Insurance: Living with uncertainty

“In this world nothing can be said to be certain except death and taxes.”

Any contractor or developer embarking on a construction project will recognise the truth in those words. Risk is the name of the game and getting the insurance cover right is one of the first tasks to be undertaken. The terms that brokers use for the risks insurers cover sounds like a litany of the disasters that can befall any construction project - defective title, restricted covenant, rights of light, environmental pollution, surety bonds, delay. And of course there are the standard insurance perils of fire, adverse weather and so on.

In the current climate the pressure on developers is further ratcheted up by the demands of those providing the finance. Banks and finance houses are increasingly risk averse and it is often they who dictate the insurances that are to be purchased.

But partly to prevent any potential collapse in confidence from funders, developers need to take the initiative in developing their insurance programmes. It has been said many times that the construction and insurance programmes need to go forward locked in step. But that’s perhaps easier said than done given the complexity of major construction projects. So let’s begin with some basic principles.

An insurance programme needs to mirror the site contractor’s timeline plan All successful insurance programmes are based on early intervention and co-ordination.  If we, as brokers and insurers, don’t get in early, we are forever playing catch-up and the programme will never run in sync with the development.

Early testing of existing insurances and cover requirements pays off later A thorough analysis and a process of due diligence minimises the risk of gaps in the cover as well as costly duplications. And this applies too – as we shall see – to analysing subcontractors’ cover.

Ensure that all your insurance broking expertise and skills are fully accessible This enables those responsible for different areas of the project to communicate with the broking advisers resulting in a comprehensive and joined-up understanding of the risks.

A couple of examples may serve to illustrate how early intervention can nail the uncertainties.

Subcontractor insurance

If subcontractor agreements are not fully integrated into the overall programme, gaps and overlaps will inevitably emerge. A striking example is often cited of a piling subcontractor who discovered - far too late - that they were pouring vast quantities of cement not into the piling bed but into an old Victorian sewer. The primary contractor looked to the subcontractor’s insurance to compensate for the cost over-run. But, because of a “hold harmless” agreement, there was no insurance in place. The primary contractor had prejudiced their insurances by not referring the insurance aspect of the contract to their brokers.

Rights of light

With the explosion of inner city, high-rise developments rights of light is a major issue for developers and lenders. Several projects have been blighted by court injunctions or even the mere threat of injunction and the resultant delays can have a very negative effect on the relationships between developers and their funders. Insurers have responded to the challenge by both giving the option to cover risks on a pre-planning basis and by structuring policies to allow “agreed conduct” negotiations with affected neighbours.

On all exposed projects we work closely with surveyors/developers/funders and believe in maximum flexibility and consultation with neighbours to remove as many of the unknowns as possible.

Anticipating catastrophe

Catastrophic events are rare and so relatively cheap to cover. For instance we insured the building of a new stand for a football club and incorporated advanced profit coverage which would have averted, for instance, the disaster of the stand burning down on the first day of the season. It didn’t happen - but it didn’t cost very much either.  Similarly provisions to anticipate possible liabilities such as late completion penalty clauses would save many contractors from financial disaster, including as I recall the Australian contractors for Wembley stadium (they went into liquidation). 

Surety bonds

As a developer it is prudent to ask the lead contractor to arrange a surety bond. Essentially, the surety promises that if the contract is not performed, it will pay damages if the principal cannot (if, for instance, it has gone bust).

Projects undoubtedly thrive by limiting uncertainty in the right areas. And, in my view, that is only possible through an intimate understanding of the project and the financing arrangements. There is, fortunately, a growing realisation among contractors, developers and funders of the essential importance of building close partnerships with insurers and insurance brokers in managing their on-going risks throughout the duration of the development programme. And equally they are beginning to appreciate the importance of bringing the insurance team to the table as early as possible.

Peter Morse is executive director at specialist broker Clear Insurance