Builders’ Risk: Water Damage or Flood?

Addressing the risks, understanding the coverage for damage and mitigating the exposures by Mark Gadaire and Raymond Szczucki When water Whether it’s a slow leak or a sudden Recognize the Source flood, water can cause extensive and finds its way, and expensive damage to a construction Water damage sources may be internal — project. Although it may not draw the that is, within the building envelope or on ends up where it headlines of an accident like a crane the site — or related to weather and other collapse on a busy city street, water can external causes. Complicating the matter doesn’t belong, be highly destructive. The causes vary is the fact that construction sites vary widely — from human error, such as an ill- greatly in size, from compact city lots major setbacks and fitted plumbing connection or an accident to campus-like settings that encompass that triggers a sprinkler system, to a local hundreds of acres or several mile long costly damage may water main break or a region-wide heavy civil projects. Whatever the cause, water rain event, with or without storm surge. damage may lead to lengthy delays in a follow, with claims Water may enter the project at one point construction schedule. Sometimes the and cause problems at another. When damage is direct, such as when a pipe that often run water finds its way, and ends up where it breaks and damages property on the doesn’t belong, major setbacks and costly floor or in the same area. It may also be into the hundreds damage may follow, with claims that often indirect, such as when water leaks from a run into the hundreds of thousands of broken pipe on an upper floor and travels of thousands of dollars…and even higher. down to several floors below. dollars…and When it comes to property , External sources can also cause damage. where the water comes from and how An example of this is leaving materials even higher. the damage occurs can make all the uncovered and exposed to rain in a difference in respect to policy coverage. building that doesn’t yet have a roof Too often, policyholders do not recognize or complete curtain walls or a facade. the differences in policy wording that Simply leaving exterior windows or doors determine what and how much coverage open overnight can cause problems from is provided. It is important to understand wind-blown rain, such as mold growth, the differences in how a policy which may require extensive cleanup distinguishes between water damage, and remediation. flood or storm surge before obtaining your coverage, not after a loss. Locally heavy rain can lead to sheet flow onto a project site and into a building or Policyholders should also be aware of along the project alignment. A water main the proactive steps they can take to break on a local street can cause flooding. reduce the likelihood of water damage Flooding may also be caused by rising caused by incidents on the site and to rivers or storm surge over a wide area. protect against damage from internal In the Middle Atlantic to New England and external sources. Regardless of how area, storm surge can occur from a well a project is managed, damage can Nor’Easter or from a high-wind storm still occur. By recognizing the numerous that pushes water inland. In Florida, sources of water damage, understanding storm surge is likely to arise from tropical the variances in coverage, and building storms and hurricanes. In the Midwest, a comprehensive plan to proactively spring snowmelt can lead to flooding address potential exposures, builders and downriver. In the West, long dry spells contractors may be able to reduce the lead to issues with sheet flow once the likelihood of a loss, and limit the financial wet weather returns. impact should loss occur.

2 Understand the Policy

Whatever the cause of water damage, policyholders should look carefully at their policies to understand what is covered and which deductibles and limits will apply. Insurance coverage usually distinguishes between damage caused by rising or overflowing water (i.e., by flood and storm surge) and all other water damage, whether it be from precipitation, such as wind-driven rain, onsite sources, or otherwise. Flood and storm surge are not necessarily covered by all policies.

When it comes to floods, insurance purchasers should also understand the definitions in their insurance policy and recognize that flood definitions vary is responsible for damage caused by flood month of May, including damage from from policy to policy. As an example, the or water damage, those parties should hailstorms4. And in April 2016, Houston Insurance Service Office, Inc. (ISO) has make sure that the definitions in the experienced intense flooding again - the published a Flood Coverage Endorsement contract align with the definitions in the second major flooding event in that (CP 10 65 10 12) to its Commercial insurance policy being placed. Variances metropolitan area in less than 12 months. Property Policy. Under this ISO in wording or meaning could lead to Preliminary estimates indicate losses endorsement, flood is defined to mean: disagreements between the owner and from that event could reach nearly $2 contractor as to responsibility for damage billion.5 A general and temporary condition after a loss. of partial or complete inundation of Such extreme rainfall events may be normally dry land areas due to: The damage from such incidents can be growing more frequent. Over the past widespread and costly. During Storm 30 years, heavy rainfall events have 1. The overflow of inland or tidal waters; Sandy, a storm surge of more than 9 feet been setting new records beyond 2. The unusual or rapid accumulation hit Battery Park at the southern tip of that explained by natural variability, or runoff of surface waters from any Manhattan1, flooding tunnels, subway according to a study by climate source; or stations and basements, damaging researchers that found a clear trend 3. Mudslides or mudflows which are building electrical systems and other toward more unprecedented daily rainfall caused by flooding as defined in 2. property. One of the costliest storms in events consistent with rising global above. For the purpose of this Covered U.S. history, Sandy hit New Jersey as a temperatures6. In the , heavy Cause of Loss, a mudslide or mudflow post-tropical cyclone in October 2012, downpours have been increasing over involves a river of liquid and flowing causing $18.75 billion in insured property the last three to five decades, particularly mud on the surface of normally dry losses, excluding flood insurance claims in the Midwest and Northeast, and that land areas as when earth is carried by covered by federal flood insurance2. trend is likely to continue, according to a current of water and deposited along the 2014 National Climate Assessment7. the path of the current. In the spring of 2015, some areas of Texas experienced more than three weeks of While extreme rainfall may become more Understanding how a particular policy rain that broke historical rainfall records common, the process for how claims are defines flood is critical because it leads and dropped enough water to cover the handled should remain consistent. For to an important consideration: if there entire state 8 inches deep3. The Insurance policyholders, the issue often comes down are contractual agreements between the Council of Texas estimated that insured to whether a claim involves flood or water building contractor and owner as to who losses could reach $1 billion for the damage and how the insurance policy

3 Builders’ Risk: Water Damage or Flood?

responds to those scenarios. One key point occurrence. On the positive side, new the only risk factor. Water, from a variety is that, on many policies, deductibles are limits may be available under the policy of sources, is a frequent cause of damage likely to be higher and policy limits lower for each such occurrence as well. This at construction sites, as it is able to for flood than for water damage. is of particular concern to companies infiltrate a building through unfinished whose operations spread over a large areas during construction and through The way that the insurance policy in region or a number of states. Policies may defects once the project is complete. question responds to any type of damage also be subject to aggregate limits that Rain can enter a building through open depends on the policy wording. Where set a ceiling on the amount that will be windows, doors, and unprotected/ water damage (other than flood) is the paid over a given timeframe, although yet-to-be-completed openings. Interior cause of loss, policies typically provide policyholders can seek to purchase plumbing and fire suppression systems coverage up to the policy limit, above policies that provide for reinstatement of may leak because of defects or installation the main working deductible. Where those limits in some cases. mistakes, because they are damaged flood is the cause of loss, the deductible during construction, or when a system is is typically higher and, in some policies, Whether coverage for storm surge is activated for testing. Valves may simply may be expressed as a percentage of provided under the flood or named be left open. property value rather than a specified windstorm portions of the policy may also figure. That percentage deductible is likely affect the limits. Named windstorm sub- As the number of water sources within a to be much higher than a flat deductible limits of insurance may be equal to the structure increases, so do the potential for water damage. policy limits, while flood sub-limits may be exposures. During construction, subject to a substantially lower sublimit, unprotected water lines can freeze in cold On a builders’ risk insurance policy, or vice-versa. weather. Workers moving equipment or the deductible may be based on the adding materials can damage sprinklers, value of the project at the time of loss like when drywall installers drill screws under a value-at-risk-at-time-of-loss Identify the Risks into pipes that aren’t protected by metal (VARTOL) clause. For example, if only the plates. Improperly sealed fittings and foundation is completed, the percentage Floods and storm surges can’t be incomplete plumbing connections can deductible is based on the value of that prevented, but policyholders can take also cause severe damage. portion of the project, which is much steps to help mitigate potential losses. lower than for a completed building. Storm Sandy provided an expensive Because even seemingly small leaks can For instance, on a value in place of lesson. Following that storm, many lead to expensive claims, all signs of water $1 million, a 5 percent deductible is contractors and property owners leakage should be investigated promptly $50,000; for $10 million, it is $500,000. incorporated flood protection into and thoroughly to prevent more costly Where large percentage deductibles are their projects, such as walls or gates. problems, such as damage to mechanical part of the policy, policyholders may Contractors and property owners may or electrical equipment that voids be able to obtain a separate deductible also consider placing portable flood the manufacturer’s warranty. And as “buydown” policy. protection equipment, such as inflatable buildings include more technology water dams and flood barriers, on their for sophisticated climate control Time may also be an issue, because sites. Limiting damage from flood and systems, telecommunications and damage sustained over a period of days storm surge is also a priority from a data centers, contractors have to be may be deemed multiple occurrences design standpoint. In areas that are prone aware of the potential for damage to under the policy, depending upon to storm surge and flood, mechanical and even more expensive and hard-to­ policy language. If, for instance, a flood electrical equipment should be placed replace equipment. “occurrence” is defined in the policy above projected surge heights. Following as being limited to 72 hours in duration Sandy’s widespread destruction this has and the flood conditions persist into become a particularly hot topic with a fourth day, there may be more than property owners, insurance carriers, one flood occurrence involved, and the and tenants. policyholder may have an obligation to pay separate deductibles for each such However, floods and storm surges aren’t

4 Build a Comprehensive Proper Work Sequencing – Before an incident occurs, identify Prevention Plan – Schedule the delivery of porous interior and establish a relationship with an materials such as drywall, paneling, emergency restoration company to Having a prevention plan in place can ceiling tiles, and wood finishes after the assist with clean-up efforts. help mitigate potential problems, and building envelope is completed. limit damage should a problem occur. – Store materials off the ground, on A comprehensive plan, like the sample dunnage, and away from moisture Make Water Damage an below, will incorporate pre-task planning, sources, and cover porous materials Everyday Concern address proper sequencing of work, with plastic sheeting or tarps. and detail robust response measures if – Avoid storing anything that can be While a comprehensive risk management leaking water is found. damaged by water in areas that are not strategy can reduce the potential for weather-tight. losses, water damage can still occur at Pre-task Planning – Use mold resistant wallboard in central even the most careful sites. In the case of – Include a review of the building and stair shafts, electrical rooms, and other storms and floods, the cause is outside water system designs, as well as a areas that have to be built before floors of human control. The large number of quality control/quality assurance are fully enclosed. potential exposures makes it critical for program. – Seal intermediate floors to provide a contractors and builders to ensure that – For buildings that are geometrically “temporary roof” before the building is the insurance they have in place offers complex, consult an envelope specialty topped off and closed in. the most appropriate coverage for their engineer for a third-party opinion on – Construct water dams around duct specific project or company. It is essential water tightness. shafts and stair openings. for policyholders to understand the – On renovations or additions, inspect – Where permissible, use water resistive damages covered by a specific policy existing structures to identify any pre­ (W-rated) fire-stopping at horizontal and how the policy wording impacts existing water problems. openings, including pipe penetrations their coverage. – Schedule pre-installation meetings with and slab to curtain wall/façade edge all relevant exterior subcontractors, details. When dealing with water damage, having manufacturers, and design teams – At the end of each day, have workers the right insurance carrier in place is just to verify design intents and confirm walk the entire project to make sure as important. An insurer with experience product compatibilities between that all windows and doors have been in the construction industry has a greater systems. closed and that all water sources have understanding of unique risks contractors – Project managers should review water been turned off. and builders face, and is able to offer damage protection and quality control – When practical, use a nightshift for more tailored, comprehensive solutions measures with their mechanical and cleanup labor to keep workers on the to help mitigate those risks. This may fire protection systems subcontractors. site around the clock. include risk and safety engineering Some key concerns are system-testing services, to help prevent and reduce protocols for leak monitoring after Responding to water damage costly water damage claims before they activation, leak detection protocols, – Keep response equipment, such as happen. By proactively ensuring the right alarm systems, flow detection and industrial pumps, vacuums, fans and coverage is in place, and making water monitoring, as well as system and absorbent materials onsite. damage prevention an everyday part of component inspections. – Make sure employees know where project culture, builders and contractors – Management personnel should witness critical shutoff valves are located may reduce the likelihood of a claim — all wet system tests to help recognize – Install water flow detectors on fire and and limit the financial impact should potential problems. All roofing and domestic water pumps. If a working one occur. waterproofing tests should be carefully telecom system is not yet available, documented, and the testing should install a cellular network to allow meet both design and manufacturer monitoring companies to detect flows criteria. outside of typical usage and during off hours.

5 Builders’ Risk: Water Damage or Flood?

About the Authors: Endnotes

1 NYC Hazards: storm surge, New York City Office of Mark Gadaire is Senior Vice President, Emergency Management. Inland Marine. Based in New York, Mr. See: http://www.nyc.gov/html/oem/html/hazards/ Gadaire serves as Builders’ Risk Product storms_stormsurge.shtml 2 Hurricanes, Insurance Information Institute. Leader, where he maintains overall See: http://www.iii.org/fact-statistic/hurricanes responsibility for Builders’ Risk product 3 Texas flooding: Here’s a look at the state’s rainfall management in the United States. He has by the numbers, NBC News, May 29, 2015. See: http://www.nbcnews.com/news/weather/35­ more than 30 years of experience as a trillion-gallons-water-texas-record-rain­ loss control representative, underwriter numbers-n366541 and underwriting manager, concentrating 4 As Texas dries out, accounting of damage begins, Dallas Morning News, June 1, 2015. on construction exposures. Mr. Gadaire See: http://www.dallasnews.com/news/state/ earned a BA in Civil Engineering from headlines/20150601-as-texas-dries-out-accounting­ the University of Lowell in Lowell, of-damage-begins1.ece 5 Houston flooding could cost up to $1.9 billion, BBVA Massachusetts. Compass economists say, April 22, 2016. See http:// www.prnewswire.com/news-releases/houston­ flooding-could-cost-up-to-19-billion-bbva-compass­ Raymond Szczucki, P.E., ARM is Account economists-say-300256077.html Engineer, Inland Marine. Based in 6 Record-breaking heavy rainfall events increased Pennsylvania, Mr. Szczucki is responsible under global warming, Potsdam Institute for Climate Impact Research, July 8, 2015. for engineering evaluations and See: https://www.pik-potsdam.de/news/press­ construction risk management services releases/record-breaking-heavy-rainfall-events­ for Builders’ Risk and engineered risk increased-under-global-warming 7 2014 National Climate Assessment, U.S. Global accounts. He has extensive experience in Change Research Program. this field, having previously held a variety See: http://nca2014.globalchange.gov/report/our­ of engineering positions for both risk changing-climate/heavy-downpours-increasing management companies and engineering firms. Mr. Szczucki earned a BS degree in Civil Engineering from Drexel University in Philadelphia, Pennsylvania and a MBA from Wilkes University in Wilkes-Barre, Pennsylvania.

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