When taking out a warranty & indemnity (W&I) policy, real estate buyers have historically faced a non-negotiable blanket exclusion for a target property’s structural defects. However things are beginning to change, as W&I insurers respond to a competitive market with increasing flexibility (opens a new window). Some have even hired experienced real estate specialists to take a more informed and commercial view on coverage.
With this in mind, our experts have set out the following guidelines to help buyers maximise cover for W&I-backed corporate real estate acquisitions:
Undertake your due diligence (technical and structural)
Unsurprisingly, and as recent case law has demonstrated (opens a new window), procuring W&I insurance is not a substitute for a light approach to due diligence. Although the case above concerned the acquisition of an operational business, the same maxim applies when dealing with non-operational corporate real estate targets.
When it comes to avoiding a property defects exclusion, a full technical and structural survey carried out by a reputable adviser is essential. While there is an element of tolerance for lower-risk issues, the survey should present a predominantly clean picture to support minimal inherent or latent defects. If there are minor snagging issues identified, these can be carved out so that any unknown matters can remain within the scope of a W&I policy (and thereby not excluded) in the event a claim arises.
We have seen situations where the buy-side has conducted full technical and structural due diligence, yet the seller has resisted the inclusion of warranties covering property defect liabilities. It’s a testament to the importance of due diligence that, in these circumstances, a number of insurers have been willing to cover property defects warranties synthetically under the W&I policy.
With regards to the wider property due diligence, insurers will typically require the report on title/certificate of title (as applicable). This is to evidence that there are no material existing or historic disputes with tenants or contractors relating to works or conditions of property. Specific enquiries raised in the property Q&A will also provide additional comfort.
Ensure you have adequate underlying recourse
W&I insurers will want assurance that there is an adequate level of recourse against contractors with respect to latent defects and, to a lesser degree, the wider property insurance package. In reviewing these, they will assess both the contractors’ covenant strength and the extent of cover in place (especially with regards to time periods under the collateral warranties).
With regards to building insurance, insurers will pay particular attention to both the target’s and buyer’s claims history. A large number of claims, one significant historic claim, or any ongoing issues may impact their decision-making process.
Depending on the type of asset, buyers should consider undertaking additional due diligence covering the collateral construction warranties and underlying property insurance policies. This will provide further comfort to insurers.
Consider tenant repair and maintenance covenants
When targeting an occupied asset, the nature of the repair and maintenance covenants on the tenant(s) also plays a pivotal role. If the relevant lease agreement(s) include full repairing and insuring (FRI) obligations, underwriters are typically far more flexible.
Understand the target property’s risk profile
Central to a W&I insurer’s willingness to remove an exclusion will be the age, location, and profile of the target property, as well as the profile and claims history of the owner(s). While historically, it was standard practice to exclude ongoing construction from coverage, underwriters are now taking a more pragmatic approach.
Understanding the nature and stage of construction (together with quality of counterparties) will be key here. Recent construction, or evidence of appropriate refurbishment with a focus on structural modifications (rather than mere cosmetic alterations), will provide additional comfort of limited condition-related issues. As with the findings from structural/technical due diligence, particular areas of concern can be excluded if unpalatable for an insurer.
Protecting your transaction
The guidance above offers some insight into what W&I insurers look for when assessing whether they can remove an exclusion with regards to property defects on corporate real estate acquisitions.
Ultimately, the good news for purchasers is that, based on the current market sentiment, there is no longer a ‘one size fits all’ approach when it comes to addressing property defects under a W&I policy. Rather, it depends on the target asset, the due diligence conducted, and what other recourse insurers can seek to rely on should a claim arise.
For more information, please visit our Real Estate Transactional Risk Insurance (opens a new window) page, or contact:
Somers Brewin, Solicitor & Vice President, Private Equity & Corporate Acquisitions Practice
