It is a mistake to ignore the power and influence of the banks when buying insurance protection
One of the less reported effects of the global financial crisis is the rising influence banks have on the construction sector as they press for extra layers of financial protection. Traditionally, the only extra insurance policy needed by contractors would have been the old JCT 21.2.1, more recently known as the 6.5.1 policy that provides protection against loss, claims or proceedings due to nonnegligent damage to property.
In this piece, Chris Davies, construction specialist and Director of independent insurance broker Prescott Jones Property and Construction Risks examines the importance of adding to and/or modifying existing policies to satisfy lenders in this evolving period.
Professional Indemnity (PI)
Professional Indemnity insurance is now commonly required for anyone acting as a main contractor, even where all design work is being sub contracted to an architect. Lenders rarely accept the argument that design work is being sub contracted. They require the main contractor, all subcontractors to have their own professional indemnity insurance. This means, if any company goes bankrupt, they have options against the others should subsequent problems in the building arise.
Contaminated Land Policies: Contaminated land policies cover unexpected and fortuitous losses arising from historical contamination. This means land has to be analysed and remediated if necessary. Policies typically cover injury and property damage, cleaning costs and fees. Lenders are usually also looking for loss of rental income and policies are typically issued for single periods of insurance up to ten years.
Environmental Impairment Liability (EIL): A standard public liability policy covers pollution that can be identified as a sudden specific event, for example, a tank bursting. However, where pollution occurs gradually over a period of time, for instance, a slow drip from a supply pipe connecting to the tank, it is specifically excluded. Consequently, there are a number of policies available that cover gradual pollution that are more focused on contractors’ environmental exposures.
Contractors All Risks
Normally the principal contractor covers the new build structure throughout the lifetime of the contract until practical completion and handover to the employer. It was common under the JCT Contract Form for cover to be required in joint names of the contractor and employer. However, lenders now typically want their interest to be noted by way of a Joint Insured, Co- Insured or Composite Insured endorsement. They also often require to be made ‘First Loss Payee’. There can be a significant amount of compromising between lenders, solicitors and insurance companies until an agreement can be reached.
Delay In Start Up (DSU) – Advanced Loss of Profits
In the event of major damage to the Contract Works, prior to Practical Completion, the repair/rebuild will inevitably delay handover. The income that the building was going to generate, by way of rent for example, may be delayed by a month or even up to two years. It would be typical to cover lost rent or additional finance costs and have an indemnity period reflecting the rebuild time in a worst-case scenario.
It is very difficult for developers to source cover separately from the Contract Works as quickly restoring damage reduces unnecessary delays therefore, typically, the same insurer has to be involved i.e. the contractor’s insurer.
There is currently a huge demand for performance bonds, which have been around for a long time. Bonds are typically valued at ten per cent of the contract and given in favour of the employer, providing a financial buffer to complete a project where the original contractor defaults.
They are typically available from banks and insurance companies, however insurance market bonds are favoured where use of a bank bond would severely deplete the contractor’s working capital. However, there are certain classes of bonds e.g. ‘On Demand’ bonds that insurers will not underwrite.
The cost and availability of insurance sector bonds is entirely dependent upon the financial strength of the contractor. Premiums also depend upon the duration for which the bond remains in force. This is normally tied to the contract period with release of the bond on practical completion of the contract.
Unexpected Archaeological Insurance
Still in its infancy, employers and funders increasingly demand this. The UK has a huge, undiscovered archaeological heritage that is protected by several pieces of legislation aimed at protecting and preserving it.
Contractors and developers can and have been badly caught out when archaeological finds are made on the contract site. For instance, the 1800-year-old Roman sculpture of an eagle discovered at the site of a planned hotel in London in 2013 resulted in costly delays and financial expenditure for parties involved.
The key to the cover is contained in the word ‘unexpected’. A policy would be available following evaluation of the site by means of a desk study and possibly field investigations. A typical policy would cover cancellation or delay, extra archaeological costs, redesign costs and loss of profit or value. It is important to recognise that each contract and each lender’s terms will require a tailored solution. Put simply, the need for specialist and independent advice has never been more important.
Chris Davies is Director at Prescott Jones Property and Construction Risks, part of Prescott Jones Insurance Group. Prescott Jones Insurance Solutions is a leading insurance broker in Wales and the west. Headquartered in Swansea, it also has offices in Cardiff and Bristol.
For more information, please see www.prescott-jones.co.uk/products/property-and-construction-risks