Was the hot water system the owner’s or the owners corporation’s? That is your starting point, because if it is the owner’s corporation’s hot water system they are liable for the damage.
From what you have said however, it sounds like the hot water system belongs to the owner, so in the face of it she is liable for all the damage, as it is her system and she is responsible for it. By way of example, if someone is driving their car on the common driveway and has an accident and damages a building that is common property, they are responsible for that damage.
The problem you may have is that the owner has home and contents insurance but she may not have more general liability insurance. If she isn’t covered for the more general damage, then the strata is in a bind because they have a responsibility under section 62 to maintain the common property, they have to fix the damage. So if she isn’t covered, the strata would have to fix it and claim on their insurer, and the insurer then has the option to pursue a legal claim against the owner, on the basis that she is responsible for the damage.
Re your questions:
1. see above.
2. the original parquetry flooring is the responsibility of whomever is liable for the damage, it doesn’t matter whether it is common property or not. If that floor is damaged you could probably replace it with something else, if there was a floating floor over it.
3. Yes the strata should do thorough investigations to ensure that any possible concrete cancer is dealt with. Given the age of the building, that puts it right in the concrete cancer problem zone. Liability could be arguable as there may already have been concrete cancer there, and you would need to get advice on that.
4. Yes the owners corporation should inspect the damage as a matter of utmost priority, I am surprised they haven’t already considering the extent of the damage which sounds awful.
5. Insurance companies always give you the runaround, they make money from not paying out claims. The best thing you can do is contact your insurance company as a matter of urgency and explain the situation, they have an interest in this being resolved, and they can deal with the other insurance company.