The United States recently dodged direct hits by Hurricanes Erin and Imelda, but those in the construction industry are still in the cone of uncertainty when it comes to protecting their projects this hurricane season. According to NOAA, 93% of hurricane landfalls along the U.S. Gulf and East coasts occur between August and October. Property owners and contractors should approach insurance coverage for peak hurricane season with Category 5 focus.

This is especially true in states like Florida and Texas, where construction is booming. Property owners and contractors face significant risks to their construction projects during this season. But builder’s risk insurance can help mitigate those risks.

Below is a primer on what builder’s risk insurance is and three things policyholders need to know about their builder’s risk policies now that hurricane season is in full swing.

What Is Builder’s Risk Insurance?

Builder’s risk insurance is a temporary, first-party property insurance product designed to cover property damage to buildings under construction, renovation or repair and on-site project materials. Some policies also cover construction project materials stored off-site and soft costs, like additional architectural or permitting fees. Delayed completion coverage is an optional add-on. It covers income losses or additional expenses resulting from the project’s delay in completion as a result of covered property damage.

While policies are often tailored to specific projects, builder’s risk policies typically cover losses from weather-related incidents. So, when hurricane season whips up, this coverage can help policyholders weather the financial storm.

Three Things to Know

To ensure that construction projects are adequately protected this hurricane season, property owners and contractors should know three things:

1. Who is responsible for obtaining coverage differs. 

Responsibility for purchasing this insurance varies. Typically, contractors and property owners agree on this term in the construction contract; which party buys the policy often depends on who has greater buying power in the market. The cost of the policy itself, which is separate from who is required to obtain coverage, is typically borne by the owner as part of the contract price. In addition, if an owner is obtaining construction financing, the lender providing such loan may also have specific requirements as to the type and amount of builder’s risk coverage that the owner will need to obtain, as a prerequisite to the loan. A construction lender’s requirements will usually be determined through its internal underwriting process, and in negotiation with the owner and the general contractor.

Standard industry forms differ on who should obtain coverage. AIA Document A133™–2019 Exhibit B, which discusses insurance and bonds, provides for the owner to obtain builder’s risk coverage. In contrast, the ConsensusDocs 200 Standard Agreement and General Conditions Between Owner and Constructor (Lump Sum) originally called for the contractor to obtain builder’s risk coverage. Updates suggest the parties should focus on which party bears the risk for uncovered damage and negotiate coverage accordingly to establish a framework for risk and repair obligations.

This lack of consistency can lead to neither party obtaining sufficient coverage or both parties obtaining duplicative coverage. Neither is desirable. As the Ninth Circuit has stated, “The next worst thing to having no insurance at all is having two insurance companies cover the same claim.”[1] Insurers are repeat litigators with deep pockets, so they can spend “months, even years, wrangling with one another, while the insured and the provider of the covered services are left holding the bag.”[2]

2. Not all policies are created equal. 

Unlike other types of insurance, such as commercial general liability and homeowners insurance, there is no true standard builder’s risk policy. This means that not all builder’s risk policies provide the same coverage.

When it comes to coverage for hurricane-related damages, not all builder’s risk policies even provide protection. Some offer no windstorm coverage at all. Others provide coverage for damage caused by wind, but not for flooding associated with a windstorm. Or they are subject to large deductibles or low caps, squeezing coverage from one side or the other – or both. That can leave policyholders in the eye of a coverage gap.

So, it is critical that property owners and contractors read their builder’s risk policies carefully to ensure they have the coverage they need to ride out the storm.

3. How your builder’s risk policy handles multiple causes of loss. 

As discussed above, some builder’s risk policies provide coverage for damages or loss caused by a windstorm, but not by a flood. Hurricanes often bring both. To avoid the storm of coverage litigation this can lead to, some insurers have included anti-concurrent cause exclusions in policies in an effort to deny coverage when there is a dispute regarding the cause of the loss. An example of such an exclusion is as follows:

“We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.”[3]

The enforceability of these exclusions came into focus after Hurricane Katrina, when it was heavily disputed whether losses were caused by wind, flood, or both. So what can policyholders do? Carefully review your policy to ensure that both wind and flood are covered. If that is not possible, review your policy for an anti-concurrent cause exclusion and try to negotiate around it. Finally, seek the guidance of coverage counsel to determine whether the law of the applicable jurisdiction recognizes the enforceability of the anti-concurrent cause exclusion. This proactive approach before a claim may help ensure that your project proceeds with little interruption in the calm after the storm.

[1] PM Grp. Life Ins. Co. v W. Growers Ass. Trust, 953 F.2d 543, 543 (9th Cir. 1992). This case involves two ERISA-covered health benefit plans, but it is a truism for many insurance coverages.

[2] Id.

[3] Cheetham v. Southern Oak Ins. Co., 114 So.3d 257, 260 (Fla. 3d DCA 2013).