All damaged dry wall need to be changed immediately, and the entire place dried out with a very powerful dehumidifier. If he hasn't done that within a few days of initial damage , then mold would already be growing. The seller's insurance should cover all of this work. He is probably just trying to keep part of the settlement for himself. You should ask for his communication record with his insurance company, their initial evaluation, and proof that he has called a water damage restoration company to treat the water damage already. If he's unwilling to give you any of these records, or he hasn't called anyone to treat the water damage right away, then it's probably best for you to walk away. Or if you still want the house, call a restoration company yourself to get a quote on treating the damage, then demand the full amount from the seller as part of closing.