From extensive property damage to debilitating business interruptions, unchecked water can lead to significant losses which can translate into costly changes to your Business Insurance. In the third of this three part series the professionals at UBX and EPB&B Insurance explore how modern leak detection technology can mitigate these costs.
Beyond the protection against water damage, the deployment of modern leak detection systems presents a compelling financial argument for property owners and businesses. The primary goal of such loss control measures is to significantly reduce both the frequency and severity of water-related business insurance claims. Insurance carriers are increasingly recognizing the value of these proactive measures, which translates into direct financial incentives for policyholders:
- Typical Discounts: Businesses that implement monitored leak detection systems often qualify for premium credits, often ranging between 5% to 10% on their property insurance premiums. The specific discount percentage can depend on several factors, including the building’s type, the comprehensiveness of the sensor deployment (e.g., coverage of all high-risk areas versus limited placement), and the sophistication of the alerting and alarming systems in place (e.g., real-time mobile notifications versus passive data logging).
- Premium Credits: Demonstrating a proactive leak management posture through advanced water sensors with active monitoring and alert functions, may make a business eligible for additional policy premium credits. These credits can typically range from 5% to 10% on liability premiums and may include an additional 2% to 10% on property premiums.
- Deductible Credits: Some insurance carriers offer further financial incentives by reducing “all-peril” property deductibles for businesses that institute comprehensive water sensor systems. Specific water damage deductibles may also be lowered, directly impacting the out-of-pocket costs in the event of a claim.
- Eligibility Requirements: For certain classes of business where the potential for property damage and business interruption losses due to water events is exceptionally high or in the case of vacant properties, some insurance carriers may not even offer coverage programs unless water sensor systems are installed. This makes leak detection not just a benefit, but a requirement for accessing favorable insurance terms or, in some cases, for obtaining coverage at all.
Cost Breakdown of a Real-World Insurance Claim
To fully appreciate the financial impact of proactive leak detection, consider an actual claim scenario, with identities removed to protect the impacted parties. An $80 million manufacturing and distribution business operates a 25,000 sq. ft. facility. The property consists of a $7 million building, $6 million in machinery and equipment, $500,000 in office furniture, and an average of $9 million in raw materials and finished goods on-site.
One Friday evening, after employees had left for the weekend, an overhead water pipe delivering processing water experienced a critical valve failure, resulting in a burst line. The leak went undiscovered until Monday morning when the first workers arrived, finding significant portions of the facility flooded with several inches of water.
The resulting insurance claim costs broke down as follows:
Building Damage: $1,050,000 for rip-out and replacement of flooring, drywall, and inspection/replacement of water system components, along with professional cleaning and remediation.
Business Personal Property (including stock): $2.5 million in unsalvageable raw materials and finished goods, plus $100,000 for damaged ordinary business contents.
Equipment: $1.1 million for the critical piece of machinery vital for production, including full replacement, expedited shipping, and installation.
Business Interruption: $20 million in business interruption loss, compounded by $750,000 in extra expenses. The company was forced into a six-month downtime before full production could resume. It is worth noting that a prior agreement with a contract manufacturer helped mitigate some of these losses, but without such an arrangement, the business interruption loss for that six-month period could have reached an estimated $40 million.
Total Claim Costs: Between $25,500,000 and $45,500,000.
This case illustrates the potential for disaster. While an average water damage claim for a small business might range from $25,000 to $50,000, businesses with larger footprints routinely see losses quickly turn into six figures. For mid-sized and larger enterprises, multi-million dollar claims, as demonstrated, are not unusual. Had smart water leak sensors and potentially automatic shut-off valves been in place, the leak would have been detected almost immediately, enabling rapid intervention that would have drastically decreased the overall number and ultimate costs of the water damage.
Choosing the Right Insurance and Sensor Partners
Implementing an effective leak detection strategy requires careful consideration of both the technology and the insurance partnership. Finding the right sensor provider involves selecting a system that not only meets the property’s operational needs but also satisfies specific insurance provider requirements for maximizing discounts and benefits. Considerations for sensors include:
- Accuracy and Reliability: Prioritize systems known for precise leak detection and consistent performance to ensure alerts are legitimate and timely.
- Form Factor and Device Placement: Look for systems that offer a variety of sensor types and flexible device placement options to effectively cover all high-risk areas within a facility.
- Connectivity and Alerts: Evaluate the robustness of the alert mechanisms. Systems that dispatch immediate notifications via multiple channels (e.g., mobile apps, email, SMS, and cloud-based dashboards) facilitate the quickest response.
- Scalability for Business Size and Capabilities: Look for systems that can easily expand to cover future needs and potentially integrate other critical monitoring functions. Many advanced platforms can also monitor refrigeration units, indoor air quality (IAQ), temperature, or occupancy detection providing a more comprehensive property management solution.
When it comes to insurance providers, open communication is key to receiving leak detection benefits. Initiate a discussion with the provider to understand what specific discounts and benefits are available for implementing leak detection systems. Some areas to focus include:
- Discuss Discount Eligibility: A first step is to engage directly with your current or prospective insurance agent. Inquire specifically about eligibility for premium credits and deductible reductions offered for installing leak detection systems.
- Understand Policy Requirements: Gain clarity on any specific requirements the insurer may have regarding the type of system, its monitoring protocols, device placement, and the response procedure requirements to ensure full compliance and maximize potential benefits.
An Investment That Pays for Itself
Modern leak detection systems are more than just a preventative measure. They represent a strategic investment in a business’s operational resilience and financial stability. As demonstrated by the potential for multi-million dollar claims and the possibility of discounts exceeding the cost of the leak detection systems, the price of inaction far outweighs the investment in these technologies.
By safeguarding physical assets, ensuring business continuity, and generating tangible financial returns through insurance savings, leak detection sensors unequivocally pay for themselves. Businesses are strongly advised to take proactive steps including consulting with an insurance agent to uncover potential discounts and eligibility then diligently research and implement suitable leak detection solutions tailored to your specific property’s needs.
Developed in partnership by UBX (Scalable smart building platform) and Elliott, Powell, Baden & Baker (leading insurance provider in the Pacific Northwest), this blog series aims to raise awareness of the risks associated with water leaks and the benefits of their early detection.