Home Features Construction Companies and Water Damage: Listening to the Insurers

Construction Companies and Water Damage: Listening to the Insurers

by Brian Sims

Very few Tier 1 construction companies are installing water leak detection systems at the beginning of new build projects. This may be for cost reasons, or because the construction companies may not feel it’s their responsibility to implement these systems. Yet repairs to damage caused by leaks and bursts during the construction and defects period will cost both time and money. That’s why, logically speaking, leak detection systems should ideally be installed at the beginning of any construction project – not as an afterthought. Michael Wakley elaborates on the fine detail.

The initial focus for the insurance market has traditionally been on the developer, with a concentration on post-construction damage. However, insurers are now starting to look at construction contractors’ policies and the cost of claims in this segment.

Chris Andrews, head of risk management solutions at Aviva, finds that, at present, there doesn’t seem to be a default position among construction companies when it comes to installing leak detection. That being so, there’s a need for an ongoing campaign to raise awareness and understanding of the benefits of water leak detection systems in order to change the existing mindset.

Andrews stated: “We see the losses across the industry and understand the impact – the knock-on effect on those that are going to use or occupy the buildings. We provide Best Practice advice to mitigate losses from all forms of damage to property and to protect lives and prevent injury. Losses add costs even on the construction management.”

He added: “There are various detection technologies out there and one of our customers is now building some of that technology into its standard specification, so we are starting to see a shift. This is positive for ourselves as insurers as well as for the end customer.” Aviva works with Leaksafe to provide leak detection systems.

Late to the party

Andrews estimates that less than 10% of construction companies are installing leak detection systems. To increase this figure, water leak detection should be specified at the tender stage.

“Installing systems during construction generally reduces the cost compared with retrofitting,” commented Andrews. “As is the case with automatic sprinkler systems for preventing fire, these are complex plumbing systems and so it’s cheaper and more effective to install them from the outset as part of the building infrastructure when all of the different areas are exposed and contractors are working within the building.”

To avert potential losses from huge insurance claims, Andrews feels the insurance industry should be educating contractors to install leak detection systems at the earliest possible stage.

Nicholas Hartley, head of business improvement and innovation at the Ecclesiastical Insurance Group, suggests that although his insurance company’s focus is on buildings that already exist, he also finds that the cost of claims is slowly increasing across the industry, and that much depends on the quality of property construction as well as the use of different materials. From the commercial perspective, there’s more of a risk from water loss as more equipment can be damaged than is the case with domestic properties. On that note, Hartley explained: “Some of the buildings we insure house historically important things that may include invaluable works of art.”

At the high end of the ‘smart home’ market, house builders will often install a range of automated systems. Despite this, Hartley hasn’t found many examples of water leak detection systems being fitted. He added that the quality of new buildings is lacking, in the main due to a skills shortage in the construction industry, and therefore supports the idea of installing water leak detection systems from the outset of any construction project.

“With a very large block of flats it would be feasible to install some kind of leak detection system, and this is where I see systems supplied by one of our Ecclesiastical Preferred Suppliers being deployed. With a property that you insure that has a frequency of claims and leaks, you may increase the excess to avoid incurring further losses, but if you truly want to prevent the claims that usually arise from water leaking, you have to have a different mindset, and that’s when technologies such as water leak detection come in handy.”

Plumbing complexities

Plumbing repairs are one of the most expensive aspects of post-construction repairs. There’s a tendency to conceal most mains services for aesthetic reasons. That leads to more pipework being hidden, and so the location of leaks is often not immediately obvious. Floors may have to be taken up or walls damaged, thereby adding to the overall costs of repair and, indeed, the cost of re-instating the services.

Good leak detection, argues Chris Andrews, therefore needs to occur in tandem with good quality assurance and control during plumbing works. To determine which leak detection should be installed, he advises that consideration should be given to the type of construction project, and ultimately to the likely end use of the building. Principally, observed Andrews, there are two types of water leak detection systems: “…those that alarm and notify someone and those that automatically shut off the water supply.”

Remote risk monitoring systems have prevented losses on various construction projects. Andrews said: “We have a team of risk engineers that meet clients to understand the risks and potential losses, and then we work with them to help them implement loss prevention Best Practice and install leak detection systems when applicable.”

Water leaks can cause the following issues:

*Delays in occupation and therefore delayed revenue streams, as wall and floor finishes have to be removed and the walls and sub-floors dried out prior to being re-finished. This often occurs at the final stage of construction when the plumbing is installed and running at operating pressures

*Complex and potential legal disputes as it’s difficult to answer the question of when the leaks actually started. Was it during the contractor’s defects period or afterwards? Cases can end up in litigation at this stage as the developer’s insurer may seek redress from the contractor

*Reputational damage to a development, or even to a developer’s name. This can lead to slow sales, void periods and punitive terms for the leaseholders who are reimbursing the landlord for the insurance premium

*Insurers moving away from the construction market as a result of the number and value of insurance claims. This limits the amount of available insurance capacity, in turn leading to less choice that can then result in increased insurance premiums, while also impacting deductibles and Terms and Conditions. Consequently, brokers will have fewer options to offer their clients.

Andrews commented: “Leak detection isn’t an area construction companies want to invest in at the moment. At Aviva, we’re underwriting more construction business and we would look more favourably on a construction project that adopts Best Practice leak detection measures. We have a ‘prevention first’ philosophy to risk management. If nothing is done, the escape of water will become harder to insure, and so we want to work with those construction projects who wish to embrace Best Practice loss prevention.”

Improving risk at handover

Michael Wakley

Michael Wakley

The installation of water leak detection systems from the outset of a construction project also improves risk at the handover stage, offering the insurer an opportunity to protect the construction project and the building when it goes live to become operational. This protects the future occupants of the building as well.

Aviva uses its own escape of water predictive analytics to achieve this. Those analytics show that one leak carries a high probability of being followed by a second one. If a second leak occurs then there’s a significant increase in probability that there will be a third and so on.

The insurance industry is concerned about the costs of leaks both during construction and when projects are completed and occupied. In the last three years alone there has been no let-up in the rising cost and frequency of escape of water claims. “Claim costs have increased by a third,” stated Andrews.

Constructors should therefore listen to their insurers because the alternative is to accept higher insurance premiums and more costs than is often necessary. With constraints already created by thin operating margins, no construction company wants to develop a reputation for generating a high incidence of water damage claims.

Michael Wakley is CEO of LeakSafe

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