The Impact of Water Damage on Commercial Property Insurance

The Impact of Water Damage on Commercial Property Insurance

Scott McDonough, head of Large Property at The Hartford, shares the impact water damage has on business property.
Scott McDonough
Scott McDonough, Head of Large Property, The Hartford
Businesses and institutions are being faced with water damage challenges in 2020 that will continue into the foreseeable future due to labor shortages and quality of workmanship.
According to Scott McDonough, Head of Large Property with The Hartford, “Water damage is one of the largest loss causes we deal with in the commercial insurance industry, yet only a small percentage of clients have a formal Water Damage Prevention Plan in place. Those with higher exposures should have plans to both prevent an incident and to mitigate the severity of loss should one occur. Our risk engineers have had formal training to recognize the exposures and consult with clients on risk improvement strategies. We’ve made excellent progress in the last 12 months.”
Below is a discussion of water damage with insights from Scott McDonough.

What are the most common causes of damage related to water losses?

Failure of older plumbing systems and improperly maintained sprinkler systems can result in significant damage to property and interruption of business operations.
Scott McDonough: “Water damage from sprinkler discharge will typically have a more severe outcome. In a vertical risk such as a high-rise office building, the water can quickly penetrate multiple floors. Plumbing failure is often more gradual, yet even with measures to mitigate, can still cause loss.”

Describe the direct and indirect costs associated with water damage claims.

Damage to physical property and its contents is very common. The severity depends on where the water originates, how quickly the problem is identified and the type of contents that are affected.
Scott McDonough: “Even a small amount of water can cause significant loss to high-valued equipment. In a space with low content, there can still be significant cost. For example, in a vertical risk, the damage could entail tearing out and replacing floors, ceilings and walls. If the property cannot be occupied, there is potential for loss of rental income. Damaged production equipment can slow or shut down a business while repairs are made, causing short term income loss or loss of customers over time. The magnitude of these losses is often dependent on how well prepared the business is to handle disruption.”

What type of remediation should be done to buildings to better protect against interior and exterior water damage?

Scott McDonough: “To help prevent or reduce significant losses due to water intrusion, building owners or managers should understand their exposures, take proactive measures to avoid water damage, and be prepared to act in the event of a water intrusion. In fact, one of the most important remediation strategies includes regular building maintenance to prevent against physical damage and deterioration leading to water intrusion.”
This calls for a Water Damage Prevention Plan (WDPP) that is routinely updated and exercised.
An effective WDPP includes:
  • Routine site inspections to identify uncontrolled water damage exposures
  • Map and label all zonal shut off control valves
  • Identify employees that have shut-valve authority
  • Establish preventative maintenance programs that target vulnerable exposures
  • Have a trained team of water damage responders, provided with water intrusion response kits
  • Maintain an updated list of contractor’s contacts numbers for emergency purposes
  • Utilize water sensing technology to monitor the most vulnerable exposures
Exterior target areas in need of regular maintenance include roof coverings and drains, drain lines, eaves and gutters - which are susceptible to ice dams. Windows, doors and vents need to be properly cared for with paint and caulk. Foundations, bulkheads or other below-grade openings should be maintained to prevent leakage. Ideally the landscaping and grounds should be graded to move ground water away from the building.
Interior target areas include attics, basements and crawl spaces with water pipes or equipment. These need to be properly insulated, heated or monitored for temperature and water leakage using sensing devices. Routinely and seasonally monitor heating and cooling systems, mechanical systems like hot water tanks, air handlers, sump pumps, building drainage piping, sewage systems and small appliances. Monitor domestic water lines, systems and drain pipes, and sprinkler piping which is prone to failure. Prior to exceeding their useful life, it’s critical to maintain or update appliances such as washing machines, dishwashers, toilets, sinks, showers, and wet closets. Finally, monitor critical equipment that’s highly vulnerable to water intrusion including computer rooms, hospital diagnostics, telecommunications, data centers and clean rooms.

How can technology improve response times and reduce water damage loss?

Many major water loss events involve some degree of human error. Water sensing technology can help mitigate losses.
Scott McDonough: “Often people who discover an incident do not know what to do and they call building security. This wastes valuable time in which hundreds of gallons of water can escape. Knowing where a shut off valve is located and how to use it could mean the difference between a relatively minor loss and one that involves millions of dollars.”

What do you see as the long-term trends?

With the historic number of losses, more clients will be ramping up with WDPPs and considering water sensing technology.
Scott McDonough: “Many of the commercial carriers are addressing the issue of water damage via risk engineering focus and coverage changes. As water sensing technology continues to evolve, the capabilities, effectiveness and cost of these devices are making it more desirable to clients. Over time I believe they will be more commonplace than they are now.” 
All coverages and services may not be available for all businesses or in all states. For details on what coverages and services are available to you, contact your agent at The Hartford today.
This site outlines in general terms the coverages and services that may be afforded under a Hartford policy. All policies must be examined carefully to determine suitability for your needs and to identify any exclusions, limitations or any other terms and conditions that may specifically affect coverage. In the event of a conflict, the terms and conditions of the policy prevail. All Hartford coverages and services described on this page may be offered by one or more of the property and casualty insurance company or life and accident insurance company subsidiaries of The Hartford Financial Services Group, Inc.
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