Managing the risk of groundwater leakage at construction sites – the insurance perspective
By Omri Nisani
How to adequately manage insurable or uninsurable risks when there is a presence of groundwater at the construction site.
Until recently, the issue of groundwater at construction sites in Israel was not a major or critical issue. Most Contractors All Risks policies did not address this matter at all, and even when insurance company surveyors mentioned the presence of groundwater in their reports, they did not usually go into great detail.
However, following major changes in the insurance industry, in the main due to an unprecedented change of heart by overseas reinsurers (reinsurers are the insurance companies that partly insure the Israeli insurance companies to limit the risk and protect their balance sheet) the presence of groundwater at construction sites is a matter which can no longer be taken lightly.
Each and every project which involves a risk of groundwater leaks, however small, goes through a very stringent and thorough underwriting process.
This trend corresponds to numerous cases of groundwater leaks at construction sites in Israel which have “flooded” the media, together with other types of events which were once a rare occurrence – sinkholes and subsidence, quite often caused by groundwater.
Zero tolerance attitude
The insurance companies are taking a zero tolerance attitude to the risk of groundwater leaks. Firstly, the underwriting process has become much more stringent than in the past and includes scrutinising the reputation and previous experience of the dewatering contractor, the experience of the main contractor in similar projects and more. As soon as a risk of groundwater leaks is identified, the insurance companies deal with this by applying increased deductibles, and in some cases completely exclude loss or damage due to groundwater leaks.
In other words, if you are about to commence a project at a construction site which will involve coping with groundwater, it is important to point out that a Contractors All Risks policy might not necessarily provide you with adequate insurance cover, and in some cases no cover at all.
In this short article we will provide an overview of several possible solutions to this complex issue, centred around three main risk management mechanisms – insurance, contractual and preventative.
Insurance risk management
Managing the risk by stipulating that dewatering contractor and/or other relevant contractors (such as an earthworks contractor or drilling contractors) arrange their own insurance to cover loss, damage or liability due to groundwater leaks at the construction site where they work.
In many cases, the deductible under a stand-alone policy arranged by a dewatering contractor will be lower than the deductible under the main Contractors All Risks policy for the project.
It is also important to note that if the contractor or the developer works with a dewatering contractor who does not hold adequate insurance, and in the absence of clear contractual protections between the parties, an event involving groundwater leakage, leading to a third party claim which would in all likelihood be filed against all contractors and other parties involved with the project, or damage to the contract works or bodily injury to a worker, might not be covered under the insurance.
Contractual risk management
Another effective way of managing the groundwater risk at construction sites is by limiting the risk in the contract. The agreements between the main contractor and the various subcontractors including the dewatering contractor, as well as the main contract between the main contractor and the principal can be adapted to address the issue of groundwater leakage.
For example, if a groundwater leak occurs shortly before hand-over of the project, when the dewatering contractor has already completed their work and left the site, a dispute between the principal and the contractor concerning who is responsible for paying for the repairs could reach millions of shekels.
The contractual risk management mechanism should also take into account the possibility of a groundwater leak occurring at different stages of progress in the project.
For example, it is an established fact that the water table is not fixed and varies depending on various parameters such precipitation and seasonality. A situation is quite possible where the works are carried out properly in the summer, but as soon as winter arrives the water table rises and a flood occurs which causes extensive damage (for example, damages to lifts, car parks, stacked parking, robotic apparatus and the like).
Our recommendation in this regard is to create a clear contractual risk management mechanism between the principal and the contractor concerning damages which are not covered under the insurance policy, or which are subject to a very high deductible.
Preventative risk management
One of the most important principles of insurance, relevant to Contractors All Risks insurance as well as to any other insurance policy, is “Prevention is better than cure”, or in the words of King Solomon: “The teaching of the wise is a fountain of life, those who accept it avoid the snares of death” (Proverbs 13:14).
In other words, preventative measures should be implemented in contract works involving a groundwater risk in order to create the thickest layer of protection possible against future insurance claims. Groundwater is not a triviality and in many cases groundwater leaks, as such, or their extent, are not necessarily predictable.
The contractor or developer should take all practical measures to avoid the possibility of such an event, especially in view of the loophole that could arise under the Contractors All Risks insurance policy.
Property developers might be well advised to avoid entering into projects which present a high risk of groundwater leaks. To put it quite simply, it is quite possible that the potential financial gain from building another 10-20 spaces in a fourth floor of an underground car park might not justify the risks involved excavating deeper into the ground to the point where the contractor might encounter groundwater. In some cases it might well be advisable to alter the plans and build fewer underground parking floors.
Furthermore, when there is a need to find a solution to the presence of groundwater at a construction site, it is important to find a reputable dewatering contractor with proven experience. In the absence of insurance cover, negligence or unprofessionalism by the dewatering contractor could leave the contractor or the developer in a hopeless situation.