Are your existing structures correctly covered? And what happens to the development once the build Is complete?
A topic of conversation that regularly comes up in property development is how to correctly insure a development from the moment a developer is legally responsible for it; that includes public liability, existing structures and then, of course, what happens at completion whilst the developer is refinancing or awaiting sales.
Insurance can be a complex puzzle, but understanding how different insurances can dovetail to ultimately protect a development project throughout is essential. This protects the developer’s interest as well as any investors and pivotally, appeases lenders.
So, for the benefit of any new developers, I wanted to share a few thoughts on it.
A developer’s legal liability to the public
Developers will want to make sure that they are protected as soon as they become legally responsible for a new site or property. This is usually at exchange and if there’s a lender involved, they’ll often specify what insurances you need to have. Typically, this includes some kind of Third Party Liability which could come in the form of Public or Land Owner’s Liability, or Property Owner’s Liability. This key class of insurance will provide cover to help protect the developer from legal claims if they are held responsible for injuring or damaging a third party on their property.
What about existing structures. Are they covered?
If the existing structures are being retained it’s the developer’s responsibility to insure them. If they’re being demolished, you won’t be able to insure them for damage but you may be able to insure the cost of debris removal.
I recently worked with a developer on a conversion project which by its nature, meant there was a considerable proportion of existing structure being retained. This developer assumed (wrongly) that the Contractor’s All Risks policy would cover their existing structure.
Whilst it’s not completely unheard of for a contractor’s policy to include existing structures, usually they don’t! This means if there is a loss to the existing structure that occurs during the works, then the cost to rectify won’t be covered – this would lead to increased costs to the developer, the investor, and the lender. Bad news all round.
The solution
Depending on the complexity of the project (and how the developer and the professional team are structured), we might recommend an Owner-Controlled Insurance Programme (OCIP), where cover can be included for the existing structure and it can also include Loss of Profits, Non-Negligent liabilities and other important add-ons. Alternatively, we might look at an Unoccupied Property Owner’s policy which specifically allows for contract works.
What happens when the build Is complete?
It’s important to know most construction policies end when construction wraps up. So, if developers are not prepared, there could be a gap in cover from when the development is signed off as complete and the inception of a property owners/buildings/home cover. An uninsured loss at this stage could be catastrophic for a developer, especially as the budget has been spent and the build is completed.
Some construction policies offer a short extension after completion to cover the sales period, but this is rare and typically it would only be for up to 3 months. If the sales period goes on longer, or if the developer decides to refinance and hold the property for rental purposes, an alternative is needed.
Cue the property owner’s policy.
Further considerations need to be made around the new declared value of the newly completed build, as well as the occupancy. Will it be unoccupied? For how long? Also, what level of cover does the developer wish to insure with? Are there any lenders involved and what are their requirements?
Some common limitations
Every development is different and insurance policies can vary greatly, so it’s important to be aware of and understand any conditions expected of you, as well as any standard exclusions or restrictions. I’ve noted below a few simple things that developers and investors should think about and be aware of:
- Before you complete the site purchase: Be aware of where your risks lie and know what your lenders and investors might request to de-risk the project.
- During the build: Standard annualContractor’s All Risks policies do tick the box in many instances, but developers will be wise to check they & their projects (and any project intricacies) are also covered within that policy. Alternatively, the developer can take ownership of this and insure their own project, which helps them manage cost and ensure correct cover.
- Building defects: Loss or damage from faulty design, specification, workmanship or materials is always excluded from property owners/buildings/home insurance policies. This triggers the need for a suitable Structural Guarantee/Building Warranty aka Latent Defects Insurance. It’s also important to understand what agreements are in place with contractors regarding the Defects Liability Period.
- Unoccupied properties and properties where there are ongoing works: Be sure to know your insurer’s stance on unoccupied properties, as many policies impose strict conditions and limit coverage. This could be things like keeping a regular inspection log or shutting off the water and electricity. Theft or malicious damage may not be covered and in new developments there is an increased risk of water leaks, so coverage for water damage caused by escape of water is often capped and sometimes excluded. There may also be increased excesses for certain perils.
- Lender and conveyancing requirements: Know what your lender and conveyancer are asking for/advising you to do – Working with a good finance broker will help you but make sure you allow yourself ample time to source what they request and also give them time to approve it. Insurance is quite often the piece of the puzzle that holds up a completions at both ends of the development!
The bottom Line
Ensuring correct cover, at the correct time and throughout your property project lifecycle is essential and requires careful planning. Who knew?!
Having a decent professional team, which includes a good insurance broker, should help to solve the problems before they arise. A good insurance broker can work with you proactively to help limit your exposure to risk and minimise gaps in cover which will facilitate you as you move through your development to completion and beyond.
If you have any questions or need advice on your upcoming projects, feel free to get in touch with me. I’m here to help you navigate the complexities of insurance and ensure your development is fully protected. Let’s discuss how we can tailor the right insurance solutions for your needs.
Antoni
