When the unthinkable happens on a long-term construction project, insurance pays for the repair of the building. But, the contractor incurs the “soft cost” damages, such as construction loan interest, property taxes and marketing collateral. A contractor’s insurance policy often covers the soft costs associated with the incident, but contractors should be careful not to miss out on recovering these funds because of mistakes made when submitting a construction claim.
Failure to Record the Damage and Recovery Efforts
When a contractor delays recording the immediate damage and recovery efforts, the insurance adjuster can dispute the magnitude of the loss and the basis for any delays.
Document all elements of the loss in photos, video and writing immediately after the incident. Ongoing documentation tasks include:
- Photograph and videotape the entire construction project weekly. Photos and video should show the damage, the work being done to recover and the impact the incident had on the normal progress of the project.
- Maintain a daily written journal of all progress on the project. The journal should include, at a minimum, the names of subcontractors onsite; the scope of the subcontractors’ work (repair work versus normal construction progress on undamaged areas); meetings and agendas; and estimates for the recovery of the project.
Although this task may seem daunting, this information is virtually impossible to reconstruct months after the project is complete.
Failure to Assign the Task of Documentation The documentation duty should be undertaken by someone who is knowledgeable, thorough and able to follow through until the final insurance payment is made, which could take months depending on the size of the claim.
A contractor that wants to maximize soft cost recovery dollars from the insurance company should allot ample resources in terms of payroll hours and supplies to complete this task throughout the insurance claim process.
Failure to Provide High-Quality Graphics
Every soft cost claim should contain two critical graphics. The “extent of damage” graphic is a general schematic of the project; for example, a color-coded rendering showing the extent and cause of damage. This graphic provides a powerful visual tool that helps the adjuster, who may not be a construction expert, to analyze the damage. When provided immediately to the adjuster, the graphic also can help prevent future disputes regarding the scope of damage and associated repairs.
The second graphic is a timeline of events showing the anticipated completion date, the date of the event that triggered the loss and the actual completion date of the project. If other factors affected the completion date, the graphic should include a hypothetical date of when the project would have been completed “but for” these additional events.
Failure to Document All Verbal Conversations with the Adjuster
When dealing with an insurance company representative, operate under the assumption that if it is not in writing, it never happened. Verbal meetings between a contractor and insurance adjuster can be helpful, but immediately after they occur, the contractor should recap the meeting in an email or letter to document agreements and the next course of action.
Failure to Provide Sufficient Supporting Documentation All insurance claims require supporting “source documentation.” For example, when the adjuster wants to see support for additional construction interest paid during the delay, a typed note from the bank, indicating the total amount paid on the loan for an eight-month period, is not sufficient. Instead, the insured should provide:
- a copy of the original loan agreement;
- a copy of any changes or extensions to the original loan agreement;
- an amortization schedule indicating the amount that should have been paid throughout the life of the project, including the delay period;
- copies of all checks used to make payments on the loans;
- copies of bank statements showing all payment transactions; and
- monthly loan statements issued by the lender.
Failure to Hire a Forensic Accountant Early in the Process
Contractors should seek a qualified forensic accountant at the time the project’s insurance policy is placed. A forensic accountant is not a contractor’s normal CPA or bookkeeper, but rather an expert in forensic accounting and insurance claims. If a loss happens on the project, a forensic accountant can identify the appropriate documentation and any other actions necessary to submit a compelling claim to the insurance company on behalf of the contractor.
Contractors face many pitfalls when submitting a soft cost claim. By assembling the right team, obtaining the appropriate supporting documents, ensuring effective communication, and creating a visual and verbal journal of the loss, contractors can maximize their soft cost recoveries with winning results.