Is the traditional structural warranty keeping pace with a rapidly evolving construction industry at a time of highrise mixed-use developments and new methods of building? Kim Vernau, CEO of BLP Insurance, takes a look
When inherent defects in buildings arise, it not only affects the asset value of the property but can also result in significant disruption to a business and its income stream. The ramifications of structural issues emerging post-construction can be severe for all stakeholders involved, including landlords, tenants, funders, contractors, builders and designers.
Despite the high risks, there are growing concerns that the insurance industry is failing to provide an adequate response. The construction sector has made significant leaps forward in building methods and design but the insurance industry, and in particular traditional warranty policies, have struggled to keep up with the pace.
Established in the 1930s, traditional defects cover sought to address poor building practice and indemnify buyers against any latent defects in new properties. Standards were drawn up with the average two-bedroom, red-brick house in mind and financial limits were set accordingly to cover the defects that you would expect in this type of building. This model still exists today in the form of traditional warranty products and continues to serve standard residential properties well.
However, the reality of the UK’s urban landscape today is a far cry from the construction sites on which this traditional warranty model was built.
High-rise, mixed-use apartment blocks encompassing all tenure types are being developed at a rapid rate, which the industry could not have foreseen. As a result, standards and technical manuals outlining best practice for the average property fail to reflect the variety of technologically innovative build methods and materials used on high-rise developments. For example, manuals on erecting timber walls and installing wall ties would be of little assistance when fitting German glass cladding, which is increasingly found covering skyscrapers from top to bottom.
The logistics of the build are not the only problem. Traditional policies with a maximum scheme liability of £25m for new builds and £5m for conversions are simply not fit for purpose when skyscrapers in London can cost up to £400m to reinstate. This substantial monetary gap in cover leaves investors and funders severely exposed to unnecessary risk.
Approximately 70% of the more than 500 high-rise buildings that are currently under construction in the UK have an element of mixed use, including Embassy Gardens, located in Battersea, London, due for completion later in 2018. The building will accommodate the new US embassy, as well as a park, two residential apartment towers and a ‘Sky Pool’. Modern architecture, building methods and the use of indoor space have changed dramatically in the last two decades and will continue to evolve. Despite this, traditional policies do not reflect this shift and fail to provide the comprehensive cover required for varied use under one roof.
One insurance provider may cover the residential portion of the development while another covers the commercial. Proper seamless building cover seems a distant prospect. Policy lengths can also vary from 10 years for private property to 12 years for social housing, and fundamental requirements for a tenant such as “loss of rent” cover the former but not the latter. More bespoke cover is required.
Some insurance providers are listening to the developing industry requirements, offering bespoke commercial latent defects insurance, which is being used increasingly in new build projects for commercial and mixed-use developments. It provides the comprehensive structural cover and protects the building against mechanical and electrical failure, component failure, loss of rent and business interruption in the event that problems with a building occur later on. The cover can be taken out by the developer, contractor, owner/funder, landlord or tenant and may be assigned to any future owners, funders or tenants.
This first party insurance policy covers the building, not the builder, and is designed to cover the full rebuild value of the development in the event of a building failure arising, providing comfort to the funders of the project and protecting the interests of all shareholders.
By technically assessing a build project from design through to workmanship onsite, insurance providers can help to minimise the chance of any future building defects occurring. In an environment where construction rates are rapidly rising and the risk of standards slipping is greater than ever, this assurance creates a more saleable and/or lettable property with the comfort that the build has been finished to a high standard. It also serves to reassure prospective tenants that if anything happens to the building, their financial exposure can be mitigated.
With the UK in chronic need of additional housing for its growing population, the construction of mixed-use buildings for residential, commercial and leisure purposes will become more and more prevalent, exacerbating the need for a more bespoke cover for all stakeholders. Developers, tenants and funders must have the reassurance that the property is adequately covered should defects arise down the line. If the construction industry fails to wake up to the benefits of bespoke commercial latent defects insurance, participants could find themselves exposed to millions of pounds of potential liability through policies that have failed to keep up with the changing nature of new build developments.
Chief Executive Officer
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