By David Leff, ABCP, Insurance Managing Director at Huntington Insurance Inc.†
Key takeaways
- The rise of extreme weather events and significant claim losses has led underwriters to tighten water mitigation requirements on property owners.
- A property’s water mitigation tactics, location, and construction all factor into underwriters’ risk assessment and subsequent coverage opportunities.
- Property owners prioritizing water risk mitigation through comprehensive assessments and technology implementation could improve negotiations for lower premiums and better policy terms.
- A successful water risk mitigation strategy should include a preventative maintenance program and be part of an overall business continuity strategy.
Water damage can disrupt operations faster than most businesses anticipate. For commercial property owners, the risks tied to water issues – whether from sudden floods or slow leaks – go beyond the structural damage. As extreme weather events increase and insurance carriers face mounting losses, underwriters are tightening the reins on who they will cover and on what terms. Securing favorable insurance rates now partially relies on a company’s ability to show an effective water risk management program.
“By prioritizing water mitigation efforts, organizations stand to gain more than just protection against costly damages. These measures can help safeguard operations from downtime and could allow for long-term savings in the form of better policy terms,” says Matt Kistner, Insurance Sales Executive Senior at Huntington Insurance, Inc.
Taking a strategic approach involves understanding how water risk can impact insurance policies, then leveraging emerging technologies and careful assessments to address vulnerabilities.
Understand the risk water poses to commercial properties
Addressing water issues might not be top of mind for commercial property owners, especially those facing other costly retrofit projects, rising vacancy rates, and economic uncertainty. However, water damage has become the leading cause of commercial property losses across real estate classes, according to industry experts‡. In addition to the costs associated with fixing damages, leaving water issues unchecked can impact insurance eligibility.
These are the most common areas for water damage in commercial properties:
- Plumbing and Utility Pipes: Issues with internal plumbing systems lead to moisture buildup, small leaks, or burst pipes that cause significant damage. Large commercial buildings have countless points of potential failure from HVAC systems, extinguisher systems, sinks, and toilets.
- Rainwater and Stormwater: River flooding, coastal flooding, and flash floods can inundate properties quickly. High water tables can also lead to groundwater seeping into basements and subfloors.
- Sheet Flow: Sheet flow refers to the movement of water across surfaces like parking lots, open spaces, or low-slope roofs that can’t be collected in storm sewers following a rain event. Without proper slope management or drainage systems, that water can lead to erosion, water pooling near foundations, or building intrusion.
The rise of extreme weather events is exacerbating risk from these areas. According to NOAA’s billion-dollar disaster tracking database, the last decade has seen 18 flooding events and 113 severe storm events that amounted to a combined $342.8 billion in damage costs in the U.S§. In the prior decade, there were fewer than half that many severe storm events in this category≠. Increased events and their resulting damage have led to unexpectedly high losses for insurance carriers, who are in turn passing those costs on to their customers.
How water risk impacts property insurance policies
Water mitigation is a serious issue from an insurance perspective, so underwriters are adding new layers to their water mitigation stipulations for coverage. For example, many carriers require companies to have water detection sensors or similar mitigation technologies in place before they’ll even consider covering the building under a policy. Underwriters commonly monitor new builds to ensure these technologies are being implemented throughout construction.
A property’s location relative to floodplains or bodies of water can also impact a policy’s terms and premiums. Insurance carriers model risk based on the property’s geographic location and the 500-year,100-year, and special consideration flood zones. These models consider how those areas might expand and impact the properties they’re assessing, which can heavily affect coverage.
The construction and age of the commercial property itself is also factored into this assessment. Though new building techniques meet specific requirements to mitigate water, older buildings might not have the right connective material to withstand water accumulation pressure. If water could put the structural integrity of a building at risk, a carrier might require property owners to add bracing and additional repairs before issuing coverage.
If the risk is too high across these areas, the property owner might face high premiums, worse terms, or a water damage exclusion clause in their coverage, forcing them to self-insure or foot the bill for damages. From that standpoint, unmitigated water risk carries considerable financial risk. Investing in a thorough water risk assessment could help address problem areas proactively, not to mention demonstrate a commitment to risk management that could be valuable in insurance negotiations.
Conduct a comprehensive water risk assessment
A proactive risk assessment is not just about identifying potential risks. Companies can use it to create a detailed plan that includes mitigation, preventative maintenance, and long-term resistance. Underwriters can use this information as supplemental evidence when determining insurance policy terms.
- Initial Site inspection. Begin by assessing the property to identify areas vulnerable to water. Pay attention to roofs, walls, foundations, and drainage systems. Factors like roof age, standing water, blocked exterior drain lines, and foundational weaknesses can increase the likelihood of water intrusion. Working with an experienced third-party can help find those areas most likely to cause a problem or be scrutinized by an underwriter.
- Be Aware of Your Location. As stated previously, properties situated on floodplains, waterways, or risk zones will require a more robust mitigation strategy. If in a high-risk area, consider investing in flood walls, extra sump pumps, or other emergency precautions to protect against catastrophic events. While these may be costly, they will likely reduce the likelihood of significant damage and could improve insurance standing.
- Compile Findings. The property’s water risk assessment offers a roadmap for long-term mitigation efforts and continuity planning. This data will be useful in mitigation efforts as well as for underwriters to evaluate the property’s risk profile.
Implement water mitigation technologies and preventative measures
Now that vulnerable areas have been identified, it’s time to coordinate sensors, detection technologies, and mitigation equipment to address them. Examples include sump pumps, IoT-enabled detection systems, puck sensors, and automated shutoff valves. Companies can take advantage of innovations in this market by investing in advanced, Bluetooth or wi-fi-enabled systems that can monitor water flow, humidity, and pressure in real-time. Property owners can be alerted to abnormal patterns and troubleshoot before they turn into bigger issues.
Placing sensors in low areas to send water detection alerts is a good first step, but what happens when one stops working? All technologies must be regularly inspected to ensure they’re functioning properly and aren’t in need of repair or replacement. Establishing a preventative maintenance program helps make sure the systems designed to protect your property won’t fail when you need them most.
Preventing water damage should not be a standalone business process. Responding to these events should be a component of a business continuity plan.
“In the event of a disaster, clearly defined roles and responsibilities ensure a fast response, minimizes downtime, and business interruption. Taking a holistic approach – integrating technology, risk assessment, and continuity planning – better positions you for disasters and demonstrates to insurers that you’re prepared for water-related risks,” says Michelle Szymanski, Insurance Sales Executive Senior at Huntington Insurance, Inc.
Prioritizing water risk mitigation for the future
Extreme weather events and significant losses have driven insurance carriers to put pressure on businesses’ proactive water risk practices. By conducting risk assessments, implementing mitigation technologies, and practicing an incident response plan, organizations do more than just comply with insurance best practices – they position themselves for the future.
With risk management strategies in place, commercial property owners can help protect their assets and set themselves up for more favorable insurance terms. The Huntington Insurance, Inc. team can work with you to develop a customized commercial property insurance program to meet your needs for risk management. To learn more, please reach out.
