Running Risk

Chris Davies, director of Prescott Jones Property and Construction Risks, a division of the Prescott Jones Insurance Group, explains how to meet the insurance requirements of lenders.

One of the less-publicized consequences of the global financial crisis is the growing influence of banks on the construction industry as they push for additional layers of financial protection.

Traditionally, the only additional insurance policy required by contractors was the old JCT 21.2.1, more recently known as the 6.5.1 policy, which protects against loss, claims, or proceedings resulting from non-negligent property damage.

I’ve examined a variety of typical insurance requirements below, but it’s important to remember that each contract and each lender’s terms will necessitate a customised solution. Simply put, expert advice on the proper protection has never been more important, as the consequences of not getting it can be costly.

Indemnity for Professional Services

Professional Indemnity (PI) insurance is now required for anyone acting as a general contractor, even if all design work is subcontracted to an architect. Lenders almost never accept the argument that design work is subcontracted. They require the general contractor, all consultants, and key bona fide subcontractors to have Professional Indemnity insurance. This means that if one company goes bankrupt, the others have options if subsequent problems in the building arise.

Because one-off project PI is not commonly available, a contractor must budget for six years (UK Limitation period) or twelve years (where collateral warranty is required), though there is benefit in the legal cover it provides when a claim must be defended. Furthermore, some insurers offer a free collateral warranty checking service.


Contaminated land policies cover unanticipated and unavoidable losses caused by historical contamination. This means that the land must be analysed and, if necessary, remedied. Policies typically cover bodily harm and property damage, as well as cleaning costs and fees. Lenders are typically looking for loss of rental income as well, and policies are typically issued for single periods of insurance ranging from one to ten years.

A standard public liability policy covers pollution caused by a sudden specific event, such as a tank bursting. However, pollution that occurs gradually over time, such as a slow drip from a supply pipe connecting to the tank, is specifically excluded. As a result, there are a variety of policies that cover gradual pollution and are more focused on contractors’ environmental exposures.

All Risks for Contractors

Typically, the principal contractor is responsible for the new build structure for the duration of the contract, until practical completion and handover to the employer.

Coverage in the joint names of the contractor and employer was common under the JCT Contract Form. Lenders, on the other hand, now prefer to have their interest noted with a Joint Insured, Co-Insured, or Composite Insured endorsement. They frequently demand to be designated as the “First Loss Payee.”

While there are no financial consequences, there is a significant amount of negotiating between lenders, solicitors, and insurance companies until an agreement is reached.

Start-Up Delay

In the event of significant damage to the Contract Works prior to Practical Completion, the repair/rebuild will invariably cause a delay in handover. The income that the building was supposed to generate, such as rent, could be delayed by a month or even up to two years.

Water Source Heat Pump

In a worst-case scenario, it would be typical to cover lost rent or additional finance costs and have an indemnity period reflecting the rebuild time.

It is extremely difficult for developers to obtain cover apart from the Contract Works because quickly restoring damage reduces unnecessary delays; therefore, the same insurer, i.e. the Contractors Insurer, is typically involved.

Bonds for Performance

Performance bonds, which have been around for a long time, are currently in high demand.

Bonds are typically valued at 10% of the contract value and issued in the employer’s favour, providing a financial buffer to complete a project if the original contractor defaults.

They are typically available from banks and insurance companies, but insurance market bonds are preferred when using a bank bond would significantly deplete the contractor’s working capital. However, certain types of bonds, such as “On Demand” bonds, are not underwritten by insurers.

Internal Insulation

The cost and availability of insurance sector bonds are determined by the contractor’s financial strength. Premiums are also determined by the length of time the bond is in force. This is typically tied to the contract period, with the bond released upon practical completion of the contract.

Archaeological Insurance That Wasn’t Expected

Employers and funders are increasingly demanding this, despite the fact that it is still in its infancy.

The United Kingdom has a vast, undiscovered archaeological heritage that is protected by several pieces of legislation aimed at safeguarding and preserving it.

Contractors and developers can and have been caught off guard when archaeological discoveries are made on the job site. For example, the discovery of archaeological finds at a major road scheme in Northern England in 2007 resulted in costly delays and financial outlay for all parties involved.

The word “unexpected” holds the key to the cover. Following an evaluation of the site via a desk study and possibly field investigations, a policy would be available.

A typical policy would include coverage for cancellation or delay, additional archaeological costs, redesign costs, and loss of profit or value.

Last Updated on December 28, 2021


Author: Indra Gupta

Indra is an in-house writer with a love of Newcastle United and all things sustainable.

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