In the wake of the massive destruction wrought by Harvey, details tucked away in builders’ risk policies may spell the difference between financial relief and hardship for some contractors.
While water damage was a leading cause in the estimated $20 billion worth of damage caused by Harvey, not all water damage is created equal when it comes to builders’ risk policies, insurance industry experts say.
The key issue is whether the damage was caused by a “flood” or by wind-driven rain or other sources, which can determine significantly how much the policy will pay towards repairing the damage.
“When it comes to property insurance, where the water comes from and how the damage occurs can make all the difference in respect to policy coverage,” notes a recent white paper by Chubb, “Builders’ Risk: Water Damage or Flood?”
If flooding is the cause of the damage, the policy is likely to be less generous, Chubb notes. In this case, there will likely be a higher deductible and it may be pegged to a percentage of the property’s value. Under the percentage scenario, the deductible can be considerably higher than a flat deductible for other types of water damage, the insurer’s white paper notes. By contrast, when the water damage is of the non-flooding type, the coverage is likely to go right up to the policy limit, according to Chubb.
The same difference the amount a policy will pay out is also true if the damage is caused by a storm surge and whether that storm surge falls under the policy’s definition of a wind-driven event or flooding.
How a builders’ risk policy defines flooding and how that definition matches up to the events that caused the damage is crucial then, Chubb notes.
One example cited by Chubb, drawn from a policy put out by the Insurance Service Office, defines a flood, in part, as:
“A general and temporary condition of partial or complete inundation of normally dry land areas due to:
- The overflow of inland or tidal waters;
- The unusual or rapid accumulation or runoff of surface waters from any source.”
But whether damage is defined as flood caused or wind-driven won’t matter much to contractors who failed to protect themselves with adequate insurance before the disastrous storm hit, according to a Harvey alert issued by the law firm Gray Reed & McGraw, which has offices in Houston and Dallas.
“Harvey may also prove to be a costly lesson for many project owners and contractors,” note lawyers at Gray Reed. “As Texas begins to focus on recovery in the coming weeks, Harvey will further serve as a reminder to all construction industry stakeholders that hurricanes, and other “acts of God”, are risks that must be effectively managed during the pre-construction and construction phases of every project.”
J.P.Vogel, a partner at the firm, said Harvey inflicted more severe wind damage on Texas' coast, then punished it with a storm surge. Houston mainly sustained flood damage.
"The claims process is going to start unfolding probably starting right now," Vogel said. "I would say probably not until the next couple of months are you going to see this tally board on what's being denied and what's being granted."