Why construction companies need to listen to insurers

There is increasing interest among insurers in getting contractors as well as developers to buy in to the inclusion of leak detection systems in building projects. Intelligent Insurer reports.

“Such cases can end up in litigation as the developer’s insurer seeks redress from the contractor.” Michael Wakley, LeakSafe

Water leak and fire detection systems should be built into any construction project to forestall any future disaster, but most water leak detection systems are installed post-construction—almost as an afterthought.

Michael Wakley, chief executive officer of LeakSafe, a UK-based company specialising in the supply of water leak detection and prevention systems, finds that very few Tier 1 construction companies are installing them from the outset.

“This reflects the fact that the initial focus for the insurance market has been the developer, with a focus on post-construction damage,” Wakley says. Fortunately, this approach is now changing, and insurers are starting to look at construction contractors’ policies, and the cost of claims in this segment.

Chris Andrews, head of risk management solutions at Aviva, adds: “There doesn’t seem to be a default position among construction companies to install leak detection. This is partly because the technology is still in its relative infancy, so there needs to be better awareness and understanding of the benefits to begin changing this mindset.

“There are various detection technologies out there and one of our customers is now building it into their standard specification, so we are starting to see a shift, which is positive for us as insurers as well as for the end customer,” Andrews says.

“We would estimate that less than 10 percent are installing leak detection systems—this is across the board. Unless you are specifying this at the tender stage, you are probably too late.

“It’s hard to bring it in post-tender as you are adding new costs to the contractor which, with tight margins on a project, may not be top of their agenda. So, leak detection needs to be part of the tender.”

Need for education

Aviva tends to get involved with construction projects when they are looking for insurance. When leak detection isn’t already integrated into the fabric of the construction project, Andrews says, constructors are having to add it in to the specification later on. However, he argues, the insurance industry should “tell contractors they need to be thinking about installing leak detection at the early stages”.

“There are no discernible trends at present other than there is increasing interest among insurers in getting contractors as well as developers to buy in to the inclusion of leak detection,” adds Wakley.

Claims and costs

Nicholas Hartley, head of business improvement and innovation for group strategy at Ecclesiastical Insurance Group, says his insurance company’s focus is on buildings that already exist, and that the cost of claims has slowly increased across the industry.

“There are many reasons for that—including the quality of house construction and the use of different materials,” he says.

“In my experience, and my background was primarily commercial underwriting, the most common types of loss are still prevalent. On the residential book, from the frequency perspective, fire is low, but more severe. From the commercial perspective, there is more of a risk from water loss, as there tends to be more equipment that can be damaged.

“For example, there was a claim involving raw steel and it was easier to write it off; it was caused by a leaking pipe. Some of the buildings we insure have historically important items inside, too, such as invaluable works of art.”

With regard to current smart home trends at the high end of the market, Hartley says housebuilders will often install a range of features, yet he hasn’t seen many examples of water leak detection systems being fitted.

“The quality of new builds is not up to standard because there is a skills shortage in the construction industry. However, I think it is a good idea,” he comments.

“With a very large block of flats it would be feasible to install some kind of prevention system, and this is where I see LeakSafe being deployed. In a property with a frequency of claims and leaks, an insurer may increase the excess to avoid incurring the losses that are no longer fortuitous.

“If you truly want to stop water leaks, you have to have a different mindset, and that’s when technologies such as water leak detection come in handy.”

Plumbing complexities

As to the question of why plumbing is the most expensive aspect of post-construction, and the likely consequences of not installing leak detection systems from the outset of a construction project, Andrews says: “Any remediation work post-construction is expensive. In the UK we have a tendency to conceal most mains services for aesthetic reasons, and the consequence is that there is much more hidden pipework.

“This has an impact on the overall costs to repair damage and reinstate services. It is expensive from an insurance perspective. Plumbing is often boxed in, as well as the fact that it is underneath the floor, and so leaks aren’t always immediately obvious.

“You have to identify where a leak comes from, so you may need to damage floors and walls before having to repair them.”

Andrews adds that good leak detection systems should work “in tandem with good quality assurance and control during plumbing works”. With various types of leak detection systems on the market, he advises that the most appropriate one to install is determined by the project type, and the likely end-use of the building.

“There are systems that alarm and notify someone, and those that automatically shut off the water supply,” he explains.

In his opinion LeakSafe has an excellent leak detection system that works for certain risks. Andrews claims that it has prevented losses on various construction projects once they have become live.
“LeakSafe, along with other companies on our specialist partner network, are chosen based on the type of project and property.

“We have a team of risk engineers that meet clients to understand the risks and potential losses, and we work with them to implement loss prevention best practice, and to install a leak detection system when applicable.”

Leaking consequences

The likely consequences of a water leak are delays in occupation and therefore revenue streams as wall and floor finishes have to be removed and walls and sub-floors dried out prior to being re-finished, Wakley explains.

“This delay to occupation is a widely acknowledged issue arising from water leaks in the final stages of construction, ie, when the plumbing is all installed and running at operating pressures.
“Many leaks are not catastrophic, but are relatively low flow rate leaks that are absorbed by wall and floor finishes and will only become apparent afterwards.”

Unrestrained water leaks over a prolonged period of time can cause significant damage. It will also become more difficult to determine when a leak started.

“Was it during the contractor’s defects period or afterwards? This is when such cases can end up in litigation as the developer’s insurer seeks redress from the contractor,” Wakley says.

Water leaks can lead to reputational damage to a development, or even to a developer’s name. If a developer becomes significantly associated with water leaks, he explains, this can lead to slow sales, void periods and extortionate terms for the leaseholders who are reimbursing the landlord for the insurance premium.

Insurers move away

From an insurance perspective, the consequences of not having water leak detection systems installed include some insurers moving away from the construction market. Andrews suggests this limits the amount of available insurance capacity.

“There is less choice which may impact premiums, deductibles and terms and conditions and means fewer options for the brokers to approach. I wouldn’t say the market is broken, but insurers are re-shaping their focus.

“It’s not an area they want to invest in at the moment. At Aviva we are underwriting more construction business, but we would look more favourably on a construction project that adopts best practice leak detection measures.

“We have a ‘prevention first’ philosophy to risk management. If nothing is done, escaped water will become harder to insure, so we want to work with those construction projects that want to embrace best practice loss prevention,” he says.

Improving risk

There is a dual benefit to installing a water leak detection system into a construction project from the outset. For example, it improves risk at the handover stage. It also offers an insurer such as Aviva an opportunity to insure the construction project and to insure the building when it goes live and becomes operational.

“Having systems installed and operational protects future occupants and makes for a better risk,” Andrews says.

“We have our own escape of water predictive analytics which show a strong correlation that if you have one leak, you are likely to have a second; if you have had two leaks there is a significant increase in probability that you’ll have a third one.”

Differing opinions

On why insurers are pushing construction companies to install water leak detection and other preventive systems, Hartley replies it would be interesting to see “how much impetus the industry can put behind these devices”.

“The industry has had differing opinions about construction materials in the past, and it hasn’t always been successful in changing views,” he says.

He nevertheless emphasises that constructors should install more than just water leak systems—even though they are very much on the radar at the moment.

Andrews adds that the insurance industry is concerned about the costs of leaks, during construction and when projects are completed and occupied.

“In the past three years there has been no let-up in the rising cost and frequency of escape of water claims. According to the Association of British Insurers, claim costs have increased by a third, and we believe this has now become a key strategic priority,” he says.

Potential savings

“The potential savings of installing a leak detection system are at present difficult to quantify in sterling terms,” says Wakley.

“Insurers are convinced of their benefit as is shown by their willingness to apply risk management funds to such measures. 

“Constructors should therefore listen to their insurers. They don’t want to carry greater premium and higher costs than are necessary when many are operating on thin margins, and they do not want to develop a reputation for a high incidence of water damage, and risk not being included on developer’s tender lists.”

Andrews agrees. “From Aviva’s point of view, it’s about mitigating losses, protecting lives, preventing injury and damage to property. Losses add costs even to construction management.”