Daniel Lund III | Phelps Dunbar
A contractor for a hotel in Seattle was tasked with constructing the hotel utilizing premanufactured modular hotel rooms. The modular unit portion of the project was the subject of a $15.8 million subcontract between the general contractor and the manufacturer. The manufacturer was also responsible to the GC for shipping and installing the modular units.
Shipping was to be “DDP,” or “Delivery Duty Paid” – which, according to a New York federal court, “is an international shipping term meaning that the seller assumes all responsibilities and costs for delivering property to the named place of destination, including export and import clearance, fees, duties, and taxes.” Additionally, per the subcontract, the manufacturer was responsible for “ensur[ing] all modular units [were] covered, secured[,] and protected from damage during the shipping process….” The modular units were shipped from Poland to Seattle. In the shipping process, the units spent some time in the Port of Everett in Washington state, where the units sustained water damage while sitting in port.
A related damage claim made by the subcontractor against the general contractor’s builder’s risk policy. On the face of the policy, the policy covered subcontractors as “additional insured” parties, covered all manner of materials and the like to be used on the project, and would provide that coverage in the process of transporting the materials insofar as “inland or coastal waters” were concerned. Yet, the builder’s risk insurer refused to cover the claim for the damages to the modular units which occurred while sitting in port in Everett.
In ruling in favor of the builder’s risk insurer, the court determined that the subcontractor was not an “additional insured” under the builder’s risk policy for purposes of the storage of the modular units at the port in Everett. The builder’s risk policy contained an express limitation on the point: “As respects manufacturers and suppliers, their interest is limited to their site activities only.”
The manufacturer’s position in opposition was that it was a “subcontractor,” rather than a manufacturer, according to its agreement with the general contractor, noting that the incident subcontractor expressly declared that “for the avoidance of doubt, Polcom is a ‘Subcontractor’ under the terms of the Contract Documents.” The builder’s risk insurer differed, agreeing only that it was “not in question” that the manufacturer would qualify as a “subcontractor” and therefore an “additional insured” for its activities at the actual site of the hotel construction.
The court continued: “[O]ur reading of the Additional Insured clause is consistent with the purpose of builder’s risk insurance generally. … We agree with [ the builder’s risk insurer] that ‘builder’s risk policies are designed to cover damage to buildings under construction and the associated equipment and tools used to construct the buildings,’ and such policies are ‘not issued to become a substitute for the additional insured’s own property away from the construction site.”
Additionally, based on the facts above, the court determined that the modules while in port away from the project site were not the “Covered Property” of the general contractor.
Polcom USA, LLC v. Affiliated FM Ins. Co., 2023 U.S. Dist. LEXIS 152220 (S.D.N.Y. Aug. 29, 2023)
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