RENOVATIONS: Insuring Against the Risks
General News
Fires at the Glasgow School of Art, Notre Dame, and the Copenhagen Stock Exchange underscore the inherent vulnerabilities associated with renovating old and historic structures
In the face of growing environmental concerns and the push for sustainability, industries and governments worldwide are advocating a shift in focus to repurposing and refurbishing existing buildings rather than demolishing and rebuilding structures.
This strategy became more pronounced in March 2023 when the City of London Corporation issued new guidelines, making it substantially more challenging for developers to demolish buildings, with a strong preference for preserving and refurbishing existing structures whenever possible.
However, refurbishment, particularly involving buildings of historical and architectural significance, comes with its own set of risks. Notable incidents, such as the fires at the Glasgow School of Art, Notre Dame, and the Copenhagen Stock Exchange, underscore the inherent vulnerabilities associated with renovating old and historic structures. A study investigating fires at World Heritage sites between 1990 and 2019 found that 21% of these fires occurred during restoration efforts.
The potential loss of these irreplaceable architectural and historical landmarks emphasises the need for strict adherence to safety protocols during renovations. Developers and contractors must provide comprehensive training in fire risk management to minimise the likelihood of major losses.
How are renovation projects insured?
Understanding the insurance landscape is crucial when embarking on a renovation project as the insurance market treats new works and existing structures differently. The relevant insurance market is divided into two distinct sectors: construction and property. Construction insurers focus on insuring new build construction projects, whereas property insurers specialise in insuring existing operational buildings that aren’t being worked upon.
Determining the appropriate insurance coverage for a project involving renovations to an existing structure can be complex. The decision depends on several factors, including:
1. The contract value of the new construction works
2. The reinstatement value of the existing structure
3. The age, condition, and historic status of the building
4. The extent and nature of the new works
5. Whether the building will be occupied during the renovations
Typically, property insurers may decline to cover construction works where the value exceeds a certain threshold (usually sub-GBP 5 million), necessitating a Construction All Risks (CAR) policy. Additionally, construction insurers might only include existing structures in a CAR policy if the reinstatement value is somewhat comparable to the value of the new works and crucially where the building will be unoccupied during the renovations.
Furthermore, in the event of insured damage during a refurbishment, there might not be a need to reinstate the elements that have been demolished or stripped out. In this scenario Developers often recalculate the existing structures reinstatement value based on only the retained elements that will form part of the new development i.e. after any demolition and strip out. Providing a reduced sum insured helps with insurability and premium.
Apart from construction and property insurance, early consideration should be given to Latent Defects insurance (LDI), typically driven by tenants and investors on large new-build schemes. Obtaining LDI on refurbishments can be challenging, as the necessary technical audit process usually begins at the start of construction and is primarily designed for new builds. However, in recent times Gallagher have seen an acknowledgement from some of the leading LDI insurers that retaining structures and refurbishing them will only continue to grow so they are aware of softening the historical stance. Crucially however providing a recent condition survey will remain a key part of successfully obtaining LDI on existing structures.
The importance of a robust contract
When a project involves refurbishing or extending an existing structure, the standard JCT contract mandates the employer to insure both the construction works and existing structures for specified perils in joint names with the contractor. These perils typically include fire, lightning, explosion, storm, flood, escape of water, earthquake, aircraft and other aerial devices, and riot and civil commotion.
However, the use of this default contractual provision requires careful consideration and often necessitates a negotiation between the employer and contractor early in the contracting process. This negotiation aims to secure agreement from the insurers of the existing structure. It is also essential to consider third-party liability risks and ensure proper disclosure and negotiation with liability insurers.
In the event of a loss, it is the contract that will determine the claim’s route, not the agreed insurance position. Therefore, all parties’ legal and insurance advisers should be involved to ensure all project contracts reflect the agreed insurance position.
Understanding potential challenges
The appetite and cover available for refurbishments has changed in recent years, due to the number of substantial high-profile losses. This sector has been at the forefront of the hardening insurance market.
Reinstatement following damage can be slower than with new builds. Understanding the costs associated with upgrading old infrastructure with modern services can be challenging until a loss occurs, leading to higher claims. Delays can occur due to the discovery of asbestos, the need for specialised trades with longer lead times, and issues around re-securing planning permission. Listed structures are especially out of appetite for construction insurers, as demonstrated in the recent example of Manchester Town Hall, which is significantly delayed and over budget due to discoveries being made about the true condition of the existing structure.
What solutions exist?
Given these challenges, developers and employers of refurbishment projects should leverage their existing insurer relationships. This includes engaging their existing property and construction insurers to ensure synergy across any construction, property, or hybrid insurance placement. This is particularly important in a scenario where the existing structure must remain covered in the property market, while the new works need to be covered in the construction market.
Developers should also:
· Consider the actual reinstatement value of the retained structures after strip-out and demolition.
· Carry out extensive investigations before strip-out works commence.
· Provide a recent condition survey of the existing structure to demonstrate its good condition.
· Address concerns highlighted in the condition survey with details of risk mitigation.
· Provide details on how the risk of damage to the existing retained structures arising from works will be mitigated.
While the insurance market for refurbishment projects may present challenges, developers can navigate these complexities by engaging a specialist insurance broker like Gallagher early in the planning stages. This proactive approach can help manage risks effectively, secure comprehensive coverage, and obtain competitive terms in an evolving insurance landscape. With careful planning and risk management, developers can contribute to the global push for sustainability while preserving architectural and historical assets.
Source: AJG.COM
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