Did You Know...? Part 1: The Problem
Did you know...
... that water is now the leading cause of loss in vertical properties under construction, remodeling, or retrofit?
While floods, hurricanes, severe convective storms, and excessive rainfall make great headlines, they comprise only a small part of Builder’s Risk loss experience. Industry data shows that non-flood water damage claims cost the insurance industry a whopping $15 billion each year, representing over one-half all insurance payouts, which do not include repair costs absorbed by the insured in deductibles or uninsured delays, soft costs, and project disruption.
Vertical Construction Builder's Risk Claims Breakdown By Cause
Worsening Outcomes
Recent economic trends have not helped. With factors ranging from general inflation to shortages of skilled labor driving unit costs higher, contractors can also be exposed to supply chain reliability issues, increasing environmental and permitting costs, and the potential for liquidated damages on late project delivery.
Day-to-day challenges are hard, but throw in a major water damage loss – the most severe incidents can spiral into millions of dollars in damage – and project profitability goes down the drain. It should come as no surprise that the median cost of water damage claims in construction has risen by over 20% in recent years, and losses exceeding $1 million have tripled.
Adding insult to injury, the cost of insurance has climbed alongside the worsening loss experience. So, what can be done?
Understanding the Problem
Broad industry data is helpful for a general sense of the problem; however, more needs to be understood about the root causes of water damage losses and the potential for mitigation.
In reviewing data from almost 1,000 water damage claims over a five-year period with an aggregate payout exceeding $270 million, we found that only 20% of these claims accounted for over 83% of losses incurred, with an average claim value exceeding $1.1 million. The distribution looks like this:
Clearly, the water damage problem is concentrated in a relatively small number of very large claims. But why do some water damage incidents appear to get totally out of hand, producing significant losses, while most others result in generally manageable outcomes?
According to a recent study, the single largest driver of water damage losses is burst pipes, which most often occur as the result of rapidly falling interior temperatures during winter, usually the result of heating system failures or man-made errors such as failure to properly secure building openings during cold weather periods. Other causes include human error, malfunction, and vandalism.
Water Damage Causes (Frequency).png?width=500&height=500&name=Water%20Damage%20Causes%20By%20Frequency%20(1).png)
Unlike fire, which is abrupt and noticeable, water damage worsens over time, placing a premium on early detection and remediation. Whether from a leaky toilet, a failed supply line, or a burst pipe, water damage typically starts small and grows until detected and repaired. This can be measured in minutes when the problem is noticed immediately, or days or even weeks in the case of vacant or temporarily unoccupied properties, such as an apartment building under construction that suffers a water event overnight, or during a weekend or holiday.
The nature of the leak and its location also play large roles in determining severity. A small leak on the ground floor may have no consequences at all, whereas a more severe incident on a high story could have ramifications for the entire building if left unchecked. A single faucet releases enough water over a weekend to fill a standard backyard swimming pool; a higher-volume water main would fill the area of a football field to a depth of nine inches.
These factors highlight the challenge of managing water damage risk. With all that is at stake – damage repairs, business interruption, reputational harm – attention must turn to prevention and management. Here there is good news: more than three in four water damage losses are preventable. In our next installment, we will introduce proven technologies and risk management strategies designed to eliminate most commercial water damage losses.
"Did You Know ...?" is a series of articles created to help risk and construction executives identify, prevent and mitigate water damage and other perils affecting construction jobsites. Future articles will address: Solving Through Technology, Technology Works, Keys to Success, and Our RiskTech Future.
