When it comes to a construction project, a slow leak can be just as damaging to a contractor’s bottom line as a sudden flood. With builders’ risk insurance, the origin and cause of water damage can make all the difference in determining if and how a policy responds. By taking three key steps, builders and contractors can proactively address their risk and, ultimately, help avoid severe consequences.
Understand the policy. The wording in a builders’ risk policy usually distinguishes between damage caused by rising or overflowing water—such as flood or storm surge—and all other water damage—such as wind-driven rain or onsite sources. Not all policies cover flood and storm surge, and even if they do, the flood definition may vary. Understanding what a specific policy covers when obtaining coverage, not after a loss, can potentially impact contractual agreements between the building contractor and owner over responsibility for flood damage. Optimally, the contract definition matches the policy definition. The way a policy responds to damage also depends on policy wording. Where water damage other than flood is the cause of loss, policies typically provide coverage up to the policy limit, above the main working deductible. When flood is the cause of loss, the deductible is typically higher and, in some policies, may be expressed as a percentage of property value rather than a specified figure. That percentage deductible is likely much higher than a flat deductible for water damage.
Identify the risks. Water damage isn’t always preventable, but policyholders can take steps to mitigate potential losses. For example, in areas prone to storm surge and flood, place mechanical and electrical equipment above projected surge heights. Keep in mind, internal sources can be just as damaging. Because even small leaks can lead to expensive claims, investigate all signs of water leakage promptly and thoroughly to prevent more costly problems, such as damage to equipment that voids the manufacturer’s warranty.
Build a comprehensive prevention plan. This can help mitigate potential problems and limit damage, should a problem occur. A comprehensive plan will incorporate pre-task planning, address proper sequencing of work and detail robust response measures in the event of leaking water.
To learn more about how builders’ risk policies can distinguish between different types of water damage, and to access a sample prevention plan, download this advisory: “Builders’ Risk: Water Damage or Flood?”
Mark Gadaire is Senior Vice President, Inland Marine, and serves as Chubb’s Builders’ Risk Product Leader, where he maintains overall responsibility for Builders’ Risk product management in the United States.
Raymond Szczucki, P.E., ARM, is Account Engineer, Inland Marine, and is responsible for engineering evaluations and construction risk management services for Chubb’s Builders’ Risk and engineered risk accounts.