Cranes considered 'machinery' in Builder's Risk Insurance

Insurance eBulletin - 21 February 2017

Summary

New York's High Court confirms insurers' ability to rely upon a contractor's tools exclusion to bar coverage under a Builder's Risk Policy, for weather damage to a crane caused by Hurricane Sandy. This is one of the few decisions on contract works cover relevant to cranes, which are integral to building projects.

This eBulletin looks at the decision and whether courts in Australia would come to the same conclusion.

 

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Background

In October 2012, Extell West 57th Street LLC (Extell) was constructing a 74-story skyscraper in Manhattan. Lendlease (US) Construction LMB Inc (Lendlease) was engaged to manage the project, and in turn retained Pinnacle Industries II, LLC (Pinnacle) to supply and install two diesel fuel tower cranes. But on 29 October 2012, Hurricane Sandy hit the New York City area, causing severe damage to one of the cranes supplied by Pinnacle.

Extell was the named insured (and Lendlease additional insured) on a program of Builder's Risk Insurance, which comprised of five separate insurance contracts (Policy). The lead insurer was Zurich America Insurance Company (Zurich). Excell and Lendlease sought cover under the Policy for weather related damage to the crane.

 

High Court review

The NY High Court, in reviewing previous decisions of the NY Supreme Court, considered whether the crane was covered under the Policy in the first insurance, and if so, whether:

  • the damages were excluded due to the Policy's "contractor's tools exclusion" (exclusion); and
  • the exclusion is ineffective because it would render the coverage granted for temporary works illusory.

1. Was the crane covered in the first instance?

The court was not required to make a finding on this point; however, it noted that:

  • the question of whether the Policy covers the crane considers the interpretation of the language of the Policy's insuring agreement;
  • the crane was both a "structure" and "temporary", as it would be removed when no longer required on site;
  • the crane " was incidental to the project" as an incidental step towards the completion of the project; and
  • the dispute about whether the crane was disclosed as part of the “total project value”, was a triable issue of fact.


2. Application of the exclusion

The relevant exclusion under the Policy was:

"the Policy does not insure against loss or damage tocontractor's tools, machinery, plant, equipment including spare parts and accessories, whether owned, loaned, borrowed, hired or leased, and property of a similar nature not destined to become a permanent part of the INSURED PROJECT, unless specifically endorsed to the Policy"

Extell argued that Underwriters failed to satisfy the burden of establishing that the exclusion applied, because the crane was neither a "tool" nor "equipment" within the meaning of the exclusion.

In finding that the exclusion applied, the court concluded that the crane fell within the Policy's definition of "machinery" and that although certain components of the crane were to permanently remain as part of the building, this consisted of only reinforcements and ties and the main or principal part of the crane was "not destined to become a part of the [building]".


3. Does the tools exclusion render the coverage illusory?

The court rejected the Extell's argument on the basis that the tools exclusion did not defeat all claims for cover under the Policy's temporary works provision, as cover would still be provided to claims for scaffolding, "temporary buildings", and for such other things as "formwork, falsework, shoring, and fences".

 

Interpretation in Australia

This is one of the few recent decisions on contract works cover that are relevant to cranes, which are integral to building projects. The decision makes it clear that where the contract works policy contains a tool and equipment exclusion, the crane(s) on a project will be caught by that exclusion unless the policy is specifically endorsed to provide cover for them.

Although not specifically in relation to cranes, Australian Courts have previously applied the exclusion in the same way. In our view, it is likely that an Australian court would come to the same conclusion when interpreting the exclusion and the policy wording as a whole.

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Author

Paul Breidenbach | Associate (admitted in England & Wales)

 

Further information

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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