Hurricane Damage: Who Pays?

Thousands of homes and commercial buildings have been damaged or destroyed by hurricanes Helene and Milton. More than a few of those were buildings under construction or re-construction when the hurricanes hit. Losses will be major. Any time a project is damaged before final completion, who should pay? The owner or the contractor? Does it make a difference if the work was paid for or not?

What Every Contractor Should Know

As a general rule, any portion of the work completed belongs to the owner. For example, once framing is up, that framing belongs to the owner. Storm damage to any portion completed is the owner’s loss. Not true for a stack of lumber sitting on the job site or contractor equipment left on site. For those, any loss falls on the contractor. It doesn’t make any difference if the work was invoiced or not.

What This Means

• You’re owed for the portion of work completed. Be ready with proof: pictures, receipts, payroll records and expert testimony.
• You have no obligation to repair hurricane damage. That’s the owner’s responsibility – at extra cost.
• You still have a valid contract to finish the job as originally planned. Cancellation would probably be a breach of contract.

Of course, collecting could be a problem if there’s no readily available source of funds. That raises the next issue.

Insurance?

Obviously, it’s better if both owner and contractor are insured. The bad news: The owner’s property insurance probably doesn’t cover work in progress. Neither does your contractor’s liability policy. A builder’s risk policy is designed to fill this gap between owner and contractor coverage. Anyone with a financial interest in the project can buy a builder’s risk policy. But don’t be confused by the name. Builder’s risk insurance should be the owner’s responsibility, not the builder's. Remember the general rule: Any portion of the work installed is property of the owner.

Some builder’s risk (course of construction) policies require a special endorsement for rising water or earthquake. But most other risks are covered: theft, vandalism, fire, lightning, arson, collapse, windstorm, hail, debris removal, back up of sewers or drains. Premium will vary with scope of work. But don’t delay. The costs may be higher if work starts before applying for coverage.

How to Protect Yourself

Make risk of loss during construction part of your standard agreement. Make it clear:

1. The owner is liable for property losses once materials are installed.
2. Require the owner to give notice if not providing builder’s risk insurance.
3. Require coverage for any physical loss.
4. Be sure coverage extends through final completion.
5. Both the prime contractor and subs should be protected.
6. Make the owner liable for any deductible.
7. Policy proceeds should be applied first to rebuilding or repairing the work destroyed.

Occupancy or use of the building before completion should not limit the recovery for any loss. But it’s OK to exclude the value of excavation, backfill, foundations and underground utilities. Sitework and foundations are seldom destroyed.

Add good choices like builder’s risk coverage to your agreements. Savings could be in the thousands. Construction Contract Writer drafts letter-perfect agreements for any state and for any type of project. The trial version is free.