Ensuring buildings are properly insured

With the market forcing insurers to look more closely at the risks they are covering, professionals need to make sure their policies are suitable and they are satisfying the terms


  • Jason Oldham

11 March 2021

Insurers have experienced several significant high-profile losses recently – such as the Grenfell Tower fire – that relate to the use of certain construction materials including cladding and wooden balconies. As a result, they are taking a much closer look at what they are insuring.

Property owners therefore need to understand what is and isn't considered standard construction by insurers, and what might cause them to refuse cover, impose stricter policy terms, levy higher premiums, or raise objections in the event of a claim. This will enable them to make a fair presentation of risk to their insurers.

Other factors that owners will need to consider include the insurance necessary for changes of use, and how best to cover contractors undertaking any works. Choosing the appropriate policy will depend on the kind and extent of works being performed.

Standard or modern?

Historically, the term "standard construction" has been understood by insurers to mean traditional properties built from brick or stone, roofs made from slate or tiles, and timber or concrete floors. Anything different is classified as non-standard.

Modern methods of construction (MMC) by contrast is a term used to describe several techniques that differ from traditional or standard approaches. MMC commonly involve factory-built, industrialised or system-build components, entailing prefabrication or flat-pack-style construction on site. Products include timber-framed properties – popular in new-build hotels and student accommodation – and pod-like construction.

Developers have increasingly turned to MMC to meet ambitious housing and environmental targets and ensure affordability. Unfortunately, these methods also increase the likelihood of an insurance claim occurring and the costs associated with it.

Insurers are now taking a more active interest in the construction of the properties they are being asked to cover due to the increased combustibility of the materials used, and the construction systems exacerbating the extent of possible damage or complicating the process and cost of reinstatement.

While fire is still one of the major risks as far as property insurers are concerned, other causes of damage such as flood and escape of water are equally significant. Leaky pipes or roofs can cause water ingress, as well as gutters, balconies or parapet walling, for example. The severity and frequency of these claims has increased disproportionately over the past few years, in part as a result of MMC.

As climate change causes global temperatures to rise, this is leading to more extreme weather events such as storms, high winds and flooding. In turn, properties are being subjected to more severe weather more frequently, which is leading to more damage and increased property insurance claims. Even buildings that are not situated on a flood plain may be susceptible to serious flooding and suffer property damage or loss of rent.

The residential sector is meanwhile seeing an increase in large, high-rise blocks being built as land becomes scarcer in urban areas and it is more cost-effective to build upwards. Unfortunately, this stacking of residential units means that it is not unusual for 3 or 4 floors to be affected by a single incident such as a water leak.

Furthermore, although building standards and fire risk assessments focus predominantly on the protection of life, it is the protection of property, business interruption and continuity and environmental risk that will influence insurance underwriters when deciding whether to accept the risk and on what terms.

So the question is: do you know the exact design and construction of the properties you manage or acquire for investor clients? Would you be able to set this out clearly to an insurer to help your client satisfy the duty of disclosure?

Presentation of risk

The Insurance Act 2015 places a "duty of fair presentation of the risk" on all commercial customers. Policyholders have always been obliged to be open and honest with their insurers, but the act clarifies what this means.

For example, you must tell your insurer about any material circumstances that you know, or should have known, relevant to your cover. A material circumstance is something that could influence the insurer's decision about whether to offer you a policy and what terms and conditions to apply. This will include providing your insurer with any special or unusual information relating to the risk; MMC would fit into this category.

If you do not make a fair presentation of risk, the act provides insurers with a number of proportionate remedies, which range from applying premium terms and conditions retrospectively or reducing claim payments to avoiding the policy altogether. Clearly, this is not a desirable situation in which to find oneself, especially at the point of a major loss.

The Hackitt Review has called for changes to the building management control process and new information management requirements. In particular, it recommends a "golden thread of information" for buildings; that is, a digital resource designed to ensure that the right people have the right information at the right time.

This would make the process of arranging insurance for property much simpler and help the owner satisfy their duties when presenting the risk to insurers. But for much older properties, which may also be listed buildings, it is extremely difficult to obtain absolute confirmation of the construction without intrusive investigations.

Conversion considerations

Changes of building use from commercial to residential are increasingly common, but the process can be riddled with insurance loopholes. Building policies may include limited cover of up to £500,000 for renovation works, but not for anything over and above that value.

Furthermore, if insurers have not been kept adequately informed about developments, policies may not provide the relevant cover for any period of vacancy before the commencement of works.

Failure to apprise insurers about conversion work could mean not only that the property itself is not insured, but that there is no contract works or third-party liability cover either. Specialist policies may therefore need to be taken out to cover these exposures.

In multi-tenure properties, where tenants' contracts may cease at different times and occupancy of the property can vary, changes will need to be notified to insurers – and policies amended – before the start of any works.

If you own a property that you are going to alter then you will need to consider a number of factors in addition to insurance for the existing structure and the work to be done. These include security, any materials stored on site, cover for hired plant, the length of the contract, and which party is responsible for arranging cover.

Insuring a building that is in a poor state – or one that is in a reasonable condition but being renovated or converted – requires a special policy. Home cover or property owner's cover will not be suitable because, even if your insurers are prepared to consider covering the property while the work is in progress, the policy is likely to be restricted to damage caused by fire, lightning, explosion and aircraft impact. As the most likely cause of a claim will be storm, flood or theft, this will leave out a fair amount of important cover.

A contract works clause wording was designed for small-scale refurbishments, and it forms a standard extension to many property owners' policies. However, it is not full contractor's all-risks cover as it does not insure against collapse or hired plant or tools. It is instead intended for unattached materials or works not yet handed back to the insured party, and is therefore not suitable for major development work.

"Changes of building use from commercial to residential are increasingly common, but the process can be riddled with insurance loopholes"

Covering the contractor

The insured party – that is, the building owner – is required under the terms of a contract condition to take out cover on the buildings jointly in their own name and that of the contractor. This extension of cover allows the contractor to pass on the risk to the building's insurer; otherwise, they could be sued if their negligence caused damage.

The policy provides such extensions of cover where the insured party is the employer under a building contract. If the policy has been arranged by the freeholder but the leaseholder is the employer, it is likely that the clause will not apply. In such circumstances the leaseholder should approach the freeholder and request that the contractor be named on the policy.

If you purchase a leasehold property, your lease is likely to contain a covenant that requires you to seek the freeholder's permission for certain alterations and improvements. These can include fitting a wooden floor, installing windows, or making other structural alterations.

Just as the law implies that consent cannot be unreasonably withheld, it also states that a freeholder can charge a reasonable sum for legal or other expenses properly incurred in connection with the granting of consent. Be aware of the sort of charges a landlord might make: these could include such items as surveyors' costs for checking plans and the work itself, solicitors' costs for drawing up a formal licence, and general administration charges.

The provision allows for contractors to work on the buildings to effect any repairs, minor additions and alterations or decorations. Clearly, however, a change of use does not constitute a minor addition.

However, a separate contractor's all-risk insurance policy provides cover in respect of the works being carried out. This cover is comprehensive and will often include tools and equipment that are hired to carry out the work, as well as items that have been bought and delivered but not installed in the building.

Contractor's all-risk insurance is necessary because it covers the actual work being done before it is completed. For example, a householder may have full cover for the home that they are extending; the builder has completed the works to the first fix stage and the property owner has paid half the total agreed contract value. Then a break-in occurs and all the copper wire and plumbing is ripped out. The cost of replacing the stolen items and redoing the work would be covered by the contract works cover.

If the property burnt down through no fault of the builder or contractors, a contract works policy would also pay for the reinstatement of the work that had already been done, including all materials required.

It is possible to extend some works-in-progress policies to cover contract works, or it can be bought as a stand-alone policy by either the contractor – as contractor's all-risks cover – or the property owner.

Finding an appropriate policy

If major development works are being considered, a contractor's all-risks policy is more appropriate. This takes into consideration the cost and length of the contract, cover for any damage to the existing building, and the cost of hired plant, responsibility for which is normally outlined in the contract.

A contractor's all-risks policy is designed for construction works, and the cover is drawn up to reflect the related risks. Other policy features that address consequential losses following any damage include increased costs of working and suppliers' extensions, meaning such a policy offers more appropriate cover. JCT non-negligence insurance should also be considered.

Generally, in terms of public liability coverage, property owners' policies would extend to works as far as their policyholder protection. However, if you start employing individuals or have oversight of bona fide subcontractors then a property owner's policy is not appropriate, and you would need to insure for separate employer's liability and public liability. Property owner's liability also excludes loss or damage to any part of the building as a direct result of work carried out by the insured party or their agents.

Clearly, any contractors allowed into the building should have appropriate public liability coverage, and activities involving hot work should be properly controlled given that this is where insurers suffer many of their major fire losses. Permits are therefore required for hot works, namely any operation involving open flames or producing heat or sparks such as brazing, torch cutting, grinding, soldering or welding.

Putting cover in context

In summary, we must advise that if the full details of construction or the extent of any construction works at a property are unknown, then these should be sought as a matter of urgency and the findings referred to insurers.

You have to place this in the context of a property owner's policy, which provides insurance for damage to the building, consequential financial losses, and liability to third parties for accidental injury, loss, destruction or damage to their property.

Furthermore, the property owner is only covered as an "employer" engaging the services of a contractor to carry out minor works. If the owner were leading the project themselves and engaging architects, surveyors or labourers, for example, then their property policy would be wholly inappropriate in meeting their insurance needs.

A surveyor should not be involved in advising, arranging and administering insurance unless they are authorised by the Financial Conduct Authority to do so. If a firm does this it also requires regulatory approval, which can be secured in a number of different ways; for instance, by joining the RICS Designated Professional Body Scheme. To do so, it will need to demonstrate that it holds the relevant professional indemnity insurance cover at the prescribed limit.

Remember you require the advice, support and guidance that a specialist insurance broker can offer if you are to understand fully your risks and responsibilities and be certain that any cover meets your needs.


Related competencies include: Client care, Contract practice, Insurance

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