With the ever-increasing strain that comes with a lack of residential dwellings and yet seamlessly an abundant supply of aged office spaces that need to be repurposed, there seems to be a perfect middle ground that can solve both issues.
Whilst prime premium central offices are still in high demand across the country, the other classes of office buildings (B and C), for example, those that sit on the fringe of the city, could be prime for redevelopment and conversion into residential dwellings, otherwise known as permitted development.
When embarking on a permitted development, there are key insurance considerations to ensure that developers are adequately covered throughout the lifetime of the project.
Consideration one: Ensuring the existing structure is adequately covered
It is important to ensure the existing structure is adequately covered. Often, the value of the existing structure outweighs the contract value of the redevelopment. As a result, contract works insurers are at times hesitant to provide cover. More often than not, they will pass the risks/responsibility back to the original property insurers who cover the existing structure.
Although the new contractor can be absorbed into the property policy, many developers are hesitant to do so as this exposes their property program to any damage the contractor causes throughout the development of the project. Consequently, this impacts their annual insurances.
How developers are responding:
As an alternative, developers can provide a waiver of subrogation in conjunction with the contractor for an agreed-upon limit. This limit is commensurate with the value of the structure being worked upon. It protects the developer’s annual insurances against any small attritional losses and is there to step in as a failsafe against any major events that may occur.
Another option is to maintain the property policy as it is and rely solely on the contractor’s public liability insurance. However, it is important to note that whilst property policies offer coverage for specified perils, a common exclusion is ‘collapse’. If collapse were to occur as a result of the contract works and collapse was excluded under the property policy, the only avenue of insurance recourse would be under the contractor’s public liability insurance.
It is worth noting that if the reinstatement value of the existing structure is more than the public liability limit arranged by the contractor, it could potentially be a large uninsured exposure that would need to be considered.
Consideration two: What level of public liability insurance is enough?
With public liability insurance, there are a multitude of potential losses that this is designed to cover. For example:
Small impact damage
Burning a nearby building, causing resultant fatalities.
The limit selected should be at a level the developer is comfortable with. In selecting the limit, developers should take into consideration the potential losses which could arise, as well as the reinstatement value of the building.
Consideration three: Implications of contract works coverage
When considering the contract works coverage, traditionally the risks associated with this cover have been pushed down to contractors.
However, in the current climate, Lockton is increasingly observing developers taking back these risks. This is made possible by an Owner Controlled Insurance Program (OCIP). The purpose of this policy is to help protect developers against contractor issues. It allows the inclusion of lender interests.
Under this arrangement, the responsibility for procuring contract works insurance is taken on by the owner. Regardless of who obtains the required insurance, the cost is ultimately passed back to the developer.
An OCIP provides developers with the assurance that their development is insured throughout its duration, protecting them from potential issues such as contractor non-performance, insolvency, or other contract-related complications.
Depending on how the project is financed, there may also be financial implications faced, caused by damage covered under the contract works section in a policy. Exposures can include loss of revenue or rent, additional interest costs incurred due to loan extensions or renegotiations, fixed costs, and other increased costs of working. This is known as Delay In Start Up (DSU) insurance.
Consideration four: What does this mean for Delay In Start Up (DSU) insurance?
With Delay In Start Up (DSU) insurance, it is worth noting that this cover can only be obtained under a policy arranged by the developer in joint names with the contractor. This is because the contractor has no financial interest in the developer's exposure upon project completion.
It can be assumed any financial losses can be claimed back from the contractor. However, this works on the basis that the contractor’s balance sheet is strong enough to do so and can continue to keep up with the payments. It is also important to note that any losses arising from force majeure events would not be covered by the contractor.
If the intention is to try and place the existing structure under a contract works policy, it’s worth noting that there isn’t a one-size-fits-all approach. Each development will need to be assessed on its own merit.
Consideration five: What are insurers most concerned about?
The primary concern that most insurers will have is evaluating the value of the contract works against existing structures.
A reinstatement valuation of the building should be performed prior to commencing the contract works. This not only ensures that the asset isn’t underinsured in the event of a total loss, but also gives insurers a clear idea of their exposure evaluating against the works. A condition report of the existing structure will additionally help with insurers evaluating the risk. If a copy isn’t available, then high-quality images should be provided in order to paint a clear picture as to the current condition of the building.
Hot works, by nature, pose heightened fire hazards. As a minimum, adherence should be made to the best practices: from using proper equipment to fire prevention protocols, these will encompass a range of safety measures. Providing evidence of hot works safety compliance helps reassure insurers in respect of the project's risk management, which can translate into more favourable policy and premium terms and conditions.
The contents of this publication are provided for general information only. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this document. Lockton arranges the insurance and is not the insurer. Any insurance cover is subject to the terms, conditions and exclusions of the policy. For full details refer to the specific policy wordings and/or Product Disclosure Statements available from Lockton on request.