When disaster strikes, contractors rely on their insurance to help get projects back on track as quickly as possible and maintain cash flow in the interim.
Yet, a large-scale loss event, such as that caused by a hurricane or other natural catastrophe, can have enduring effects that can delay insurance recoveries and stall projects for extended time periods. Navigating these challenges requires careful planning in advance of any potential loss event and timely and hands-on focus when losses occur.
Quantify worst-case exposures before buying insurance
While construction values may be accurately quantified prior to a loss event, potential consequential damages, such as delays, soft costs, extra and expediting expenses, and indirect costs often go without sufficient assessment. Thus, when losses occur, they may be uninsured or underinsured.
On the other hand, without sound pre-loss analysis, contractors may be buying more insurance than they actually need. Quantifying worst-case project exposures before obtaining insurance also can yield a more efficient and reliable insurance program.
When a loss occurs, it’s critical for contractors to make sure their claims providers can gain access to the project site and assess any damage as quickly as possible. Insurance companies typically rush their own adjusters to the location to estimate damages so they can set reserves. Once that happens, it’s difficult to convince the insurer to make any upward change to the estimate.
Following are some key steps for effective builders risk claim preparation.
- Pre-planning helps. Builders risk claims can be complex and difficult to resolve. Work with the insurance broker or claims consultant to establish a claims plan—ideally in advance of an incident—and assign responsibilities to various team members.
- Shore up accounting systems. Before any claim event, work with operations and financial teams to make sure all accounting systems that could be needed to generate information quickly in the event of a claim are in place, capturing and recording all necessary information and functioning accordingly.
- Recognize that builders risk policies have unique claim requirements. These policies have specific requirements for claim preparation, especially with respect to soft costs associated with related construction delays. These costs can be significant and should be calculated on a weekly, monthly or yearly basis for any potential or actual delay.
- Work to establish a collaborative process with the insurer. It’s important to start the claim situation as a collaborative process between the contractor’s team and the insurer’s team. From the outset, work with the insurance broker or claims advisor to develop a set of objectives and strategies in cooperation with the insurance company. And work to be responsive to requests made by the insurer’s team right from the beginning.
- Work quickly to create a preliminary estimate. This should be as complete as possible, but needs to be timely for effective planning, establishment of adequate reserves by the insurance company and to help generate sufficient advance claim payments from the insurer.
- Seek cost-effective solutions to get the project back on track. Certainly, it is the best interest of all parties to avoid any soft costs associated with project delays by expediting repairs and recovery to the extent possible. However, be aware that from the insurance company’s perspective, any expenditures associated with expediting recovery often will need to be demonstrably cost-effective compared to the potential soft costs associated with the delay.
- Don’t overlook the details. Prepare comprehensive reports of claimed losses that include: schedules summarizing hard and soft cost losses; detailed analyses of all loss elements, including costs related to project delays; and key supporting documentation, such as invoices and financial documents.
- Keep track of the insurance company’s claim team. During the claims process, particularly in the early stages, the contractor’s team should closely monitor the adjustment activities of the insurance company’s team and respond as quickly and as completely as possible to any requests for additional information or supporting documentation.
- Communication is key. When a claim occurs, establish a process for frequent meetings and constant communication among all of the internal and external team members involved in the management of the claim. In addition to the contractor’s own claims team, it is critical to maintain a flow of communication with the insurance company’s team and to respond on a timely basis to all requests for information and documentation.
- Keep the claim management process moving. Maintain a focus on all activities related to the claim until final settlement is achieved.
A key to effective management of a builders risk claim involves recognizing how to make the best use of any external resources on the claims team.
One area that can involve some thorny issues is change orders. A broker or claims consultant can help manage the change order approval process, which often calls for establishing protocols and coordinating communication among contractors/subcontractors, construction managers and construction experts representing the insurance company. In these situations, any potential contentious issues related to repairs need to be resolved early in the claim process.
Outside claim resources also can be helpful in addressing potential cash flow issues. Large projects often involve multiple sources of public and private financing. Given the reliance on third-party financing, managing cash flow needs is a priority. It’s often prudent to involve the insurance broker or external claims advisor to coordinate with all parties involved in the project and the insurer to help ensure that adequate advanced payments are secured throughout the recovery process to meet liquidity needs.
While resolving builders risk insurance claims can be challenging for contractors, effective planning and the use of outside experts as appropriate can help make the claims process more manageable, address potential cash flow issues, speed recoveries and get the project back on track.