Contractors all risks insurance and water damage coverage at construction sites and office towers
Jan 30, 2018
A contractors’ insurance policy does cover this type of damage—after all, what’s the point of having contractors’ insurance if not for situations like this? Yet there are nuances and details that require careful understanding and monitoring of the policy; otherwise, the problem becomes an insurance issue as well.
I’ll start with a short real-world case that illustrates these insurance “fine points,” and from it, I’ll share my recommendations on how to properly structure your contractors’ insurance policy.
Real-World Incident
About six months ago, I received an urgent evening call from a client who was renovating the offices of a high-tech company in an 18-story office building in Jerusalem:
"Itzik — a major water pipe was damaged during demolition work on the 12th floor. It took a long time to locate the shutoff valve. The entire floor was flooded, and water ran down, flooding all the lower floors. There is massive damage. What should we do?"
This situation perfectly highlights why contractors’ insurance isn’t just a formality — understanding the scope, limits, and clauses of the policy is essential to ensure coverage and prevent disputes when such events occur.
An insurance policy for contractor work covers this type of damage. After all, why did you take out contractor insurance if not for this? And yet, there are nuances and matters here that require control and monitoring of the policy, otherwise the crisis is also an insurance one.
I will begin with a short case story from the field that will illustrate the insurance 'subtleties' and, based on this, my recommendations on how to properly structure your contractor all risks insurance policy.
A real event from the field
About six months ago, I received an urgent call in the evening from a client who was renovating the offices of a high-tech company in an 18-story office building in Jerusalem: "Itzick - a massive water pipe was damaged while performing demolition work on the 12th floor. It took a long time for us to locate the water pipe. The entire floor was flooded. The water flowed down and flooded all the floors. There is a lot of damage here. What do we do?"
Water damage – one of the most problematic
The description as detailed reflects one of the most problematic types of damage.
Repairing the pipe that caused the damage is usually negligible, but the resulting and environmental damage is often very large.
Water pipe damage that causes severe damage can occur in a wide range of renovation and construction projects: during the construction of a new building, while performing renovations in a populated and prestigious office building or apartment building, in an industrial plant, in a complex and system-intensive facility, above the floor of computer and server rooms, in a place where water-sensitive equipment is stored, complex electrical systems, and more.
There are many causes of water damage.
A pipe that was damaged while performing work, water taps that were left open because someone asked to open them and, realizing there was no water, didn't bother to close them, a failure in the construction of the pipe that suddenly bursts, malicious damage, and more.
The damage can be much greater and more severe if the workers on the site or in the building have not received training on the subject and are not aware of the location of the water bodies (as described above). Therefore, sometimes a long time passes before the water source is cut off. Meanwhile, the damage spreads, the water flows and washes the entire building - and the damage is enormous.
The description as detailed reflects one of the most problematic types of damage.
Repairing the pipe that caused the damage is usually negligible; however, the consequential and environmental damages are often very substantial.
Water pipe damage causing severe losses can occur across a wide range of renovation and construction works: during the construction of a new building; in the course of renovation works in an occupied and high-end office building or a residential building; in an industrial plant; in a complex facility with extensive systems; above floors housing computer rooms and servers; in areas where water-sensitive equipment is stored; involving complex electrical systems, and more.
The causes of water damage are numerous: a pipe damaged during work; water taps left open because someone asked for them to be opened and, upon realizing there was no water, failed to close them; faulty plumbing installation that suddenly bursts; malicious damage; and others.
The damage may be far greater and more severe if workers at the site or in the building have not received proper instruction on the matter and are not aware of the location of the water shutoff valves (as described above). As a result, it may take a long time before the water source is shut off. Meanwhile, the damage spreads, the water continues to flow and flood the entire building — and the losses are enormous.
During the formulation and construction phase of contractor works insurance policies, careful attention must be paid to the details and matters that require control and oversight in the policy, otherwise an insurance crisis could develop here as well.
Protection Conditions Established in the PolicyOften, the protection issue is a condition for maintaining insurance coverage: A requirement recorded in the policy to shut off the water supply when the building is unoccupied, ensuring faucets are closed, etc. Failure to perform such actions may reduce the insurance company's liability or even cancel it entirely.
Coverage Limitation for Damage to Property Being Worked On and Adjacent PropertyThis is a truly critical matter. It's important to remember that when performing work for a client, the work site (the property being worked on and adjacent property) is not considered third-party property. The standard extension in contractors' insurance policies for property being worked on and adjacent property is typically limited to 20% of the project value. Therefore, if the project value is low (when performing renovation or minor repairs), the coverage amount may be extremely low and completely disproportionate to the damage caused - especially regarding consequential damage. In such cases, the contractor may be exposed to claims from the client or subrogation claims from the client's insurance company - without adequate insurance coverage.
Coverage Limitation for Third-Party DamageEven in the third-party insurance chapter of the contractor policy (mainly in small projects, though not exclusively), the contractor may find himself retrospectively with a contractor policy having a low and sometimes ridiculous insurance amount, stemming from a lack of understanding of insurance needs in the construction industry. Thus - exactly like in the field example I brought at the beginning of the article - in small work performed on an upper floor, when hysterical water damage occurred to a large office building where many floors were flooded, and both the building and valuable contents were severely damaged - the damage costs may be immeasurably greater than the modest third-party insurance amount sometimes purchased.
DeductiblesRecently, insurance companies have begun setting high deductibles for this type of damage: starting from ₪50,000 and upward.
Summary of the Topic:Awareness of the importance of proper handling of the water aspect in any type of construction project, proper employee training - and purchasing appropriate insurance that takes into account all aspects, including work location, work environment, and policy limitations - may save a lot of money and headaches.
Important highlights in the contractor's all risks insurance policy
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