Water damage has become one of the most frequent and costly causes of loss for high rise construction projects, whether that be during the base build or fit-out stages of the project.
Insurers have become increasingly focused on water-based risk as claims involving burst pipes, stormwater ingress, or accidental water discharge often escalate quickly and are expensive to rectify, especially in the later stages of a project. Water ingress from any source can cause hidden damage, trigger mould growth, and will often impact project delivery owing to significant reinstatement and delays.
As a result of high claim values and loss trends across the industry, insurers are scrutinising water management measures and response procedures more closely than ever before. Insurers expect proactive controls aimed at early detection and rapid isolation of water sources, particularly once systems are progressively brought online as floors are completed during construction.
Typical insurer requirements include:
- Installation of leak detection sensors in high-risk areas such as risers, plant rooms, ceilings, and wet areas such as showers and laundry facilities.
- Automatic or remotely operable shut-off valves, especially for completed but unoccupied levels.
- Zoning of water systems by floor or trade to limit the extent of potential damage.
- Clearly identified isolation points for all temporary and permanent water services.
- Mandatory pressure testing of pipework prior to concealment, with documented hold periods.
These measures are designed to minimise both the frequency and severity of escape-of-water events.
Acting like a prudent uninsured
When water damage strikes, immediate action is essential. As per most insurance policy claims conditions, the policyholder is expected to take all reasonable steps to minimise losses by acting as a prudent uninsured as opposed to waiting for the insurer’s approval before acting. Practical measures in such circumstances might include stopping the water source, arranging for professional drying, and using dehumidifiers or air movers to prevent mould.
Once areas begin to dry, evidence of damage quickly disappears, so meticulous documentation is critical:
- Photograph everything affected including, but not limited to, walls, ceiling cavities, cable bundles, or plant sections.
- Keep records of all cleaning (including any products used and/or purchased), drying, and repair works. Insurers assess claims based on evidence, and once materials are dry, it becomes difficult to prove that they were previously affected.
A common misconception is that only the principal or first named policyholder can submit a claim. In fact, any insured party named in the project policy, including contractors can lodge a claim. This flexibility ensures that whoever suffers the loss can respond promptly without procedural delays and allows efficient management of the claim.
Understanding who reinstates what
It’s important to remember that under most construction contracts, the policyholder’s obligation is to reinstate the ‘works’, i.e. the construction or fit-out elements forming part of their current project scope. If damage extends to property outside the ‘works’, such as existing structures or the landlord’s fixtures, the responsibility for reinstatement shifts. In such circumstances, the owner of that property must notify their own Industrial Special Risks (ISR) insurer.
Under contract you are responsible for indemnifying loss/damage to third parties’ property if you are negligent, you should not take on responsibility for physically reinstating that property. Ensuring clarity on ownership and insurance responsibilities in contracts can prevent disputes when a loss occurs.
What is ‘damage’ under a policy?
Water damage to electrical or mechanical systems often attracts close scrutiny. In the event of a claim, insurers will want to assess whether individual components are truly damaged. Recent claim examples seen by the Bellrock team have shown that insurers will engage experts to ascertain damage to individual components, this is especially true for lifts and escalators.
Likewise, we have seen recent claims where cabling has become immersed in water and insurers have challenged whether this constitutes damage as well as an instance whereby a supplier has refused to honour a warranty – both examples show the potential for water damage to create practical and financial complications. In some cases, cabling can fail several years after water exposure, so engagement with appropriate experts early in the process is critical.
Some policies include cover where warranties are invalidated as a result of a claim, effectively treating the loss of warranty as a form of damage. This can help resolve disputes over components that still operate but are no longer supported by a supplier warranty.
A similar issue arises with consumer goods installed in residential projects, such as appliances. If project completion runs late, their manufacturer warranties may expire before handover leaving builders holding the risk. Fortunately, many manufacturers allow warranty extensions upon request and this is a proactive step worth considering early in the completion process.
Claim example: Even a small amount of water can have a significant impact
During a fire hydrant pipe installation, workers inadvertently struck an in-service, pressurised sprinkler main, leading to an uncontrolled water release. Water continued to escape for approximately ten minutes before the system could be isolated.
Preliminary investigations revealed that a coupling joint on the charged rising main near the works had failed, which in turn activated the pumps and exacerbated the water discharge.
The incident resulted in extensive damage to the floor which was being worked upon, including damage to materials awaiting installation. Water migrated through cabling routes and penetrated several floors below, damaging ceilings, carpets, desks, computers, and various fixtures. The repair costs for the works, excluding losses sustained to third-party property to the affected floors below, was in the region of $400,000.
Using policy extensions wisely
In the event of an escape of water, understanding what cover is available under your construction policy can make a real difference. Extensions like Expediting Expenses or Extra Expense will pay the additional cost of fast-tracking reinstatement works to avoid project delays, whilst Claims Preparation Cost extensions will reimburse the professional fees involved in preparing and managing your claim. These are valuable extensions that support both cost recovery and project continuity.
Bringing it all together
Effective management of escape of water claims is not only about having the right insurance but also about understanding your obligations and acting decisively when loss occurs. From immediate mitigation, preparation and documentation of losses, to knowing where responsibilities lie between works and existing property/third party property, are all vital. By staying proactive, maintaining clear records, and engaging early with your risk advisor and insurer, you can help ensure your project recovers swiftly and fairly when water damage strikes.
