Playing With Fire…And More

As wood buildings gain in popularity, a look at potential risks and claims.

September 07, 2020 Photo

Editor's note: This article is based off of the presentation: “TIMBER! Wood Building Construction—Its Pros, Cons, and Claims” that the authors will deliver at CLM’s virtual Construction Conference at 3:30 p.m. on Sept. 30. Register for the show here.

Wood building (including stick-build, tall timber, and mass timber) is increasing in prevalence and complexity, both in commercial and residential markets. With this boom comes a variety of claims, ranging from builder’s risk to construction defect, workers’ compensation to subcontractor default.
Generally, there are two types of wood construction to discuss:

  • Stick-Build (wood-frame).
  • Mass Timber.

“Stick-build” is a term used to describe a traditional wood-framed building, using 2x4s, 2x6s, and other natural sawn lumber. Until recently, stick-build wood-frame was most commonly used in the construction of single-family homes.

“Mass timber” is a term used for pre-fabricated, composite wood products that combine many wood elements together using dowels, nails, glue, etc. Examples include structural composite lumber (SCL), dowel-laminated timber (DLT), nail-laminated timber (NLT), glue-laminated wood (Glulam), laminated veneer lumber (LVL such as Microlam), cross-laminated timber (CLT), and CLT Plus (where steel is used in the core and for connecting braces, and concrete is used for the basement, ground floor, and garage with two ground floor retail spaces).

Over the past few years there has been a pronounced increase in use of both stick-build and mass timber for a variety of reasons. Mass timber systems are widely reported to be cost-competitive, carbon-efficient, sustainable, and reliable. Cost savings are attributed to smaller foundations, less labor, pre-manufactured components (wall and floor systems), shorter schedule durations, and fewer finishes. Other major benefits include speed of construction, design/aesthetics, sustainability (where steel and concrete consume three times and five times embodied energy respectively), quality, coordination and prefabrication, and seismic protection. Stick-build has many of these similar benefits, such as cost efficiency, product availability, and quicker schedule, though it lacks fire protection, seismic resiliency, strength, and quality.

For all the benefits of wood, there are some major concerns that have been promulgated within the construction-defect and delay arenas, specifically in regard to manufacturing, transportation, subcontracting, moisture management, and fire management.

Building Code Updates

Governing codes and industry standards that dictate what architects and engineers can design are not yet uniform, but in the broad sense, construction codes and standards in various countries have transitioned, or are transitioning, to enable greater use of wood.

In August 2018, Oregon became the first state to codify timber high-rise buildings up to 18-stories, and just a few months later, in December 2018, the International Code Council (ICC) approved three new types of construction to be adopted into the 2021 International Building Code (IBC), which set varying fire safety requirements and allowable heights, areas, and numbers of stories for mass timber buildings. For context, previous model building codes were five stories for residential and six stories for commercial. Notably, new code requirements do not consider inclusion of a concrete podium, so, for instance, a five-story concrete podium with an 18-story wood-frame building on top of it would total 23 stories. This would be problematic if local fire truck ladders don’t reach that high.

Recent Notable Losses

Peavey Hall Delamination and Collapse—Oregon State University’s School of Forestry building was being built using mass timber (CLT) manufactured by supplier DR Johnson, which had no previous experience supplying CLT for a project of this size and complexity. At the time, DR Johnson had only recently obtained and installed the equipment to perform the fabrication; however, the owner (OSU) was adamant about using DR Johnson. In March 2018, a 1,000-pound section (20x4ft) of the third floor buckled and collapsed onto the floor below. Engineers traced the panel’s failure to the glue in the CLT and determined at least five other panels showed signs of delamination. The closer they looked, the more defective CLT panels they found. By August, at least 85 panels were marked for replacement.

DR Johnson took responsibility for the bad panels. An internal audit revealed that crews had been instructed “to warm the lumber in stacks under tarps,” that were then glued together to make the panels. “Some temperature variations inadvertently caused premature curing of the adhesive, resulting in poor bonding,” the company said. In the end, almost all of the panels needed to be replaced, mainly because there is no standard for testing the strength of such members, and they were required to be replaced out of an abundance of caution since they were all treated the same way in the manufacturing process.

Wake Forest Pedestrian Bridges Notched Joint Failure—The two bridges consisted of glulam girders and trusses (fabricated in British Columbia) with a concrete on metal deck walking surface. The glulams were too long to ship in one piece, so splices were designed 36 feet apart, centered over the span. In November 2014, failures on both bridges occurred while the concrete pedestrian walkway was being poured. One person was killed and four were injured on the first bridge; there were no injuries on the second bridge. The cause of the collapses was found to be a structural design flaw—the glulam girders were severely notched at each end to facilitate the end connections, and the notches were not in compliance with applicable American Wood Council (AWC) standards.

Avalon Bay Fires—In Edgewater, N.J., in January 2015, a low-rise, 240-unit occupied apartment building burned to the ground in 45 minutes. This was the second time the complex had burned down—the first was in 2000 during construction. The cause was identified as a spark from a maintenance worker’s torch while he was fixing a leak. The fire department couldn’t slow it down and opted to let it burn. In January 2017, another Avalon Bay apartment burned down in Maplewood, N.J. The two fires exemplify the inherent lack of fire resilience of the wood material alone.

A Hypothetical Extreme Loss

When considering potential extreme claims for wood buildings, imagine the following situation: A fire damages a recently constructed 12-story tall wood residential building. Damage to the structural wood members is limited to the upper two stories. However, water damage to finishes and contents has occurred throughout the building.

The public adjuster (PA) requests a site meeting with the insurance adjuster and his consultants. During the meeting, the public adjuster reports that his wood expert believes much of the building needs to be replaced, including all of the mass-timber members, due to wood-decay damage caused by elevated levels of moisture in the wood-structural members. Since the fire occurred, six months prior, the building has been vacant with the HVAC turned off; debris and finishes, such as carpet, had only been recently removed.

Moisture tests show high moisture levels—in excess of 20 percent in many of the wood-structural members. In addition, the PA says that repairing the water staining on the exposed mass-timber members—including exposed columns, walls, floors, and floor soffits—is so costly that the refinishing costs alone justify essentially rebuilding the entire structure. The PA says, “What do you expect when you pour hundreds of thousands of gallons of water in this all-wood building and then let it sit and cook for that many months?”

All the benefits of tall mass timber buildings—cheaper overall cost of construction, sustainability of materials, and the beauty and warmth of exposed wood members—could come crashing down in a claim like this. While this may (or may not) be a possible extreme claim, evaluating damage to a tall wood building and developing appropriate, code-compliant repairs could be challenging. This is a new construction system and we don’t know what problems and issues may arise, but we can imagine given our experiences in claims.

Insurance Coverage 

Construction-defect and builder’s risk insurance claims involving wood-frame construction naturally come with the usual coverage issues that confront any construction-defect claim. General liability policies typically exclude coverage for damage to, and the cost of repairing or replacing, the insured’s own faulty work or product. They may also deny coverage for certain kinds of construction projects such as multi-family residential (apartment and condo) complexes. Additionally, given the time that it takes for certain kinds of damage to develop and appear in wood-frame structures, these cases may present complicated issues with respect to the trigger of coverage for projects that were built and operated across multiple policy periods.

Perhaps more important are the unusual coverage issues that wood-frame construction can present. It is important for carriers and coverage counsel to account for those concerns and address them adequately when issuing coverage for these types of projects, as well as when handling claims.

A good example is the issue of wood-destroying insects—termites. Various species of termites (dry-wood, subterranean, and Formosan) are common in large sections of the coastal Gulf South. To these insects, wood-frame construction is simply delicious. That is particularly true when the wood is marinated as a result of water intrusion through the building envelope. Unless a wood-frame structure is built from appropriately treated materials to protect it against termites during and after construction, these insects can cause major damage in a short time.

Although wood-destroying insect exclusions have been prevalent in homeowners’ and other first-party property policies for years, such exclusions are not as common in commercial general liability coverages. Underwriters should carefully consider the risk they are writing and whether including such a policy provision by endorsement or otherwise makes sense at the outset of the project.

Another non-coverage consideration in wood-frame construction is that most designers take the position that they don’t have to provide all of the details for problematic areas. They shift that burden onto the general contractor (GC) and subcontractors through the shop drawing and submittal process, and by arguing that the GC and subcontractors must seek clarification from the design professional by submitting Requests for Information (RFI) when the designer has omitted difficult details or designed a detail that is unworkable.

The trouble with that position is it can quickly force a subcontractor with limited professional experience and resources to attempt to address critical components of the project ad hoc, such as flashings and the termination of water-resistant barriers at wall penetrations. Many times, multiple subcontractors are involved in addressing the same penetration, and none of them take the time to coordinate and design the interaction between all of the various component parts since they aren’t being paid to do so. Those situations can quickly lead to conflicts between the subcontractors and the design professionals, and can result in construction defects with long-term adverse effects for the structure.

Those conflicts between defendants regarding installation and design details are often a huge blessing for plaintiffs’ attorneys. They have the luxury of suing all the involved contractors and design professionals. This allows the disagreements among the defendants to fester and for defendants to do the plaintiff’s work for them by attacking one another. By the time the case is ready for resolution, there is at least enough evidence to prevent any of the defendants from obtaining dismissal by way of summary judgment. At that point, the plaintiffs’ bar can choose to settle with some of the subcontractors and use the evidence they have developed to prove fault against the rest of the defendants or against the GC in a failure-to-supervise claim. 

Steps Carriers Can Take

The question, then, is how insurance carriers can effectively protect themselves against these difficult issues. There are two good options available to carriers. 

At the front end, close relationships between claims and underwriting departments allow the underwriters who are preparing policies for these projects to have a detailed understanding of the type of claims that are likely to arise. Working together, the two departments can carefully consider a proposed risk and make educated decisions about what endorsements and special provisions to add to the coverage for that project. 

Once the claim comes in, claims departments can and should protect themselves by engaging coverage counsel and appropriate experts early in the evaluation of the claim. Retaining a local architect and an engineer to assist in understanding the local building codes and construction practices is an obvious way to enhance the carrier’s understanding of what happened when a project encounters a problem.

What may be less obvious is the benefit of hiring a local contractor or construction consultant to help understand and evaluate what happened on the job site, including design issues, construction scheduling, and materials changes or “value engineering.” Having a construction expert who has actually supervised the construction of similar projects as a GC in the same area provides invaluable insight into the issues that the GC and subcontractors may have faced while they were actually working on the project, and can help the carrier understand why the contractors made certain decisions or sought particular change orders along the way.

Primary carriers should resist the urge to balk at hiring a “second set” of experts when they are already paying one set to help defend the insured. Excess carriers, meanwhile, should resist the urge to refuse to share the cost of hiring experts to assist in understanding the coverage side of the case with the primary carrier. By working together and retaining the appropriate experts early on in the claim, primary and excess carriers can often find ways to resolve the case more quickly and cost-effectively.

Make no mistake, wood construction is here to stay and could be highly beneficial overall to the construction industry and the environment as we try to steer away from steel and concrete as the sole superstructure components. However, as with all new materials and processes, it’s important to understand the risks upfront so they can be properly managed and insured for a successful project.

About The Authors
Multiple Contributors
Rose Hall

Rose Hall is strategic operations manager for risk engineering at AXA XL.

Trey Turner

Trey Turner is a shareholder at 
Rogers Townsend, LLC.

Keegan Petty

Keegan Petty is vice president, special projects at J.S. Held LLC.

Terence Kadlec

Terence Kadlec, P.E., is vice president, engineering & specialty services, at MC Consultants.

Christopher R. Teske

Christopher R. Teske is a partner at Pipes Miles Beckman, LLC.

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