Property Owners Should Check Their Builder’s Risk Insurance for Flood Coverage

Commercial property insurance can repair damage due to flooding, but coverage usually only includes the structures that were on the property at the time the policy was purchased. If you are remodeling or developing a property, it is vital that you purchase builder's risk insurance and understand the limits of your policy. Attorney Bill Voss explores coverages offered under builder’s risk insurance and explains how to ensure that your structures and materials will be protected until construction is complete.

The Many Ways Construction Projects Can Suffer Water Damage

Builder's risk insurance, also called course of construction insurance, covers building materials, equipment, and unfinished structures during construction or renovation. When insuring a property against flooding during construction, it is important that both you and the insurer are using the same definition of “flooding.” Insurers are often particular about when they will cover water damage, including dictating where the water comes from and how it enters the structure.

For example, an insurer may not cover flood damage that is caused by:

• Wind-driven rain. Most commercial flood insurance does not cover wind-driven rain, or rain that enters a structure without related roof damage. Unfortunately, new construction projects may be damaged before the roof has been installed, causing material losses and building delays.
• Storm surge. Storm surge, or a rise in water levels caused by a storm, is typically not covered by private insurers. However, this damage is covered under National Flood Insurance Program (NFIP) policies.
• Mudslides. If not specifically stated in the policy, insurers may deny coverage for damage caused by mudslides that damage the grading or structures on your project.
• Plumbing. While damage from municipal water sources is often covered under a flood policy, insurers may deny claims on new builds if the utilities are not up to code, if the newly-installed sprinklers or pipes failed during testing, or if the damage was caused by a maintenance issue.
• Earth movement. If your construction project involves digging a new foundation, you should include a provision for flood damage caused by broken pipes during excavation.

Selecting the Right Flood Damage Coverage for Your Property

In most cases, owners can avoid flooding losses during construction by purchasing a comprehensive builder’s risk policy. The policy should provide coverage for the full timeframe of the build, offer enough compensation to replace the lost value of the project, and be in compliance with city and state laws.

Owners can also protect their properties by paying close attention to construction coverage details regarding:

• Extent of the site. Builder’s risk policies are available for a variety of construction types, including remodeling an existing structure, installation, and ground-up builds. A policy may cover flood losses to materials used in building, but exclude damage to the existing structure—even if the two projects are connected. An insurer may offer an endorsement to expand the covered property to include the entire project.
• Cleanup. Most construction sites must be dried out before work can continue, including pumping standing water out of basements or pouring new foundations. Materials that have been warped or rusted will have to be disposed of and replaced.
• Ordinance and law. If your insurance covers the full site and you are adding a new structure to an existing building, this coverage pays for you to make necessary upgrades. For example, if there is flood damage to the electrical system in an existing building, ordinance and law insurance can repair the damage with materials that are up to code.
• Soft costs. Your policy may offer an endorsement for “soft costs,” or additional expenses caused by a covered loss. This can include building permits, interest on loans, taxes, and other out-of-pocket expenditures.
• Business income. Business income insurance can help compensate building owners for construction delays that prevent the venture from reopening on schedule.

If you are having trouble getting the flood insurance coverage you paid for, the Voss Law Firm can help. Simply fill out the form on this page to get your questions answered by an insurance attorney, or learn more about filing a claim in our book, Commercial Property Owners Must Read This BEFORE Filing an Insurance Claim.