The superior nature of Syndicated Insurance for Construction Projects
Syndicated Insurance is not so much an insurance solution – more a global comprehensive risk management tool for qualifying construction professionals. The application to major construction projects was developed by myself and John Curran, an expert in construction risks insurance, to provide banks with a quality event risk package in order to facilitate rapid financing at a lower cost to developers. It took 2 years of negotiation, cajoling and proving in whole or part with construction professionals.
It would also be reasonable to acknowledge David Barnes, Executive Director of Construction Risks at Willis in London who championed this product within Willis.
Having been asked to explain Syndicated Insurance I would suggest that this blog is for the spectrum of construction finance professionals as I must assume a reader knowledge of the conventional process of construction finance and construction risks insurance. Thus this blog will outline the features, scope, comprehensive nature, and benefits of Syndicated Insurance for construction projects.
The objective of this approach was to provide a totally comprehensive, all-inclusive insurance package that would include, and commit the lead underwriter to provide all requirements throughout the debt service period regardless of when, in the project timeline, certain requirements need to be activated. This provides security to a lender that all event risk requirements are guaranteed throughout the debt service period.
The ultimate global comprehensive and integrated insurance solution, designed with project finance specialists to address principal and bank requirements with unparalleled service and risk management delivery
Specifically designed to incorporate all development risk mitigation requirements for the larger contractor, property developer, and construction professional
Flexible in its application – select what is required in the most applicable form – with consistency in delivery and cover
Aligned with concepts such as long-term finance initiatives to offer long-term indemnity up to 30 years to satisfy bank finance requirements, and maintain a consistent bank risk profile, even during delays and disputes
Comprehensive inter-laced cover with a single, major underwriter to emulate the way that bank’s syndicate the debt financing component thus simplifying risk assessment, cover, claims and disputes
A comprehensive solution for the construction professional throughout the world with valuable new features not currently available with any other product
Non-collateralised bonding facilities available to limit unnecessary use of working capital – the financial and security benefits are immediate and considerable
Many of the difficulties encountered in construction litigation are avoided, significantly reducing the possibility of lengthy disputes, or project delays
Added value benefits include 3 or 5 year fixed pricing with a share of insurers profit, loss control and evaluation services provided without charge, 24-hour helpline World-wide including collateral warranty advice and claims services.
Contractors “All Risks” – Includes full cover for works, temporary works, materials & plant, whether owned or hired whilst at the contract site, in transit to or from the site, or temporarily stored away from site
Financial Risks – Takes the pressure off the Balance Sheet by avoiding the unnecessary use of working capital and bank bonding – Annual bonding facilities for Performance, Bid/Payment, Maintenance/Retention, Highways Act and other commercial guarantees
Advance Profits – Employer and contractor indemnified against consequential losses following contract delay – Exceptionally wide cove including interest on loans and loss of rent
Building Defects – Up to an initial 12 years’ cover with options to roll – initial technical audit uniquely leads to an automatic option to purchase for all projects – electrical and mechanical services can be included – enhanced value to completed construction sites – immediate compliance with requirements such as the Latham report objectives and anticipated EU directives – includes post-development efficacy of new technologies
Professional Indemnity – Liability arising from architectural surveying and other agreed professional activities – High premium discount for modest voluntary excess – wide subrogation waiver agreement
Public and Products Liability – Includes contractual liability and indemnity to principal – World-wide coverage – optional excess levels
JCT Clause 21.2.1 – Automatic annual facility – No individual Surveys – No specific contract underwriting
Directors’ and Officers’ Liability – Comprehensive cover for the obligations of Directors and Officers to meet existing legislation, company and employee reimbursement – World-wide coverage – no excess option
Employers’ Liability – Includes cover for labour-only sub-contractors, hired or borrowed persons, all other self-employed persons, and authorised work experience schemes. World-wide coverage
Property Damage – A wide range of financial protection opportunities for completed off-site properties occupied by you or leased to other parties – consequential loss – contents and other assets
Fidelity Guarantee – No mandatory system of check – generous discount for voluntary excess options – automatically includes money and goods for first and third party fraud
Motor Fleet – Includes courtesy vehicles – third party claims management – automatic repair authorisation – no excess option
Terrorism & Civil Commotion – Includes Terrorism, Riots, Strikes, Civil Commotion and Malicious Damage including fire
Brown Field – Includes latent defects arising from assuming certified brown field sites for development including asbestos and heavy metals
Environment Impact – Includes environmental pollution as a direct result of development works
Political Risks – For International projects where the political environment dictates the need for comprehensive cover against Expropriation, War & Terrorism, and Force Majeure
CONTRACTORS ‘ALL RISKS’
Responds to obligations arising from all standard conditions of contract including:
- JCT – Joint Contract Works Tribunal
- ICE – Institute of Civil Engineers
- GC/Works/1 – General Conditions of Government Contracts
- Other International contract conditions
Cover is provided in the joint names of the Contractor and/or Principal for unforeseen events causing damage to the works, temporary works and materials, whilst:
- In transit to, or from, the contract site and while temporarily stored off-site
- Own plant and hired plant
- Site huts, Employee’s Tools and Equipment
- Removal of debris following loss or damage to the contract works
- Professional fees in connection with reinstatement of the contract works
- Cover for completed buildings pending sale, including show houses and their contents
- Cover for loss of or damage to temporary works and other equipment during any maintenance period
- The cost of recovering immobilised construction plant from any site
- Cover in respect of the liability to meet loss of income claims made by a plant owner following damage to any plant hire
The Policy will automatically reinstate the sum insured following a loss.
Increasingly developers, banks, investors, local government and private sector employers are demanding the provision of guarantees, which will ensure that, in the event of insolvency, the costs they incur completing a development will be met.
- The Performance Bond makes available to the employer a sum of money, normally 10% of the contract value in many parts of the World rising to 100% in countries such as the USA, which will facilitate completion of the contract should contractor insolvency occur.
- Deed or Tender Bond – against withdrawing from a contract and that a Performance Bond is available.
- Advance Payment Bond – against non-completion of a contract, including repayment of monies advanced by the employer.
- Retention Bond – replaces the retention fund.
- Maintenance/Retention Bond – against non-performance of maintenance responsibilities thereby releasing the retention fund.
- Highways Act Bond – to local authorities against non-completion, to their satisfaction, of roads and sewers within developments.
These bonds can be provided through insurance companies. The advantage over banks, who also issue bonds, is that insurance company bonds are generally unsecured, whereas banks require collateral. Furthermore, bank-bonding facilities form part of a general overdraft facility, which could cause excessive borrowing requirements.
Insurance bonding facilities are off-balance sheet with consequential beneficial impact on statutory accounts.
Contractor and Principals’ loss of:
- Rent Receivable
- Interest Receivable on net proceeds of project
- Interest Payable on project loans
- Increased Cost of Works
all as a consequence of a delay emanating from an indemnifiable loss under Contractors ‘All Risks’.
Loss of Rent – Rental income which, but for the damage, would have been received during the Indemnity Period.
Interest Receivable – The Interest Payable for outstanding loans in relation to the Project which have to be extended or re-negotiated and/or additional loans which may have to be raised to finance other projects which would have otherwise been funded from the net income of the sale of the Project.
Increased Cost of Working – The additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing loss of Rent Receivable and/or Loss of Interest Payable and/or Loss of Interest Receivable which, but for that expenditure, would have taken place during the Indemnity Period in consequence of the damage but not exceeding the loss of Rent Receivable and/or loss of Interest Payable and/or loss of Interest Receivable thereby avoided.
Indemnity Period – The period of delay in the letting (or sale) of the Development in consequence of the damage beginning on the date upon which, but for the damage, rent would have commenced to be earned (or the sale of the Development would have been completed).
Physical loss, destruction of or damage to the property insured. This includes the collapse of the building caused by a fault defect, error or omission in design, materials, components or construction of the building, which remain undiscovered on the day of practical completion.
- First Party cover. Insurers assume responsibility for immediate rectification thereby avoiding the need to rely for compensation upon litigation against a Third Party.
- Policy fully assignable for the benefit of future owners, tenants and occupiers.
- Twelve-year period to comply with legislation such as the Latent Damages Act 1986, automatically extendable for up to 30 years to provide cover throughout various national financing initiatives and bank financing requirements.
- Technical Auditing carried out by Insurers and included in premium thereby avoiding high cost of appointing independent consulting engineers which has previously made cost of cover prohibitive.
- Initial Technical Audit leads to a facility for all projects, which avoids the need to audit each project, thereby reducing the cost and greatly simplifying arrangement of cover.
- Roof, Cladding, waterproof membrane, and underground services.
- Electrical and mechanical services
- Loss of rent, loss of profit and the costs of alternative accommodation.
- Sum Insured includes demolition costs, Professional Fees, Regulatory Compliance and Inflation Provision.
- Efficacy of new technologies post-completion
- Premium Instalments
In respect of the Insured’s legal liability for negligence in the conduct and execution of their professional activities and duties involving design or specification, supervision of construction, feasibility study, technical information calculation, always under the direction and control of a qualified architect, engineer or surveyor.
In addition to meeting costs and expenses in respect of damages and defense of a claim or potential claim, the cover may also be extended to meet those expenses which you may incur as a result of any action you take to reduce the cost of a claim or potential claim.
- Libel and slander
- Loss of documents
- Dishonesty of employees
PUBLIC AND PRODUCTS’ LIABILITY
Liability to third parties following accidental bodily injury, loss of or damage to material property or accidental loss of amenities, trespass, and nuisance arising out of your normal business and site operations.
- Liabilities arising from defective design, specification or workmanship in respect of any structural materials or goods that you supply erect or repair.
- Liability arising out of the use of mechanically propelled contractors’ plant on site.
- Contingent liability arising out of employees using their own motor vehicles on company business.
- Liability for loss or damage to premises which are leased or rented.
- The Financial Loss Public Liability cover provides for financial losses but only arising out of loss of, or damage to, property. This Extension provides cover for liability in respect of accidental financial losses suffered by third parties where damage to property has not occurred.
- Automatic Indemnity to Principals
- Cross liabilities
JCT CLAUSE 21.2.1 (OR EQUIVALENT)
Loss resulting from damage to property caused by collapse, subsidence, heave, vibration, weakening or removal of support, or lowering of ground water arising out of, and in the course of, carrying out the works.
As there are various contractual clauses necessitating this cover, it requires each to be considered on an individual basis. This would not stop work on site commencing but it may mean after a risk assessment, that the final terms and conditions will be finalised subsequently.
The period of insurance cover will equate to the contract term.
DIRECTORS’ AND OFFICERS’ LIABILITY
Protecting Directors and Officers of the Company, and the Company itself, in respect of claims made against them for any wrongful act in their capacity as Director or Officer.
A “Wrongful Act” is defined as breach of contract, breach of duty, act, neglect, error, omission, mis-statement, misleading statement or breach of warranty of authority.
- Shadow directorship
- Costs of representation at official investigations into the affairs of the Company or its subsidiaries
- Outside directorship
- 12 month discovery period
- Spouses of the Directors and Officers
- Pollution defence costs
Provides against the cost of claims for bodily injury or disease, sustained by employees during the course of their employment, for which there is legal liability. Cover includes the actual damages awarded plus the cost and expenses incurred in defending a claim.
An important feature of the Policy is that “employee” is widely defined and includes:
- Labour only sub-contractors
- Any other self-employed person
- Employees hired or borrowed from another employer
- Anyone participating in authorised work experience
- Liability to employees and the public
- Contractual liabilities and indemnity to Principal
- Additional liabilities in respect of bodily injury or loss of or damage to property you assume under contract
- Health and Safety at Work Act (1974), or national equivalent
- Kidnap and Ransom
Comprehensive cover for all buildings upon Practical Completion. Cover is available for a single building or any number of buildings, with emphasis on flexibility to accommodate a diverse range of properties, resulting in tailoring cover to meet specific requirements. To obtain the optimum level of protection, a number of invaluable extensions are included as standard, removing unnecessary complication and outlay involved in purchasing additional policies, resulting in overlapping or duplication. Conversely, gaps in cover, which may only come to light at the time of a claim, are avoided.
- Consequential loss – advance rental
- Property owners & employers’ liability
- General interests
- Denial of access
- Automatic reinstatement
- Trace and access
- Capital additions
- Internal maintenance contracts
- Loss of metered services
- Loss of keys
- Unauthorised use of services
- Landscaped gardens
Loss of money or goods caused directly by an act of first or Third Party fraud, theft or dishonesty by an employee provided the loss is discovered within two years of the termination of the Policy or the period during which it occurred.
An “employee” is widely defined and includes:
- A person under a Contract of Service or apprenticeship with the Insured
- Trainee under work experience schemes
- Directors under a Contract of Service who have a shareholding in the Company
- Temporary employees provided by staff agencies excluding computer staff, warehouse staff, drivers and others where special consideration is required
- Staff retired on a pension still working on a consultancy basis
- Auditors’ fees in substantiating the amount of claim, or amending or re-writing computer programs or security codes following fraudulent use.
- No compulsory requirement to prosecute defaulting employees.
- Defaulting employee not required to be identified if proven loss was caused by an employee.
- Cover provided on each and every basis not restricted to an aggregate.
All types of vehicles ranging from private cars, commercial vehicles, special type vehicles or motor cycles or hauliers.
This cover can be diverse to include:
- Normal Commercial Fleets
- Industrial Fleets
- High Performance Cars
- High Net Worth – Collection of valuable vehicles
- Plant equipment licensed for road use
- Unlimited third party property damage
- Unlimited manslaughter defence costs
- Full cover for trailers whilst attached to vehicle
- Courtesy vehicles
- Automatic repair authorisation
- No Excess Option
Indemnifies the Insured for the Ascertained Net Loss sustained as a result of direct physical damage to or physical destruction of Insured Assets arising directly out of Terrorism, Riots, Strikes, Civil Commotions or Malicious Damage including fire damage and loss by looting. For the purpose of this cover, an act of terrorism means an act, including the use of force or violence, of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organisation(s), committed for political, religious or ideological purposes including the intention to influence any government and/or to put the public in fear for such purposes.
Provides full indemnity against any latent problems associated with certified brown field sites including asbestos and heavy metals
Provides for cover against environmental impact of accidental spillage or other non-negligent events that cause environmental problems
This is a truly International product and thus, for countries for which such cover is required, provides a comprehensive Political Risks section that covers the full spectrum of risks such as Expropriation, War & Terrorism, and Force Majeure.
Expropriation – indemnifies the Insured for the Ascertained Net Loss sustained as a direct result of the Insured Events of Expropriation, Selective Discrimination, Forced Abandonment, Forced Divestiture, Cancellation of Concession Agreement, Cancellation of Export Licences or Imposition of Export Embargo
War & Terrorism – indemnifies the Insured for the Ascertained Net Loss sustained as a result of direct physical damage to or physical destruction of Insured Assets arising directly out of the following Insured Events: Political Violence, Civil War, Revolution, Rebellion, Insurrection or any Hostile Act by a Belligerent Power or Terrorism, Riots, Strikes, Civil Commotions or Malicious Damage including fire damage and loss by looting during the occurrence of or following an Insured Event, provided that such physical loss or damage occurs during the Policy Period at the location(s) of the Foreign Enterprise
Force Majeure – indemnifies the Insured for its provable and ascertainable Net Loss resulting from, due to, or in consequence of any cause beyond the reasonable control of the Insured including Business Interruption as a result of emergency partial or total closure of any road or railway line or port of navigable waterway or airport by or under the lawful order of the police, local or national authority or government, or the electricity, water or gas supply authority, and Third Party Blockade (or Quarantine) which means the politically motivated use of military force, or the direct threat thereof, of one or more third party sovereign nations.
What are the real benefits to a developer of this package?
- A single policy, segmented into chapters relating to the various categories of risk, on one common legal platform with one major rated underwriter, and from which qualifying construction professionals can select their requirements safe in the knowledge that there is no expensive crossover cover, nor unforeseen gaps.
- Known cover for all aspects of the development (regardless of the date of required cover activation) from the beginning of the project at a known cost, and not subject to any detrimental market changes throughout the development period.
- Latent Defect and Advance Profit features not currently available under any known construction development insurance.
- Developers can dispense with the need to negotiate lengthy warranties, and to scrutinise the terms of professional appointments.
- As the insurance package is not on a “claims made” basis but is, rather, for a fixed duration and level of cover from the outset, there is no need for the developer to concern themselves with the maintenance of insurance cover by professionals and the contractor nor with the continuity of the professional team in existence into the future.
- Many of the difficulties inherent in construction litigation (particularly as the apportionment and extent of liability) can be avoided. This substantially reduces the possibility of lengthy disputes.
- The sales process is substantially simplified and the need for additional documents and negotiations is kept to a minimum.
- Development financing becomes simpler and quicker as the lender does not have the concern of ensuring that all required risks are adequately covered and on what terms as this package provides a fully uniform and inter-laced insurance platform with only one substantial underwriter, and in a language suitable for bank professionals. This makes financing substantially simpler.
- The latent defect aspects of this policy provide for a far wider scope than currently available, and cover is available for up to 30 years before new inspections are required making this a significant sales aid.
- All of the above and more at a probable lesser cost than could be achieved using conventional insurance with less cover.
How will this insurance package affect the bid process?
Traditionally, as part of the procurement process, each contractor would factor into their bid the cost of obtaining insurance and obtaining any necessary bonding for their obligations. Contractors with fewer claims and who are more reliable would have access to cheaper insurance which, in theory should give them a competitive advantage. Under this policy the developer would be advised of the insurance cost differentials associated with each bidder and the developer would then use this information in assessing any bid. In this way the developer has total control on insurance costs.
What is different about the latent defect cover under this policy?
In its simplest form the latent defect cover addresses what should be available to purchasers, i.e. full rectification of any and all defects for a period up to 30 years without inspection and subject only to a satisfactory claims history. This cover is flexible in that the developer can provide say, 12 years, as part of the purchase contract with the purchaser having the automatic right to continue such cover on an agreed basis thereafter.
Can the insurance premium be broken down into its component parts for allocation purposes?
Apportionment of premium is essentially a mute point to the developer as it is a project cost, whoever initially bears it. The mechanism of this insurance product reduces the overall cost of insurance, and thus project cost. However each risk component can be separately costed for apportionment purposes.
VALUE ADDED SERVICES
This sophisticated product can only be realistically negotiated, placed with underwriters, and administered by the likes of Willis, Aon, and Marsh. For example Willis, with 300 offices in 74 countries and 14,500 associates serving clients in some 180 countries, have the capacity to provide the following added value services to ensure a quality service to construction professionals:
- A specialist construction division with staff throughout the World from surveying and/or construction loss adjusting background.
- Specialist construction claims staff enables a pro-active stance on contentious or complex claims. Integrated computerised systems enables instant access to claims information;
- Contract conditions – advice on all insurance implications and assistance with negotiating the most effective and beneficial wording for each specific project;
- Risk Management – advice in compliance with local legislation such as CDM – Health and Safety at Work Act (1974) and general loss control;
- Production of a service plan which would obligate Willis to implement all elements of service from pre-renewal meetings to site surveys on a specific time scale by way of a detailed bar chart;
- 24 hour helpline throughout the World including collateral warranty advice and claims services;
- Dedicated legal services from your usual supplier.
- The very nature of this product means that it is available to qualifying professionals prepared to engage in a technical audit for qualification purposes. This audit is for a developer or main contractor and should only need to be conducted once, irrespective of the number of construction projects.
- A first time developer is unlikely to qualify if using standard JCT or equivalent contracts. However a non-qualifying developer employing a qualifying main contractor on a full Design and Build basis is likely to qualify.
- The construction project needs to be agreed by a lender to be commercially viable.
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