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Claims Under Builders' Risk Policies Likely to Follow Sandy's Trail

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Contractors and building owners may flood insurers with builders’ risk claims in the aftermath of Hurricane Sandy, but they haven’t started showing up yet, according to brokers.

The full extent of the claims won’t be known for a while. “It’s too early,” says Paul Primavera, who heads the construction insurance operation for Lockton Cos., the insurance broker and consultant.

Other brokers say the claims are inevitable. “I wouldn’t be surprised if there were a substantial number,” said one insurance broker outside the disaster area. Something half-built doesn’t stand up as well as something fully built, he notes, and “if the project involves renovation, a more extensive renovation may be needed.”

Contamination by hazardous materials also may create claims, he adds.

Builders' risk insurance protects against damage to a project or to the materials. It is separate from the contractor's commercial general liability and workers' compensation policies.

In the grand scheme of things, builders’ risk won’t amount to much of the total estimated $30 billion to $50 billion in insured property damage and other types of losses.

Sorting out at each project or property what insurers pay under what policy could get sticky, especially in New York City, where so many renovation projects are going on at any one time.

Under many builders’ risk policies, whose range of coverage may tied to specific causes, or perils, insurers may be on the line for what’s referred to as soft cost coverage, or coverage for consequential damage, such as a delay in a building opening or loss of rent.

Steven Davis, senior vice president of broker McGrill, Seibels & Willions in Birmingham, Ala., says there could be conflicts between builders' risk insurance policies and property insurance coverage.

Contractors often elect not to buy the soft cost coverage in a builders’ risk policy, but when they do buy it there is a potential for conflicts over which policy, the builders’ risk or the property insurance taken out by the owner or developer, covers the soft costs.

Figuring the damage and losses from Sandy will matter when it comes to evaluating the cost and benefit of new storm or flood protection measures. Those costs and losses remain murky unless you are very specific in what you are discussing.

New York City’s total lost business activity from Hurricane Sandy may amount to only $1 billion or so.  Only $1 billion because the cost of repairs, restoration and rebuilding will amount to much more.

For example, forecasting firm Eqecat estimates  Hurricane Sandy inflicted between $30 billion and $50 billion in property damage, lost business revenue and extra living expenses.

According to economists, the economic losses to New York City will total about $5B, of which $4B will be recouped over time.

The size of the loss depends partly on the number of days you measure and if gasoline remains scarce and costly.

New York City Comptroller John Lui has said that Hurricane Sandy is costing the city about $200 million a day in lost business.

That size loss is painful but “you have to keep in mind that the GCP, or Gross City Product, is $600B a year,” says Frank Braconi, the comptroller’s chief economist.

Much of the loss will be recouped because business activity “is displaced over time,” says Braconi. He notes that a company planning an IPO with a NYC investment company won’t take their business elsewhere but will simply push back the IPO a few days.

Judging from past disasters, only a small part of the economic loss is recoverable through insurance. Insurers already are said to be re-evaluating their risk models to take into account increased risks from windstorms, including damage far inland from coastal zones.

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