Insurance can often play a vital role in unlocking development potential by mitigating risk so that developers and funders are willing to invest resource and finance into a project. For construction practitioners, however, the implementation of specialist insurance can also bring unique risks. Understanding these risks and seeking specialist advice can be crucial when it comes to mitigating potential claims.
Two examples of ‘atypical’ projects
Two good examples of atypical projects are ‘grey belt’ developments and ‘purpose-built student accommodation’ (PBSA), both of which have recently been the subject of articles by Lockton examining the risks and potential insurance solutions.
In brief, ‘grey built’ land is land within green belt areas that contributes minimally to core purposes of the green belt designation, excluding environmentally or culturally sensitive sites, such as Areas of Outstanding Natural Beauty and flood-prone areas. Disused car parks, previously developed land, and low-biodiversity wastelands are all examples of grey belt land.
The risks in developing ‘grey built’ include restrictive covenants, adverse possession claims, access issues and planning permission risk. As such the site potential comes with significant risk for a developer, and potential title issues are often unacceptable to lenders. Legal Indemnity Insurance can offer a mitigation of these risks, unlocking the project by reassuring funders and developers.
PBSA projects are often tied to the timing of an academic year and present an instance of delay risk, where the financial consequences of a development being finished late are compounded by the necessities of finding alternative or temporary accommodation for students against a potentially limited supply. The potential insurance solution for this risk is Delay in Start-Up (DSU) or Advanced Loss of Profits (ALOP) insurance.
For more information on these subjects please see the articles:
The implementation of specialist and uncommon insurance cover may therefore be a significant factor in the overall viability of certain projects. Such cover may determine whether a developer is willing to take on a project, unlock funding, and help to manage project risk. As such, these insurances can be in the background of affected projects.
Risks for construction sector practitioners
For construction sector practitioners including contractors, architects, engineers and surveyors, these insurance arrangements allow a project to get off the ground and provide employment to those professionals. However, there is an element of risk to them as well, and some caution is needed.
There is a regularly occurring exclusion in Professional Indemnity Insurance (PII) of claims or loss arising from the arrangement or maintenance of insurance. An example of the wording of such a clause is: “any actual or alleged agreement or failure to obtain or maintain insurance”. This might be contrasted with another example: “any consequential loss arising from the failure of the insured to arrange and/or maintain insurance”. It is notable that the first exclusion applies to any insurance arrangement issue, whereas the second is a failure by the insured firm to arrange insurance.
The language of such clauses varies from policy to policy, and it is certainly not the case that they are in every policy wording.
The concerns can be compounded if it is coupled with stricter exclusion language overall. For example, the following might be found introducing the exclusion section of a policy (highlighting ours):
“Insurers shall not be liable for and will exclude any Claim, Circumstance, liability, claimant’s costs, Defence Costs, or payment under any Extension based on, arising directly or indirectly out of or in any way connected to:”
Again, language varies considerably from policy to policy, and it is not the case that every policy wording would contain the same language as the example above. However, the implications of having both the strict introduction and a wider form of the insurance exclusion are concerning.
An insurance problem which affected an insurance policy which was fundamental to the viability of a project could have a cascade effect through the funding arrangements, attitudes of the parties and subsequent behaviours in a project. Experience informs views that PII claims are more frequent and tenacious where there are financial shortfalls on a project and the participants are facing losses.
Practitioners who have exposure to less routine projects and where specialist insurance arrangements may be part of the background of the project should be conscious of this exposure. Notably, the insurance arrangements made by developers may have been treated confidentially and therefore not communicated within the project or made public.
Access to specialist PII insurance advice may be important in assessing the contents of PII policy wordings for those practitioners who have exposure to relevant projects.
Lockton is a specialist PII broker and for more information, please visit our Construction (opens a new window) page, or contact:
James Burgoyne, Advisory Contracts & Technical Lead
E: james.burgoyne@lockton.com
