In the fast-paced world of property development, investment and contracting, a measured amount of risk-taking often goes hand-in-hand with success. Spending more time analysing and not putting in enough offers may mean missing out on deals or tenders. On the other hand, acting without due care or caution, may end up with the business taking too many hits to continue.
One way that property businesses can de-risk their activities and their projects is by having the correct insurances.
The property industry thrives on tangible assets and visible results whereas insurance is a piece of paper. In fact, it’s usually just a PDF attached to an email. So as a result, all too often insurance is purchased simply as a “tick a box exercise” rather than as a critical part of risk management and financial safeguarding for a project.
Risk-taking nature of property professionals
In my experience, successful property developers and investors are strategic and commercially astute. They are also forward thinking and not afraid to take calculated risks – after all, fortune favours the brave!
Without willingness to take on risk, you could argue there would be no new projects and no lenders willing to back them, I’d also argue all speculative developments carry some element of risk.
In an industry with so many moving parts, it would be impractical if not impossible to cover absolutely everything that could go wrong, but a well thought out risk management strategy and tailored insurance programme can certainly help reduce risk.
Not all policies are created equal
Benjamin Franklin once said: “The bitterness of poor quality remains long after the sweetness of low price is forgotten.” This is as true for insurance as it is for construction materials and naturally, as in any market, you may have a variety of options to choose from.
For example, if Policy A costs £1,000 and excludes risks such as subsidence or theft, while Policy B costs twice as much at £2,000, but includes comprehensive, all risks coverage; which policy represents better value to you?
Now consider a £5,000 claim for a loss that is excluded from Policy A but covered in Policy B. If Policy B pays out for the loss, then the extra money spent on that policy would be considered well worth it, even though Policy B was twice the price of Policy A!
If you had bought Policy A, you’d now face a £5,000 uninsured loss—effectively self-insuring at your own expense.
Now think about a loss of £100,000 (or higher). With larger claims, you could expect to see significantly delayed completion dates and increased costs elsewhere. How many of these could your project or your business withstand?
In real terms
I am often asked to provide insurance options for projects involving renovation and conversion works and whilst insurance options are written into building contracts, often the requirement for insurance is driven by the lenders involved in the project. This is because lenders want to ensure what they are lending on is correctly covered thus protecting their interest.
I recently provided terms on a renovation project where new residential units were also being created.
The lender involved rightly asked that the building be insured but also insisted upon a 10-year building warranty.
Due to the nature of the works, it became clear that a simple buildings insurance policy wouldn’t cut it. A basic policy, whilst lower in cost, would only cover standard perils such as Fire, Lightening, Explosion, Earthquake and Aircraft. Critically it would exclude things like Subsidence, Flood, Theft, Malicious Damage, the Contract Works and any losses that are a result of the Contract Works…
Therefore, I recommended a comprehensive, “all risks” policy which covered the existing building, the Contract Works, Employers, Public & Products Liability plus Legal Expenses cover.
We were able to keep the lender happy by noting their interest as joint-insured on the policy and at completion we will have the option to extend this policy to include cover for the completed building while the developer decides if they’ll sell or rent.
Regarding the 10-year building warranty, I was able to recommend cover with a reputable, well-established warranty provider, backed by an A rated insurer and holding an extensive approved lenders list. This means that if there ever is a valid claim caused by defective workmanship, there is some confidence that the insurer will be able to meet the claim; and when the developer comes to sell or refinance these units, they should have no problem with prospective mortgage lenders recognising and accepting the warranty.
Summary
Most of the time we buy insurance based on price, but a low price often comes with other considerations and shouldn’t be the sole priority. Insurance isn’t an afterthought, it should be considered early in the project and used as a strategic tool for risk mitigation—transferring risk from you to an insurer.
Well-crafted insurance provisions can do more than just “tick a box”; they can protect your projects, as well as your cash flow and your reputation, so next time you’re looking at a low premium, ask yourself:
- Does this policy provide comprehensive coverage for the risks I’m exposed to?
- Is it tailored to my specific projects and operations?
- What are the exclusions and conditions of the policy?
- Am I confident it will stand up in the event of a claim?
By approaching insurance with the same due diligence you apply to other aspects of your project, you can avoid the hidden risks of simply “ticking a box.”
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Are you confident your insurance policies are protecting you, or are you just ticking a box? Let’s have a conversation about how to align your coverage with your ambitions.
Antoni
