PREVENTING WATER DAMAGE DURING CONSTRUCTION

Workshop W7 Wednesday, November 12 1:30 2:45 p.m. and 3:05 4:20 p.m. PREVENTING WATER DAMAGE DURING CONSTRUCTION Presented by Scott Foyer National Construction Practice Leader Travelers Inland Marine Peter Wilcox Technical Director, Risk Control Inland Marine Travelers Water is a leading cause of loss on construction projects. A water damage loss can have a significant impact on a project s schedule and result in uninsurable losses that have a direct impact on the project's bottom line. This session will use a case study to demonstrate the potential impact of a water damage loss on a project, outline some simple and cost-effective prevention and mitigation techniques that can reduce the likelihood of a project delay due to water damage, and illustrate some cost-benefit data on these prevention programs. To print on both sides of the page, set your printer for duplex printing. Workshop W7 Copyright 2014 International Risk Management Institute, Inc. 1 www.irmi.com

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Scott Foyer National Construction Practice Leader Travelers Inland Marine Mr. Foyer is a national practice leader for construction at Travelers Inland Marine. In this role, he focuses on the profitability and growth of the builders risk coverage line. Other responsibilities include developing Travelers s new builders risk coverage form and other construction products, as well as authoring underwriting guidelines, conducting training, and authorizing underwriting of large risks. Mr. Foyer holds a bachelor of science in business degree from the State University of New York at Albany and a master of business administration degree from Rensselaer Polytechnic Institute in Troy, New York. He is also a veteran of the United States Navy. Peter Wilcox Technical Director, Risk Control Inland Marine Travelers Mr. Wilcox serves as Travelers s risk control technical director for inland marine. He began his 25- year insurance career in 1986 when he joined St. Paul Insurance in its Risk Management Services division. When St. Paul Insurance started its dedicated construction unit, he was selected to provide risk control services to contractors located in the New England states. In 1992 he joined his brother s electrical contracting business and ran the residential construction portion of the business. In 1997, he returned to the insurance industry, with both St. Paul and Travelers and in 1999 was once again handling the risk control services provided to major contractors in the Northeast. He assumed his current role in 2009 and is responsible for risk control services and products for Travelers inland marine customers. Mr. Wilcox holds a bachelor of science degree in safety from Illinois State University. He is a Certified Safety Professional (CSP); a member of NFPA 241 Technical Committee, Standard for Safeguarding Construction, Alteration, and Demolition Operations; and served with the U.S. Army. Workshop W7 3

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Water Damage in Construction Projects: A Business Case for Prevention Presented By: Scott Foyer National Construction Practice Leader Travelers Peter Wilcox, CSP Technical Director, Risk Control Travelers Disclaimer 5 Workshop W7 This program or presentation is only a tool to assist you in managing your responsibility to maintain safe premises, practices, operations and equipment, and is not for the benefit of any other party. The program or presentation does not cover all possible hazardous conditions or unsafe acts that may exist, and does not constitute legal advice. For decisions regarding use of the practices suggested by this program or presentation, follow the advice of your own legal counsel. Travelers disclaims all forms of warranties whatsoever, without limitation. Implementation of any practices suggested by this program or presentation is at your sole discretion, and Travelers or its affiliates shall not be liable to any party for any damages whatsoever arising out of, or in connection with, the information provided or its use. This material does not amend, or otherwise affect, the provisions or coverages of any insurance policy or bond issued by Travelers, nor is it a representation that coverage does or does not exist for any particular claim or loss under any such policy or bond. Coverage depends on the facts and circumstances involved in the claim or loss, all applicable policy or bond provisions, and any applicable law.

Agenda Topics Understand the Impact of a Water Damage Loss to a Project Identify Costs Associated with a Water Damage Loss Take Action: Employ Measures to Reduce a Project s Exposure to Loss Implement Cost Effective Prevention and Mitigation Techniques 1 Why is it the leading cause of loss? Construction practices Skilled labor force Changes in type of pipe and how it is connected Lack of specific codes/standards/regulations 2 6

Water damage Loss Scenario - High Rise Condominiums Project Specifics: Construction: Fire Resistive, 25+ stories Construction Schedule: 2 months until completion 90% Partial Occupancy Loss Specifics: Time of loss sometime overnight during non-working hours Loss location penthouse mechanical room Large diameter pipe fitting failed All condos sustained damage to some degree 3 Severity Reasons: Mechanical room construction details Lack of water flow or water level detection Water flowed for 5+ hours Water damage Loss Scenario - High Rise Vertical penetration construction details Pipe Fitting Failure Causes: Coupling not installed to specifications Quality Control inspections was lagging Workshop W7 4 7

Project Specifics: Water Damage Loss Scenario - School Construction: 2 Story Masonry Non-Combustible Construction Schedule: 2 months until completion Loss Specifics: Loss location first floor ceiling level Time of loss weekend Large diameter pipe fitting failed All first floor classrooms in wing sustained damage 5 8

Water Damage as a Percentage of the Total Loss by Occupancy 7 Insurance Services Office, Inc., Circular AS CM-2014-002, Highlights of Commercial Inland Marine Experience, August 1, 2014 Water Damage Loss Severity 300,000 280,056 250,000 213,114 200,000 193,526 150,000 100,000 50,000 153,595 138,100 48,116 146,646 Workshop W7 0 Office Water/Sewage Treatment Mercantile Apartments Institutional Dwellings Other Than Apartments Total 8 Insurance Services Office, Inc., Circular AS CM-2014-002, Highlights of Commercial Inland Marine Experience, August 1, 2014 9

The Approaches: Avoidance Reactive Preventive Review of Water Damage Mitigation Approaches and Common Criteria Measurements The Common Criteria Measurements: On Time On Budget Quality 9 Avoidance Approach can be Costly! Risk of Uninsured Costs Self Insured Retention Deductibles: Property Damage Water Damage Waiting Period Higher Insurance Premiums Past Loss Experience Construction Defect (GL) Lost Opportunities/Revenues Subcontractors delayed from moving to next project while repairing the current project Damaged Reputation may influence bid selection Business Risk from Market/Economic Changes Loss of Future Leases or Sales 10 10

Avoidance Approach can be Costly! Risks of Uninsured Costs Potential Coverage Gap Soft Costs Workshop W7 12 The Builders Risk Book, by Steven A. Coombs, CPCU, ARM, and Donald S. Malecki, CPCU, published by International Risk Management Institute, Inc. (IRMI), 2010, page 289. 11

Avoidance Approach can be Costly! Risks of Uninsured Costs Ramp-Up Costs 13 The Builders Risk Book, by Steven A. Coombs, CPCU, ARM, and Donald S. Malecki, CPCU, published by International Risk Management Institute, Inc. (IRMI), 2010, page 307. 1. Security guard service is more expensive than electronic surveillance system. Reactive Approach: Security Guard Service 2. What are the duties of the security guard? Will they detect the water leak? Who will they notify? 3. What will be a security guard response? Will they shut off isolation valves to stop the flow of water? 14 12

Preventive Approach: Water Damage Prevention Plan Elements Include: Building Design Control of water sources Quality Control Testing Detection Response Emergency Response Kit 15 Preventive Approach: Water Damage Prevention Plan Design: Waterproof curbing at vertical openings Sizing of drains in Mechanical rooms Isolation valves installed to shut off water sources 16 13 Workshop W7

Electronic Surveillance Detection Flexible: Can be used with different sensors and alarms that can aide in the prevention and mitigation of multiple perils. Adaptable: Transferable to other jobsites The setup can change with the progression of the job Reliable: 24/7 Coverage Recording Event Notifying an Event has occurred Preventive Approach: Water Damage Prevention Plan 18 14

Preventive Approach: Project Example Project Description: Occupancy: 3 Story Masonry Non-Combustible Office Building in San Antonio,TX. 59,916 sq.ft. x $25 sq.ft. Annual Lease Rate = $1,497,900 Annual Rental Revenue Limits of Insurance: Property Damage Limit of Insurance: $9,954,906 Rental Income Limit of Insurance: $1,497,900 Soft Costs: $874,374 Deductibles: Property Damage: $5,000 Rental Income Waiting Period: 7 Days Claim Scenario: Water Damage Claim to Electrical Switch Gear Property Damage: $280,056, 6-Week Delay, 25% sq.ft. Pre-Leased 19 Preventive Approach: Project Example Ramp-Up Schedule 12 85% $106,101 11 10 80% 75% $93,619 9 70% 8 s th 7 n o M 6 5 4 3 2 1 65% 60% 55% 50% 45% 40% 35% 25% $31,206 $43,689 $56,171 $74,895 Workshop W7 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Percentage Leased 20 15

Preventive Approach: Financial Example Investments - Description Dollars *Electronic Surveillance System Cellular Alarm panel $1000 16 Monitoring Annual Costs $500 Water Flow Alarm $500 Water Level Sensor $250 Setup Labor $500 Emergency Clean Up Kit $2500 - $3000 *tattletale portable alarm systems TOTAL Investment $5,250-5,750 Uninsured Costs Description Dollars Average Claim Severity Office occupancy (Insurance Services Office, Inc. 2013 Highlights of $280,056 Commercial Inland Marine Experience August 1, 2014) Deductible PD / BI 7 Days (based on project example) $5,000 / $7,281 Lower Revenues Ramp Up Costs* (based on project example) $45,770 Lower Profit Margin Unlisted Soft Costs / Extra Expense sublimit exceeded $? Reputation $? *Could be reduced by aggressive marketing activities so ramp-up is accelerated. TOTAL Uninsured Costs + $58,051 21

Benefits to Preventive Approach: Water Damage Prevention Plan Protect your Reputation: Deliver the project on time and on budget Protect your project s ROI: Don t incur additional expenses not originally contemplated Efficiencies: Your investment in equipment is transferable to other projects Cost/Benefit Analysis: Risk prevention is worth the investment in time and resources to avoid expense of a claim including mitigation Make sure you can capitalize on future projects or contracts Reduce your business risk to market/economic conditions 22 How did each Approach Measure up Against the Criteria? Criteria Avoidance No Preventive Action Taken Reactive - Watchman Preventive Water Damage Prevention Plan On Time Negative Increase Likelihood of Delay On Budget Negative Uninsured Losses No Effect Response Mitigates Likelihood of Delay Negative - Expensive/Uninsured Losses Positive Detection and Response Positive Cost Effective / Reduces Likelihood of Loss Quality No Effect No Effect Positive - Plumbing Quality Control Program Workshop W7 23 17

Agents What can you do to help educate your clients? Share the Story Be a Leader of Change Help your Clients Avoid having Insured and Uninsured Expenses from Water Damage Losses 24 Project Owners What can you do to mitigate water damage losses? Design for collection and discharge of water Specify in the contract site protection plans that include water damage prevention Third party quality control inspections Testing procedures Detection of unwanted water Prompt response 25 18

General Contractors What can you do to mitigate water damage losses? Select Subcontractors that value quality Implement formal testing and acceptance procedures Implement a Water Damage Prevention Plan Invest in systems that can provide early detection Strategically deploy response kits Train response teams 26 19 Workshop W7 Questions

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