Claims Management of Large Water Losses

In less than 10 minutes, water escaping from a four-inch water line can cause over a million dollars in damage and set a project months behind schedule. The ripple effect of the delay will impact the delivery of commercial or residential units and the lease-up of other space. With water damage claims on the rise, many insurers are now opting out of projects with a substantial residential exposure and the companies that do remain interested in this class of business demand deductibles of at least $25,000 and even $100,000. The best way to manage construction insurance premiums and the headache of a water damage claim is to avoid them in the first place. Good claims management begins
with good quality control.

For the mechanical contractor, best practices must be established, documented, communicated and enforced. As a prerequisite to setting foot on the construction site, the trade must have clear quality control procedures available for inspection. They must include procedures to identify and remove non-complaint materials and parts from the workplace because a growing number of losses are related to deficient materials making their way onto a construction site. There must be vigorous test protocols for all water lines with results scrupulously documented. Failed assemblies are to be retested until passed, all the while being conducted under the joint supervision of the trade and the general contractor. There shall be no deviation from manufacturer’s installation instructions.

Crimping tools and their use are the source of numerous problems; therefore tools must be calibrated and checked on a regular basis. The trade must ensure staff are trained and have records to show that this was done. Plan for and expect leaks; put in place a process to immediately address leaks, including shut-off procedures during times when the site is not operational. Again, this is to be done in concert with the general contractor.

The mechanical consultant must be vigilant to ensure that only approved materials are incorporated. If there is to be a change, correct certification procedures are to be followed and the means and methods of installation are to be communicated and verified. This requires regular site inspections and attendance at plumbing line tests.

Owners of highrise projects are advised to consider using a leak detection system through a building automation program. During construction,
some may choose to engage a third party mechanical engineer to do the quality control.

The general contractor must ensure that there is a correct journeymanto-apprentice ratio. They must verify the trade’s QC program to ensure that routine checks are being followed. They are to ensure that frequent pressure tests are carried out with GC superintendents’ in attendance. As for the GC superintendents, more vigorous training in mechanical installations and best practices are required.

Last, expect and prepare for water escapes. All superintending personnel must know the location of and have access to water shut-off valves. Every minute water runs unchecked costs tens of thousands of dollars. So, when bad things happen all affected contractors must mitigate their losses — it is common sense and also a requirement in all insurance policies. In the insurance world, the standard of the ‘Prudent Uninsured’ applies to any damage mitigation activities; do what is reasonable as if you were paying for the damage out of pocket. No insurer will challenge that approach.

In practice, every affected contractor should set up a separate job number to track the costs to mitigate and repair damage. Don’t wait for the adjuster to give instructions, as they are the insurers’ eyes and ears and are hired by the insurance company to document the cause, nature and extent of the loss and to establish that the repairs and the costs are correct. The insurers are contractually obliged to pay what is fair and reasonable; the adjuster’s role is to certify that the costs presented for reimbursement are just that, fair and reasonable under the circumstance.

For the general contractor, part of the site safety protocol is to have pre-established flood restoration companies selected and ready to be
called in at a moment’s notice. Should a flood occur, immediately contact the flood restoration company to do the triage work but, until their crew arrives, use any resource available to initiate clean-up activities — logging their time as it is incurred. Standard operating procedure for any project should identify qualified contractors capable of undertaking the cleanup on the site. Identify the major firms in the area and stick with them, there will be less drama.

Once the mitigation work is in hand, the contractor responsible for the damage must be notified that they will be held responsible by virtue of the “Protection of Property” clauses in most construction contracts. Section 9 in the CCA1 requires the responsible trade to make good on the damage caused. In most large projects with a wrap-up builders risk (course of construction) policy, the trade’s obligation is limited to the policy deductible.

In the case of a loss, by the time the water is removed and damaged drywall is cut away, the insurance adjuster should be on site. The claims representative from the insurance broker should also attend to survey the scope of damage. A site meeting should be called where a critical path to recovery is developed. This is vital because it is during this meeting that the insurance adjuster becomes fully informed of the constraints on the repair process. Apart from the repair to the direct damage of the project, the timing of repairs and the availability of replacement materials will have a great impact on the extent of the related delay claims. If the cost of adding extra shifts and working weekends would reduce the cost of delay claims, then proceed. Again, keep the insurance broker and the adjuster informed. Your insurance broker’s role is to ensure that there is a satisfactory outcome and that the policy they sold functions as it is expected. The project owner expects no less of the contractors and the contractors should expect no less of the insurance broker.

The key to a satisfactory outcome of a disastrous water damage loss is frequent communication between stakeholders. The insurance broker should see that owner’s representatives, general contractors, consultants, trade contractors and insurance adjusters meet and plan the shortest and most cost effective route to bringing the project to its delivery. If they have done their job correctly, the adequacy of insurance coverage to pay repairs, extra expenses, delay in startup and, project soft costs will never be a source of concern.

Glen MacRae, Vice President of Claims