Realities of Escape of Water claims

An Escape of Water (EoW) in a multi-tenanted high-rise building can result in claims in the tens of millions of pounds if the supply of water is not stopped promptly. A recent case cost insurers in excess of £30 million. These sums are not unusual as EoW claims can be at their greatest when fitouts are undertaken in fully tenanted buildings or, in the case of new builds, the water systems are not charged until near completion when the value at risk is at its highest with finishings and M&E already installed.

This is only exacerbated by the increase in the value of property per square metre and the prevalence of high-rise construction. Another compounding factor is the increased utilisation of modular construction where the rectification costs in-situ can often far exceed the original manufacturing cost, especially if the units originate from a low labour cost economy. You can read more about modular construction from an insurance viewpoint in our article here.

Beyond the cost to insurers, an EoW event can have significant impact in terms of project disruption, delays and additional costs, which may not be covered by a construction all risks (CAR) policy. Some of these additional costs can be insured via delay in start up (DSU) insurance, which you can read more about here, however this further increases the insurer’s maximum liability in the event of an EoW event and will further focus their attention on this risk.

Water damage mitigation plans

The focus on EoW risk management has been further accelerated by the general hardening of the construction insurance market. In response to increased losses, insurers are seeking to protect themselves through the application of increased deductibles/excesses (often as high as £100,000 or £150,000) and the requirement for an acceptable water damage mitigation plan prior to binding cover or prior to any water related installation works commencing. 

To help both mitigate insurers’ losses and the impact on insureds’ projects, the Construction Insurance Risk Engineers Group (CIREG) has created a freely available ‘best practice’ document, which provides industry guidance for the avoidance of EoW losses (available here). This guidance document includes an example water mitigation plan to assist insureds in creating their own robust plan to present to insurers. Insurers now expect some or all of the standards set out in the CIREG guidance to be adopted by contractors on high-risk sites.

What are insurers looking for?

The key points insurers are looking for in a robust water management plan are:

• Nominated persons responsible for:

          - Ensuring procedures are in place

          - Design, commissioning and installation of all wet services

          - Physical testing, commissioning and documentation

          - Quality assurance

          - Emergency response procedures

• Risk management measures during both construction and once operational
• Experienced reputable contractors
• Emergency procedures
• Quality control regimes

Of key interest to insurers in the current market is ensuring that shut off valves are clearly labelled on the plan and that annotated photographs are used to identify their location. Insurers are also increasingly demanding that automatic flow monitoring and shut off valves for permanent water systems should be installed in the following locations:

1. At the mains water inlet
2. Before any booster pump set – this is particularly important between booster sets and water storage tanks, but should also be installed in any other plant rooms boosting water to higher levels
3. On each floor

A robust mitigation plan will allow your broker to negotiate a reduction of the water damage excess, up to half of the values shown above, and will also make your project appear more attractive to a wider range of insurers, driving more competition for your business and therefore more competitive rates. 

Risk presentation tips

The introduction of higher excesses and more stringent requirements for water management plans are here to stay, at least until the industry sees significant improvements in the standard approaches to water management - in the same vein as appeared when the Joint Code of Practice for the Prevention of Fire was introduced. 

To allow the best outcome when presenting your risk to the insurance market you should:

• Appoint a specialist insurance broker who understands the current market requirements and your risk
• Appoint a contractor who commits at tender stage to provide you with a robust water management plan in order to support your presentation to insurers
• Build water management into your project from day one 
• Allow time for a number of insurers to review your risk to drive competition

If you would like more information or guidance on how best to present a robust risk proposal to insurers, Miller are here to help.