What are the challenges and why is insurance such a vital tool?

Latent Defects – avoiding protracted legal arguments over collateral warranties and pass it on much more easily – assignability.

Our Head of Specialist Risks, Samantha Ferneley discusses challenges, issues and more around backing commercial developments in more detail…. 

Latent Defects cover provides a wide range of commercial and industrial properties with protection against property damage and water ingress caused by a defect in the design, workmanship, or materials.

Cover protects the load bearing structure and waterproof envelope of the building to the full rebuild value (includes index linking each year). The insurance steps in to repair, right up to the full dismantling and rebuilding including the associated professional fees. The insurance term can be 10 or 12 years and sits with the property itself, which means it is freely assignable for the life of the policy.

The policy is written for the benefit of the property, not any individual, and a valid claim will respond without fault. It is also further possible to waive the subrogation rights against the consultants and main contractor for additional premium.

Collateral warranties offer less protection than a blanket LDI policy as they require proof of negligence, therefore relying on Professional Indemnity insurance which is written on a claims made basis. If cover is allowed to lapse there may be gaps in cover or the PI can be cancelled altogether. The same risk occurs if the warrantor becomes insolvent.

On commercial buildings this option is commonly used. The collateral warranty typically sits between a contractor, sub-contractor or consultant and an interested third-party benefactor, giving them rights to make a legal claim from the warrantor.

With a collateral warranty, if a defect does occur, cash flow can be an issue because the money to repair would not be available immediately and a legal challenge could exasperate this problem. There is also the risk that the legal challenge may not go the way you want.

It also must be considered that professional indemnity is expensive and the aggregate cover limits may not be sufficient, even on an each and every claim basis if the defect is substantial.

There is no requirement for commercial properties to have latent defect insurance, however we do advise the cover is taken out. This offers protection to the property owner, investors, leaseholders, tenants, and landlords.

Owner managed projects – take control of the process – DSU Delay in Start Up insurance to protect bank costs for overruns.

Delay in Start Up (DSU) insures project owners for the financial consequences of a delay to a project completion, caused from insured physical damage. It gives developers added protection during the                                      construction phase from additional costs incurred, including those related to bank overruns.

DSU is a necessity for complex construction projects, with project owners looking to mitigate the monetary impact of delays to their projects and project lenders increasingly requesting DSU as a condition of lending.

The insured needs to be all parties likely to suffer an economic loss in the event of project delay. Contractors can also be insured under concession contracts, where they are managing the contract.

DSU differs from Business Interruption (BI) in that it considers future rather than current income streams, which are the subject of BI claims. It also relates to the delay between the originally expected commercial operation date and the achieved date resulting from the insured physical loss. BI would operate from the loss date of the interruptions.

Exclusions apply and these can include the following:

• Pre–existing Conditions.
• Acts of war or terrorism.
• Government Actions – Changes in law or regulations.
• Major and Uncontrollable events such as natural disasters, strikes or epidemics.
• Inadequate funding to complete the project.
• Inaccurate scheduling and late delivery of materials.
• Fines and Penalties.

For a valid claim to succeed there must be an insured event under a material damage policy, such as the contract works, and it must cause a delay to the completion of a project, which exceeds the agreed time excess in the DSU policy. The delay must also result in economic loss to the insured, for example, gross profit, revenue loss, loss of rental or fixed costs.

Increased cost of working would only be covered by a DSU policy if it were incurred solely for the purpose of avoiding or reducing the loss and did not exceed the amount saved.

Issues with title

We can source indemnity insurance to cover any issues that may arise with title. From unregistered land, lost deeds, restrictive covenants, rights of way and other easements. Some 85% of land in the UK is registered so these issues do arise frequently, and we have inexpensive ways to protect your property investments.

Archaeological finds

The UK is rich in archaeological remains and much of it still lies undiscovered. Specific planning policy guidance exists so that planning authorities can make informed decisions about how to protect these archaeological interests.

There are stages in the planning process for archaeological management, these start with a desk-based study to assess the likelihood of historical remains on site. Planners may approve with no further investigation, or request test pits and trenches to investigate further. They can grant planning subject to a condition or agreement to deal with the archaeological requirements.

They may insist on a field evaluation and if further work is required, the developer and archaeologist should work together, and it would be agreed that either archaeological deposits be preserved in situ or excavated and recorded by professionals in that field, normally as a planning condition. This can involve a lot of expense in changing design and working methods on site to preserve or avoid. Plus, the legal expenses for the agreement between archaeological contractor and the developer.

The developer can remain at risk from further delays, costs and loss of site value and insurance can be considered for the following risks:

• Delay Costs
• Additional archaeological costs
• Cancellation costs
• Redesign costs
• Loss of Profit
• Loss of Value

This sort of cover would have to be an early conversation before work on site commences once the planning process has been agreed and approved.

Rights of Light

The legal right to natural light is not achieved automatically by a property owner, but there are several ways it can be acquired. The most common being continuous enjoyment of light, through a defined aperture (such as a window), for at least 20 years.

Developers must consider the impact their build proposals might have on neighbouring properties, and whether sunlight would be obstructed. Failure can lead to developments being halted, large settlements being negotiated and even demolition of already completed buildings. Rights of light can be protected by legal action and the costs and delays this causes can be considerable.

There are distinct options developers can take to address right to light infringements:

• Do nothing, wait, and see.
• Issue a light obstruction notice to see if challenged within the 12-month period. If not the 20-year rights are set to zero.
• Have a polite discussion with the neighbours.
• Local Authorities can appropriate land and this can lawfully override existing rights and restrictive covenants.
• The other option is to take out a right to light policy.

In built up areas Rights to Light insurance is commonplace and may be driven by a few situations, including lender requirements, proactivity by the developer or by being in London (it is estimated some 90% of developments are insured).

There are two main options for cover, depending on the approach you wish to take.

There is the wait and see approach which does not allow any contact with affected neighbourhood properties and there is the agreed conduct approach where developers can approach any injured parties and negotiate proactively.

A right of light policy will typically cover legal costs and expenses, settlement, costs of demolition/alteration/reinstatement, third party contractual costs, abortive costs, and reduction in market value.

To find out more about how Vista can help you and your business, get in touch with our Head of Specialist Risks, Samantha Ferneley at samantha@vistainsurance.co.uk or call 0203 597 0898.