Tag Archives: condos

What Insurers Need to Know About Bitcoin

A bitcoin (lowercase b), as a currency, has several flaws that will continue to limit its ability to replace money, as we know it. There are millions of words published on the subject, so I’ll leave it to the reader to assess arguments on both sides. However, Bitcoin (upper case B) as a protocol for the transfer of value is an extremely important innovation that the insurance industry would be wise not to ignore.

This article looks at the issue from the point of view where the insurance industry meets the engineering profession; this combination could be where some of the most important and valuable new opportunities arise.

The Block Chain Protocol (BCP)

The Block Chain Protocol is a brilliant innovation that cannot be un-invented – it is here to stay, and it will appear in many forms long after it sheds its association with so-called crypto-currencies. Bitcoin was designed to solve an age-old problem: the possibility of spending multiple times a promissory note such as currency. In the case of virtual currency, the problem is especially acute because a currency created on a computer can be easily copied by a computer.

The BCP can be compared to a train leaving the station. When the train arrives, the door opens and everyone piles in. After a predetermined amount of time, the doors close. While the doors are closed – and only while the doors are closed – the people write contracts for each other to agree upon. When the doors open, everyone piles out, but the contracts stay. Soon after, the doors close forever.

After the doors close, absolutely no changes can be made, ever. Any changes must be renegotiated as part of a new “block” in a continuing “chain” of transactions. This prevents someone from printing “money”, i.e., issuing the same contract to many recipients.

Today, this function is performed by a legal system, brokers and intermediaries such as banks and credit agencies – it is easy to see how these institutions would be concerned that an upstart technology that is fully decentralized with no CEO or corporate structure could literally exterminate their brokerage fees. (While I used a mechanical analogy of door and trains, the BCP operates using time stamps and cryptography to manage identities, ownership, vetting, etc.)

The big deal with bitcoin as a currency is that the value of a contract can be cast in time. The “crypto-currency” simply represents that value outside of the block for that exchange inside of the block.

Many people, including the media, get hung up on the idea of currency because that is something that obviously concerns everyone in the age of impending financial doom. However, one must not be fooled by hype nor remain complacent and hope the bitcoin issue it will go away. The BPC is here to stay, and there are thousands of them in existence, not just bitcoin.

Yes, this means threats to the status quo, but there are also great opportunities for those who learn how to use smart contracts to transmit value without institutional friction. The part that the insurance industry should be concerned with is the ability to transmit contracts.

When contracts are executed on a block chain and locked cryptographically, these are called “smart contracts.” The seminal work on smart contracts was written by Nick Szabo and introduced in this 1997 primer: The Idea of Smart Contracts. The remainder of this article will focus on one very important type of smart contract: the adjudicated smart contract partnering the insurance industry and the engineering profession.

The Oracle

Adjudicated contracts are contracts involving three parties: the insurer, the insured and the adjudicator. The insurance adjuster should immediately come to mind, but the work of the adjudicator is much more flexible.

In an insurance claim, there is often a forensic investigation involved. In many cases, the investigation may reveal failures of design, quality, defects and workmanship and moral hazard. When a payout is warranted, claim money is drawn for reconstruction and remediation per a contract.

The insurance industry depends on actuarial statistics and forensics to manage these risks. What if forensics could be performed and actuarial data compiled before the failure occurs?

Adjudication can be integrated directly into the performance contracts as the project is designed and built. Licensed professional engineers can “flip the switch” that releases funding or seal coverage for specific perils as they oversee the design/build contracts during design, construction and service life of a property. This would allow insurance companies the ability to price risk and adjust exposure pools with extreme accuracy.

Assurance by Design

In other words, it is possible to develop Block Chain Smart Contracts. My firm is doing this for the engineering, construction and property management industries. The concept is to codify current standard contract templates, such as AIA contracts, into a series of smart contracts on a cryptographic block chain. Contractual events will correspond to payment milestones underwritten by bank and insurance institutions. As each milestone is reached, the professional engineer will verify the proof of work and flip the switch that released the contract to the next insurable component.

The Insurance Industry Is Threatened

Today, many insurance companies are not too concerned with construction risk as long as it is priced correctly. What the insurance industry may not realize is that if too many good properties are subsidizing too many bad properties, private parties with good properties will use these adjudicated contracts to self-insure. For example, if a 250-unit, high-rise condo spends $4 million on a new potable water system and the insurance premiums are not discounted accordingly, the condo could now easily form its own risk-sharing pool with communities known to have new water systems.

With Block Chain Protocol technology and readily available data, almost anyone can now form an insurance pool.

The challenge then for the insurance industry is to use new technologies to build more and better insurance products using the legacy tools that they are built on and rapidly adopting new technological solutions that are now available to them.

The Block Chain Protocol may be one of the most important innovations of the digital age. Pretty much anyone with the job title of “broker” should be seriously concerned.

History provides countless examples of companies and industries that failed to adapt to new changes. For this reason, insurance should take the Block Chain Protocol very seriously. The technology is simple by design and only requires some creative adjustment and strategic partnerships to assimilate into the business plan.

Nobody will do it for us. We need to do it ourselves.

What The Insurance Industry Needs To Know About Epoxy Water Pipe Liner

Epoxy is a magnificent substance used in many important applications where strength, hardness, moisture protection and strong adhesion are a requirement. Epoxy coatings are used to protect industrial applications from factory floors to reinforcement bar embedded in concrete. When applied correctly to a strong surface, few coatings are as tough as epoxy.

Recently, epoxy manufacturers have developed a lining process to coat the inside of an old potable water system with epoxy. This method is touted as a fast, 60 year, non-invasive, and inexpensive alternative to re-piping a whole building. However, when applied incorrectly, epoxy coatings can create a dangerous sense of false security especially where hidden from view such as the internal surface of a pipe.

Many epoxy failures are appearing in the field where litigation is often protected by gag orders thereby never reaching the public domain. This document identifies a wrinkle in the market that supports the rapid liner industry as well as the consequences of an unseen failure, should they occur.

This article arrives at the following conclusions:

  • The potential for epoxy liner failures may be high in galvanized steel potable water systems.
  • There is no reliable way to inspect the adhesion of epoxy inside a pipe.
  • If an adhesion failure is found, there is no practical way to repair it except re-pipe — so, why not just re-pipe?
  • Epoxy liner failures may typically occur at the precise location where the galvanized steel pipe is already at its weakest.

These observations are very important for the insurance underwriter who would otherwise classify a water system that has been repaired with epoxy liner as a “new” system. These observations are important for the forensic analyst that may determine the cause of a major water system failure on a condition other than being weakened by the epoxy coating. These observations are very important to the insurance broker who may inadvertently force a condominium community into an epoxy liner “solution” as a condition for maintaining coverage on their property.

Recommendation
Insurers should allow their condominium clients to perform a condition assessment without threat of cancellation. A small leak does not necessarily mean that the big rupture is imminent. In any case, epoxy does very little to eliminate the risk of a large rupture and possibly increases the likelihood. Then the insurance industry should work with the community to save enough money to perform a superior re-pipe with new materials such as polypropylene or copper. Together, a strong case can be made for the reserves or lending process. In the long run, a superior re-pipe may cost several times less than an epoxy “solution.”

The Vicious Circle
Something as simple as a pinhole leak can generate thousands of dollars of water damage claims. Imagine what a fracture in a main riser cascading down 10 floors of luxury condos can cost? Unfortunately, many insurance underwriters believe that after a few small water claims, the big one is imminent. This may not necessarily be the case. Yet, many a condo is put on notice that they will lose their coverage unless the whole system is immediately replaced.

Long before the first pinhole leak, insurance companies stipulate in their policies that they are not responsible for a pipe failure if the condominium board is aware of the problem and fails to take corrective action. This condition essentially removes the incentive for the condo board to perform a quantitative piping condition assessment — if they don't know that there is a problem, they are insured. If they do know that there is a problem, they are not insured. This creates a compound moral hazard because they have no basis for saving reserve funds for a replacement.

After awhile, a few small leaks may appear leading to some minor insurance claims — this can trigger the threat of insurance cancellation for the condo. But this is the least of their worries; the condominium construction market is renowned for litigation, and many insurance companies make it very difficult or impossible for a contractor to be insured for condominium work. Condominium homeowners associations quickly learn that many contractors are simply unable or unwilling to work on condominiums.

If the homeowners association fails to save for a re-piping project, they are forced into an expensive bank loan from lenders who are equally wary of litigation … this can become a huge mess far beyond the knowledge and capability of a condo board to manage effectively. The inability to manage a project in a litigious environment leads invariably to more litigation!

Herein lies the wrinkle in the market caused largely by the insurance industry betting against itself thereby creating a vicious circle that has very little to do with actual plumbing. In the midst of this condo / contractor / insurance / banking madness arises the epoxy liner salesman who is quick to provide everyone with exactly what they need — a cheap, fast fix.

The Epoxy Liner Process
The epoxy liner process involves isolation of sections of the existing pipe, drying the pipes with hot air and then sandblasting the inside walls with pressurized air and an abrasive mineral that is supposed to remove all corrosion, leaving bare metal in order to prepare the pipe walls to accept adhesion of the epoxy liner. Once prepared, the paint-like epoxy is blown through the pipes in a liquid state using pressurized air. The epoxy is then “cured in place” either by the application of heat and/or the passage of time (pot life).

A Case Study
A reputable plumbing contractor in the Seattle Area provided samples of epoxy liner sections that were removed from at least three properties and which failed within 4-7 years of entering service.

Failure Modes
The following video demonstrates common epoxy liner failure modes correlated to available literature on epoxy liner vulnerability. The most common vulnerabilities of the epoxy lining system are associated with the planning and quality of the preparation as well as training of the applicator personnel.

 

The Anatomy of an Epoxy Failure: The following photographs demonstrate the progression of an epoxy failure where the surface has been improperly prepared.

Single Crack Allows Water To Enter

Multiple Cracks Form Due To Underlying Corrosion

Cross Section of Coating Breach, Pitting Continues

When an epoxy failure does happen, it is likely to occur at the location where the pipe is already at it's weakest — pitted areas and threads.

Pipe threads are especially vulnerable: The photo below shows corrosion in steel pipe near pipe threads. Sandblasting with epoxy would weaken the threaded area further. A crack in the epoxy at this location would allow the corrosion to continue unknown to the residents. In many cases the existing pipe is better off left alone until a full re-pipe can take place.

Corrosion In Steel Pipe Near Pipe Threads

Literature Review
Epoxy coating of steel is a widespread practice in construction and mainline water service2 3 4. While epoxy is tested safe to drinking quality standards by independent studies1 and national water quality standards6, any such “certification” is dependent upon actual adhesion to the surface of the pipe. The failure modes and vulnerabilities of epoxy are widely known and highly consistent in the progression7 of adhesion failure. It is also widely recognized that the project planning, surface preparation, and precise measurement and application of the ingredients to the substrate are the most significant variables in determining the probability of a successful epoxy coating assignment.

These factors are addressed in significant detail by the U.S. Army Corp of Engineers3, The American Water Works Association9, the American Society of Testing and Materials10, the Society of Protective Coatings, etc., who have all developed standards for the planning, preparation, measurement, and application of epoxy coatings. It can be assumed that if, and only if, these standards are followed and documented, then failures in epoxy coatings will not occur.

A comprehensive collection of tests and inspection criteria has been developed for epoxy coatings in any number of applications including internal water pipe coatings.3 Such tests as the knife blade test or those tests specified in ASTM F2831 are simple, fast and conclusive.10

The Epoxy Paradox
Epoxy coating is extremely strong and adherent if, and only if, applied correctly.7 The question arises that if an application should fail a test, inspection, or in service, what is the contingency plan to remediate the flaw? How will the epoxy be removed and how will the re-coating be applied? If re-pipe is the answer, why wasn't re-pipe considered in lieu of epoxy in the first place? If a single failure is found, what test sampling strategy must be applied to give a high likelihood that no other flaws exist in the system? Under what warranty claim would a failure be covered and to what extent will total coverage be warranted? These questions would be imminent in any litigation related to epoxy failures.5

Double Jeopardy: When an epoxy failure does happen, it is likely to occur at the location where the pipe is already at its weakest; i.e., pitted areas and threads. As such, a poorly applied epoxy liner could weaken a pipe considerably.6 The result could be a catastrophic high-volume pipe failure requiring a high insurance payout, which would not otherwise be attributed to epoxy coating.

Therefore, engineering and construction management representation and oversight can help assure that the epoxy liner material and contractors are aware of the expectation that industry standards will be applied. Independent testing should be applied as a condition of the contract bidding and warranty claims so that they may adjust their pricing to meet customer expectations. Again, epoxy is an amazing substance when applied correctly. But what if it is not?

References

1 Impact of an Epoxy Pipe Lining Material on Distribution System Water Quality by Ryan Price and supervised by Andrea M. Dietrich, PhD., Chair, Environmental Engineering, Virginia Polytechnic Institute.

2 Epoxy Adhesison Testing Sponsored by the Texas Department of Transportation.

3 PUBLIC WORKS TECHNICAL BULLETIN 420-49-35 15 June 2001 IN-SITU EPOXY COATING FOR METALLIC PIPE; Department of The Army; U.S. Army Corp or Engineers.

4 INVESTIGATION REPORT ON THE FAILURE OF MAKKAH-TAIF WATER TR.

5 Canadian law suit brought against the epoxy applicators.

6 Potable Water Pipe Condition Assessment For A High Rise Structure In The Pacific Northwest.

7 Layman's Guide to Epoxy Paint / Coating Failures.

8 NSF/ANSI Standard 61 Drinking Water System Components.

9 AWWS C210-3; Liquid-Epoxy Coating Systems for the Interior and Exterior of Steel Water Pipelines.

10 ASTM F2831 – 12: Standard Practice for Internal Non Structural Epoxy Barrier Coating Material Used In Rehabilitation of Metallic Pressurized Piping Systems.

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Engineering opinions rendered by any author are solely for the purpose of education and are not engineering advice. If you use any opinion presented in this document or on the website in any way whatsoever, you agree to hold The Engineer and the website harmless of your use of those opinions.