Water damage claims due to infrastructure failures are now costing the insurance industry more per year than natural disasters. According to research by Zurich North America, in 2021, water damage was the leading cause of property loss in offices and other commercial structures. Additionally, the company noted that 57% of all the claims it processes each year are for water damage.
And while record-breaking flooding or dramatic storm damages might grab the headlines, increases in insurance costs typically arise from much more mundane sources: leaks, burst pipes and appliance failures.
Water damage should be high on every commercial real estate owner’s list of concerns, especially since improvements to plumbing infrastructure or the implementation of a water risk mitigation plan may directly impact the cost of renewal.
Commercial real estate owners must take steps to learn about their existing plumbing systems, understand their risks and set up a plan. Otherwise, there may be serious consequences.
No matter what type of building, water is a threat. In multi-unit buildings, improperly installed newer plumbing systems are just as great a risk as aging pipes. And while standard insurance policies don't cover flooding, the average loss from a commercial water damage claim is not a trivial sum: according to research from Chubb, it was $89,000 in 2019.
A single flood is not necessarily catastrophic from an insurance perspective. However, repetitive claims for similar incidents indicate a worrying trend. Insurers will look suspiciously at a property with multiple claims for water damage, and they may dramatically increase insurance premiums, raise the property deductibles, add flood sublimits or possibly deny coverage outright.
When it comes to building-wide issues, such as the state of the plumbing system, the building owners or property managers are ultimately responsible. The primary loss exposure for rental properties is damage to the tenants’ contents and improvements. Many property owners will require tenants to carry full rental coverage to transfer a portion of a loss from the owner’s insurance to the tenant’s insurance. It will also protect other tenants in a multi-unit complex in case a loss from one unit causes damage to another unit (such as water coming through the ceiling of an apartment complex).
However, transferring risk through insurance is only one aspect of risk mitigation, and is the last line of defense. It is more beneficial for the client to invest in pre-loss mitigation strategies, which will help to reduce the likelihood of a loss, as well as reduce the cost of coverage. There are specific ways to lower the risk of water damage and reduce insurance premiums:
There’s nothing worse than trying to stay afloat once disaster hits. Don’t wait for a flood before learning about the state of a property’s plumbing system. Learning about and preparing for the worst can reduce risk and keep it lower in the future.
Chris Della Mora is a senior risk engineer at HUB International’s Risk Services Division. He specializes in property risk mitigation techniques for large industrial, commercial and real estate clients.