Navigating the Post-Disaster Insurance Recovery Process

Natural disasters can be devastating for real estate and construction companies. With the potential to cause serious damage to physical locations, operational stability, supply chains, labor markets, and contractor relationships, natural disasters can complicate or extend the insurance recovery process.

Unlike other disruptions, such as structural failures or shifting earth, the root cause of a natural disaster is clear, meaning that the recovery process can begin more quickly. Unfortunately, recovery can still take much longer than other disruptive events because critical resources, including labor and assistance from insurers and adjusters, are often in short supply. 

To help streamline the insurance recovery process, real estate and construction leaders must understand their insurance policies, what insurance recovery risks they face, and how to avoid them. Doing so will help companies take the right steps in the immediate aftermath of a natural disaster. 

Understanding the Risk Landscape

Real estate and construction companies face specific insurance risks in the aftermath of a natural disaster. Some of the most prominent risk areas include:

Contractor and Subcontractor Relationships

After a natural disaster, companies experience high demand for labor to supervise and execute recovery work. Contractors and subcontractors may impose additional fees for post-disaster work, including work outside the scope of a previously negotiated contract. These extra fees can have multiple layers, with subcontractors marking up their prices by a certain percentage and general contractors adding their own fees on top. In some cases, the final surcharge could total as much as 40% – 50% of the original cost. Builder’s risk policies vary, and some may include provisions that limit coverage for fee increases, potentially leading to disputes with insurers and contractors during fee rate negotiation.

Additionally, general contractors are often listed as the beneficiary of insurance policies for ongoing construction projects, even though the policy is held by the owner of the building. This means contractors are typically the ones incurring the costs associated with rebuilding. This dynamic can lead to disputes between owners and contractors when an insurance policy does not cover the full costs of a disaster. Deciding who will ultimately pay the difference can strain an important relationship at a critical time and risks delaying recovery efforts.

Supply Chain Costs

Developers will often opt to pay an expediting expense to quickly obtain the resources they need to support their recovery after a disaster. But in the case of a large natural disaster that affects businesses and organizations across an entire geographic area, expediting prices can skyrocket costs and competition for scarce resources. Companies without coverage for expediting expenses could find themselves in the difficult and costly position of having to pay out-of-pocket or extend their recovery timeline, delaying their return to normal operations. 

Other supply chain issues, such as tariffs, can also increase the cost of expediting shipments. As U.S. trade and tariff policies rapidly shift under the new administration, real estate and construction leaders should closely monitor tariff changes to better forecast how much coverage they might need to support future expediting needs.

Interest Rates

When a construction project is delayed following a natural disaster, the developer will need to pay an incremental rate on a construction-owned balance during the loss period. That rate will be higher so long as interest rates remain high. While these payments are typically covered by insurance policies, developers should confirm whether they have enough coverage to recover the full interest from a loss period. If their policy does not cover the full amount, the developer will have to pay the difference. This added cost could be difficult to absorb on top of the already expensive disaster recovery process.

Avoiding Insurance Recovery Pitfalls

Best practices for avoiding insurance recovery pitfalls can be grouped into two categories: navigating policy nuances and maintaining robust documentation.

Navigating Policy Nuance

Insurance policies contain many nuances and limitations, the implications of which may not always be apparent to a policyholder. Disputes between the insured and insurer, or between other parties like the owner and general contractor, often come down to disparate understandings about what costs are covered. 

By asking detailed questions about all insurance policies they benefit from, companies can make sure their interpretation matches that of the insurer. For example, builder’s risk policies can have wide variations in coverage level. When damage delays construction, some policies may only cover basic repair costs, while others will examine the project as a whole and consider the ripple effects of delayed construction timelines. Verifying policy limitations like these ahead of time can help avoid disputes or confusion during recovery.

Maintaining Robust Documentation

The value of an insurance claim is largely dependent on the policyholder’s ability to demonstrate the true cost of the disruption to the insurer. The burden of proof in a claim always lies with the policyholder — meaning those without robust documentation policies risk forfeiting their chance to tell their own side of the story.

To make sure they have the right documentation available when needed, companies should implement policies that mandate the preservation of all contemporaneous documents in the wake of a disaster. Organic communications, for example, can be a powerful tool for demonstrating the company’s understanding of the scope of a disruption. Companies should memorialize all verbal communications through detailed notes that can be referred to later, and preserve any external-facing communications with clients, vendors, suppliers, or customers.

For construction projects, documentation around schedules is crucial to the insurance recovery process. Scheduling documentation that lays out the critical path to a construction deadline, and any deviations from it, can help companies illustrate the extent of their additional costs following an event. Without such documentation, companies may have a hard time proving that delays or setbacks were specifically the result of a disaster, and not a different cause. This also means that construction companies need to regularly update and maintain their schedules throughout the course of a project, to better demonstrate the specific impacts of a disaster.

Presenting a claim supported by accurate, robust documentation can help expedite the claims process during a tumultuous time, when insurers may take longer than usual to conduct reviews and resolve disputes. A streamlined process can help companies receive an accurate claim payment and return to normal operations as fast as possible.