverage. However, from a risk management standpoint, a couple other steps are important.

First, make sure the client's attorney has drawn up a contract that will require common-sense limits of liability coverage and proof of insurance from the contractor. Second, make sure the contract holds your insured harmless for claims arising from this work to the greatest extent possible under your state's laws.

Your client may be charged an additional audit premium for this subcontract work. That can usually be minimized by obtaining proof that the subcontractor carries insurance with limits at least equal to your client's. You'll need to carefully review your client's liability policy to determine the extent of coverage for this activity and the potential charges at audit. 

Response 6: I don't blame them for being nervous. It is a good thing that they have liability insurance on the building. Depending on the details of the coverage, I would think they can be at least somewhat reassured they would have defense and coverage in the case of a claim.

The terms and conditions of the contractor's liability coverage must be scrutinized and verified, as that will almost certainly be the first line of defense following damage to the neighboring property. The insured should have certificates of insurance from the demo contractor for CGL, umbrella and workers compensation—the latter because if an employee of the contractor is injured and the contractor does not have workers comp, then the injured party can claim negligence on the part of your insured for not ensuring the contractor carried workers comp.

This question was originally submitted by an agent through the Big “I" Virtual University's (VU) Ask an Expert service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

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