Managing Water Damage Risk Involves Planning, Diligence

Maintenance and mitigation techniques are crucial to help keep insurance premiums low.

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.

Understand the Risks

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.

Minimize the Risk

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:

• Consider updating the systems. Learn about the different types of plumbing systems and understand what is in the building that is being insured. It may be necessary to replace the entire system, or only certain fittings or pipes.
• Develop a water damage mitigation plan. Build a relationship with an expert now, before help is needed. Interview several water-remediation experts to find someone trustworthy, and keep their contact information handy. Call the expert immediately upon noticing a problem. Use a template to create a simple Domestic Water Emergency Response Plan (DWERP). This involves identifying the risks, assigning key personnel to take charge, developing a communication plan to share information, creating procedures to shut down equipment and processes in a safe manner, and training staff.
• Schedule routine inspections. Regular checkups are the best way to avoid water issues. When experts regularly inspect a building, it is possible to avoid several issues completely. Perform regular maintenance on plumbing infrastructure, especially as part of an insurance renewal application. The inspector should look for leaks and sewer pipe backup, as well as confirm that sinks and tubs are draining properly and that the water pressure is calibrated correctly.
• Inspect equipment. A secondary part of those inspections includes checking up on any equipment. A huge number of claims come from damaged equipment — but inspecting the equipment regularly can keep problems away. Whether the equipment is old or new, it’s important to schedule inspections and regularly monitor each piece of equipment.
• Increase the deductible. If proactive attention hasn’t reduced premiums deeply enough, it may be worth considering a policy with a higher deductible. This strategy doesn’t work for everyone, as it leaves the owner responsible for a larger amount of claim costs, but it also might lead to a lower premium. This is recommended for well-maintained buildings only.

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.