Richard Joseph, Account Director - Jelf Insurance Brokers
YOU DIDN’T INSURE THE MONEY
Insurance. There – I’ve said it. I’ve been on a mission for years to make some lawyers
realise they’ve been getting it wrong. Not just a little bit wrong, but completely missing
the point. I will be brief before I lose you.
Developers build buildings not so that they can point at it and claim ownership to
anyone who may be interested (although they also do that). They build to access the
revenue they generate. Their lawyers, however, see
the contract between their client, the employer, and
contractor as a matter of apportioning responsibility.
Not preventing losses, and certainly not protecting
revenue or simplifying the contractual relationships,
in the event of a loss.
Using a very broad brush, for illustrative purposes,
this is how a claim develops under the traditional contractor’s policy:
• Two weeks before Practical Completion (PC) the employer receives a call from
their contractor. ‘Your site has burned down. Don’t worry though–we did pay our
insurance renewal (even though no-one checked) and our insurer will pay for the
rebuild’
• The employer realises that the now 18 month delay in completion (after site
clearance etc.) will mean an uncomfortable call to the funders to arrange a meeting
to see if the finance can be extended. Funders happily (hopefully) announce the
additional interest charges to extend the loan for the rebuild period.
• Funders agree happily (hopefully) and confirm the additional interest charges to
extend the loan for the rebuild period.
• The employer calculates the value of any pre-lets or off-plan sales that may be lost
and also the loss of interest on sale and/or letting proceeds.
The reason that this happens is entirely due to insurable interest. The contractor has no
insurable interest in the revenue because that is post-PC. Not his site, not his problem.
This is a very simple problem to circumvent. The employer takes out a Single Project
policy, which encompasses the Contract Works and includes the contractor. This way
the employer can add in cover for:
•
Extended Costs of Borrowing,
•
Advanced Loss of Profits
•
Delayed Start Up costs.
Additionally, the interests of the funders and investors can be included as Composite
insured, First Loss Payee and all sorts of other goodies, which add additional security to
their lending position.
There are other benefits too-control of the claim, cover enhancements and reducing
the likelihood of disputes. The first time this type of programme was proven was in
1990. Broadgate Phase 8 experienced a major fire prior to completion after an on-site
temporary accommodation caught fire. The developer, Stanhope, had a 14 storey steel
framed property which suffered from major structural twisting. According to insurance
sources, approximately 40% of the claim was for material damage and 60% for loss of
revenue.
Why is this not the default approach? That is something that I really do not know.
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Jelf Insurance Brokers Ltd (Reg No.0837227) is part of Jelf Group plc (Reg No.2975376) and is authorised and regulated by the
Financial Conduct Authority (FCA). Registered address: Hillside Court, Bowling Hill, Chipping Sodbury, Bristol BS37 6JX
(Registered in England and Wales). Not all products and services offered are regulated by the FCA. JIB151.06.17
