Your Top 5 Building Systems Can Be a Source of Major Liability

Managing residents is only one aspect of profitability for today’s real estate owners and operators. Another is preserving base building systems. Systems upkeep, from the building envelope to the mechanical, electrical and plumbing infrastructure, maintenance and systems, is critical to minimizing exposure. Here’s a look at the top five building systems and the potential liability they carry if not property maintained. 

Building Skin

The building’s envelope—its roof, windows, cladding and doors—can all be susceptible to leaks. The envelope is a building’s first line of defense when faced with a weather event, like a hurricane, strong winds or a heavy storm. Wind can break windows or water can leak into a punctured roof.  Extreme heat and cold can also create damage when the building envelope is deficient.

Insurance Coverage: Damage to a building will be covered by the building’s property policy. If caused by a third party or adjacent building, the property insurer may then seek reimbursement from those responsible.

Tip: Do regular, routine building inspections across the envelope. Secure all roof equipment properly. 

Plumbing

Water systems are the greatest property loss leader for building owners and operators. So much so that there’s nearly a 50 percent chance that a building’s next claim will be water related. Water-related building losses cost on average three times as much as claims that don’t involve water damage, due to the need to clean and dry out the building after interior sprinklers put out a fire or a pipe bursts.

Insurance Coverage: While a property policy will cover water-loss claims that include damage to the core building, damage to resident space—including their improvements & betterments (I&B), equipment and stock—will be covered under the building’s general liability (GL) policy.

Tip: Inspect fire protection systems and test them regularly, per NFPA requirements. Conduct preventative maintenance and ensure that insulation is adequate on domestic water lines. Also consider leak detection devices or automatic shut-offs, in leak prone areas, such as pipe chases, HVAC equipment rooms, laundry rooms, etc.

HVAC/Mechanical

Boilers, air handling units, filters, fuel tanks and cooling towers can be a source of water loss and gas leaks, causing great damage to a building’s interiors. Cooling systems also have the potential to spread mold or even Legionella, a bacterium that causes Legionnaires’ disease, a deadly form of pneumonia. 

Insurance Coverage: Physical damage to mechanical systems would be covered under the building’s property policy. Cases of mold or Legionnaires’ disease and the like will fall under the building’s GL policy.

Tip: Have routine lab testing done to detect whether Legionella bacteria is present. Consistently monitor equipment pressures to detect gas leaks, and make sure boilers are inspected annually, per local code. 

Electrical

Outages and electrical fires can result from faulty lighting and power distribution systems. Remember that fire and life safety systems running on a building’s electrical infrastructure and can also become a liability when they aren’t properly maintained.

Insurance Coverage: Electrical fires will affect the building’s property policy, while electrical problems that impact resident/occupant safety, like a personal injury claim, will impact a building’s GL policy.

Tip: Make sure to perform recommended preventative maintenance and discuss the need for infrared testing with a licensed electrician that knows the building. Frequent visual inspections and keeping electrical areas clear of combustibles, coupled with annual infrared testing, will provide warning of potential electrical failure.

Amenities

Facility amenities like pools, saunas and gym equipment are assets to your building and valued by residents. But, equipment in poor working order is an accident waiting to happen. Maintain facility amenities as if they were a base building system to minimize liability. Keeping the equipment in good working order will minimize accidents and injuries.

Insurance Coverage: Occupant injuries will fall under a building’s GL policy. Buildings with a pool or gym should have an umbrella policy, as GL policy limits may not fully cover a serious accident or injury. Consider the following rule of thumb: The more amenities there are, the more risk may exist. Additional amenities call for a more robust umbrella policy.

Tips: Staff a pool with lifeguards during open hours, or post signs warning renters they are swimming at their own risk; and let gym users know they are using the equipment at their own risk. Consider emergency phones and cameras to assist with monitoring the premises.  Control access to all amenities through keycards or similar systems. Consider waivers of liability for pool and gym users, if feasible. 

Transfer risk to insurance

Beyond doing everything possible to maintain your top five building systems, transferring a building’s risk to an insurance policy will reduce your exposure. Make sure to disclose the true age and condition of your equipment and amenities to your insurance broker, to ensure procurement of the right limits and adequate coverage should something go wrong.

Chris Dunlap is vice president and senior risk consultant with global insurance broker Hub International’s Real Estate division. He functions as a subject matter expert for the industry and leads a team that develops unique services specific to CEOs, owners and managers in the multi-family housing sector.