Manage Insurance Risk Through Proactive Pipe Replacement

Manage Insurance Risk Through Proactive Pipe Replacement

Common Pitfalls and Guidance for Community Association Boards and Property Managers

Written with assistance from David Velasco, EBP, APRI, at JGS Insurance

As pipes begin to fail in condo and co-op communities, water damage and related hazards can become more frequent and severe. And as incidences increase, so do community association insurance costs and risk.

For example, to recoup the costs of repair, community associations and their property managers will file insurance claims and eventually see their premiums go up. They can even lose coverage altogether if they don’t move early to implement proper remedies.

If the pipes in your community are failing, you can actually reduce annual insurance bills and save money in other ways by moving early to replace your piping system.

A Leak Is More Than a Leak

Consider this all-to-common scenario:

A unit owner sees paint bubbling and water running down the wall from her bathroom ceiling. Maintenance discovers a pinhole leak behind the bathroom sink in the unit above that’s been slowly misting water into the wall cavity. They shut off water to the building and hire a plumber, drywaller, and painter to replace the damaged pipe, repair the walls in both units, and replace the upstairs sink.

What does this all add up to?

  • A building-wide water outage for four to five hours, which angers residents.
  • Three days during which the upstairs unit owner has no bathroom sink and two days when both unit owners have walls open.
  • Plumbing and drywall/painting costs totaling more than $7,000.
  • Delays in routine maintenance across the community.
  • Possible health and financial risk since the association responds to the emergency without assessing or addressing hazardous substances like asbestos in the existing walls and mold.

Clearly, a leak is more than what you might expect.

The Ongoing Challenges of Aging Pipe

Unfortunately, the story doesn’t end here. In this scenario, the leak has occurred in an older building, which means it’s just one of many. On average, piping systems usually start failing at around 30 years old1 and often need to be replaced within the next 20 years—sometimes sooner.

On average, piping systems usually start failing at around 30 years old1 and often need to be replaced within the next 20 years—sometimes sooner.

As the number of incidents and damages to unit owners’ personal property multiply, the board decides to file for eligible losses in addition to pulling from maintenance and reserve budgets. After repeated claims, the insurance company informs the community that it will face increased premiums and deductibles when the policy renews.

The board discusses its options, one of which is to replace the piping system. The board obtains a rough estimate and decides a repipe is too expensive; it chooses to pay the increased insurance costs.

The board’s decision might mean:

  • Increasing complaints from residents disgruntled over repeated water shutoffs.
  • Long-lasting negative effects on insurability and unforeseen association costs. For example, carriers typically won’t cover water that leaks or seeps over time, which leaves the association to pay for damages and repairs.
  • Possible board liability and litigation for neglecting fiduciary responsibility to maintain the building(s).

And It Continues

Less than two years after the board decides to delay pipe replacement, “it” happens: The worst-case scenario. A massive leak from a larger diameter pipe floods an elevator shaft. Repairs cost the community more than $200,000, the elevator is down for almost two months, and the insurance company notifies the board that they will lose their coverage when their policy term runs out.

Finding a new carrier with affordable rates will be nearly impossible since insurance carriers won’t issue a new policy without seeing loss run sheets that reveal the leak history. In fact, it’s not uncommon for deductibles to rise to $25,000 per unit or even $50,000 per unit when there’s a history of repeated leaks.

It’s not uncommon for deductibles to rise to $25,000 per unit or even $50,000 per unit when there’s a history of repeated leaks.

Worse still, the board must now raise condo fees even higher than if they had proceeded to replace the piping earlier.

How to Avoid High Insurance Costs for Pipe Problems

So what can you do to avoid these issues? Get proactive.

Make sure you’ve implemented and are keeping up with a regular maintenance plan. If you aren’t doing so already, use an incident tracking tool like the SageWater Leak Log so that you can detect when leak patterns indicate systemic piping failures.

Understand your circumstances.

  • With the help of your legal counsel, review your governing documents to know what is the responsibility of the community versus that of the unit owner when pipes fail.
  • Include your insurance broker in the meeting so that you also learn what is covered and not covered by the master policy.
  • Compile your leak and loss histories. Pull the leak history from your leak log or preferred tracking tool and request a five-year loss history from your insurance provider, which will detail water damage claims. Combined, the data from these histories will help you and your broker better identify if your community’s pipes are failing and the extent of the problem.

Work together with your broker to develop a proactive service plan/written service timeline. Allow at least 10 months before your next policy renewal and repeat periodically. Key activities include:

  • Conduct an independent on-site inspection with a loss control specialist. You’ll learn the strengths and weaknesses in your piping system.
  • Inform residents about pipe health. For example, deliver periodic education seminars for new board members on topics such as insurance vs maintenance responsibility and publish newsletter articles about community vs. unit owner responsibilities.
  • Meet six months before your policy renewal to discuss capital improvement projects like pipe replacement, maintenance projects, and insurance market conditions that can affect your policy.

Look to replace pipes early. How do you know the right time to replace your pipes? In our experience, it’s earlier than most boards realize. We suggest you do it when it costs less per year to finance a loan than the annual cost of damages, deductibles, and increased insurance rates. That’s not always easy to know, but a proactive service plan and scenario planning will help.

Consider our example above, where the repipe project was estimated to cost $2 million. The community would have paid ~$14,000 per month to pay off a loan that was financed over 15 years at a little over 3% annual interest. That means $168,000 per year, which is far less than the $200,000 it cost for the one leak that ruined the elevator. In addition, the repipe would have netted further savings from reduced insurance rates and deductibles, and lower maintenance costs and water bills.

The Benefits of Proactive Pipe Replacement Are Clear

The calculations above don’t even factor in the full benefits that come with a new piping system like a new plumbing warranty, improvements to building functionality and life safety, and code upgrades. You’ll also avoid liability issues that can arise when you defer maintenance. Plus, you’ll enjoy happier residents, fewer maintenance calls, and less stress.

Aging pipes are inevitable, but severe condo fee increases and insurance risk don’t have to be. Stay proactive with your building’s piping systems. You’ll realize significant monetary savings, a safer, happier community, and overall peace of mind.

 

1Estimated Useful Life Tables:

https://multifamily.fanniemae.com/media/6701/display

https://www.hud.gov/sites/documents/EUL_FOR_CNA_E_TOOL.PDF

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