In the second of our articles exploring refurbishment risks, we look at how the viability of projects can be increased by careful navigation of the challenging construction insurance market.
From 2018, the construction insurance market has transitioned firmly out of a very soft market, with most underwriters amending and reducing generous levels of cover and benefits that were the norm for many years. Many leading insurers in both the construction and liability insurance markets now apply more stringent underwriting criteria to refurbishment projects because they deem them to be more risky than new-build projects.
Read the first article in this two-part series to discover the reasons for the market contraction, and how it affects insurers’ risk perception. This article examines measures that can help to differentiate refurbishment projects from those of competitors and aide in the negotiation of the most effective insurance terms.
How to Obtain the Optimum Construction Insurance Terms Available
A construction insurance broker’s value on a refurbishment fit-out project goes way beyond the placement alone. By allowing plenty of time, construction firms can make best use of their brokers' technical expertise and market relationships, enabling them to differentiate their projects from their competitors. Give them as much time as you can, to take advantage of their advisory capabilities, particularly during contractual negotiations where risk retention levels are determined.
Consideration to Contract Structure/JCT Option C
The agreement under contract is critical. Option C in the recent JCT Design and Build Contract or Construction Management Contract is drafted to cater for existing structures and their contents. Un-amended, it states that the employer is required to procure a joint names policy covering the employer and contractor for the works on an all-risks basis, and for the existing structures and their contents for any loss or damage due to any specified perils.
However, when embarking on a project, it is imperative to consider whether this is achievable. Consideration needs to be given to:
- Who owns the building? If the employer is a tenant, they will need explicit agreement from the landlord in order to amend the insurance policy that provides cover for the existing structure.
- What are the insured values? If the value of the existing structure is equivalent to or in excess of the value of the works, the construction insurance market may be reluctant to provide cover for the existing structures exposure within a construction project policy. The solution may be to utilise the property insurers, who must in turn be agreeable to the addition of the contractor as a joint named insured, which is not always achievable in the current insurance market.
Where JCT Option C is amended (whether this is through the replacement schedule or other bespoke contractual amendments), to remove the requirement for joint names status to be given to contractors for damage to the existing structure, the structure is often treated as a third party risk to contractors. Both they and the employer need to take into consideration the third party limit of liability held in light of the exposure of potential reinstatement of the building, and how policy coverage is structured.
Risk Management and Marketing
Risk and insurance managers should make sure they have a good understanding of the project risk they are taking to market, and that they can articulate a strong risk management philosophy. A detailed underwriting submission, supported by the broker, should ensure underwriters' main concerns are taken into account. To do this, project personnel and risk and insurance managers need to understand their risks comprehensively, and take measures to best mitigate them. And risk and insurance managers should engage at a very early stage with their construction insurance brokers to organise and deliver comprehensive underwriting presentations.
In order to secure the most competitive terms from the insurance market, a company should team up with its brokers to develop an organised, methodical risk transfer process. The more effort deployed in the early stages to develop and evaluate risk information, the more effective the risk transfer.
The marketing phase is critical, particularly its management strategy. Companies need to consider their marketing strategy before approaching insurers and tailor the insurance programme structure to best ensure the most competitive price and coverage can be achieved. There is no 'one size fits all' when it comes to refurbishments, so early engagement with brokers is imperative.
When engaging with insurers, it is important to take every opportunity to demonstrate an understanding of current risks more deeply than the competition, present a solid risk profile, and demonstrate good risk management procedures. Compiling presentations for insurers has become more important, and also more time-consuming. Underwriters are looking for more detailed information from construction firms regarding their project risk management, wanting sight of detailed plans most notably in the mitigation of fire and water damage risks.
Insurers are utilising risk engineers to review all information, and this will be scrutinised far more than before. Company reps should expect additional questions following the review of information. These should be responded to promptly and in detail. Insurers need to ensure that they have on file the risk information that is required by their senior management, with the approval process being far more onerous than in previous years.
Construction Insurance for Refurbishment Projects: Final Considerations
There is no single insurance strategy for refurbishment projects; each must be assessed individually to determine the best way forward. Tailoring the insurance programme to suit each individual project’s requirements, with the knowledge of what is available in the insurance market, is a key role of construction insurance brokers, and will, combined with a detailed underwriting presentation, help to obtain the most competitive terms available.
Find Out More
Discover the reasons for the market contraction, and how it affects insurers’ risk perception: Read part one of this article series, Refurbishment Works: How Construction Insurance Price Rises Could Affect Fit-Out Projects.
