A water heater construction and method includes arranging the inner water tank and the surrounding outer shell in an inverted orientation and positioning the outer shell into a cover which is arranged with clearance openings for the plumbing connections extending from the top of the tank to extend therethrough. With the tank, shell and cover in an inverted and assembled condition, the annular clearance space defined between the tank and shell is filled, at least the majority, with liquid, foam-in-place insulation. By inverting the water heater and injecting liquid foam insulation material, the clearance space above the inner water tank is foamed first thereby assuring that the foam material at this location will have greater uniformity in foam density and cell structure than at the lower portion of the annular space so as to provide enhanced thermal efficiency at the most critical location.