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Refurbishment Works: How Construction Insurance Price Rises Could Affect Fit-Out Projects

While “don’t demolish, refurbish” is a sustainable, time-friendly option for redevelopment schemes, insurance market changes could reduce its cost-effectiveness. Read the first of our two-part article series to find out why.

27/02/2021 · 5 minute read

While “don’t demolish, refurbish” is a sustainable, time-friendly option for redevelopment schemes, insurance market changes could reduce its cost-effectiveness. Read the first of our two-part article series to find out why.

Fit-out works in existing buildings are a popular choice for UK owners, developers, and landlords. The lack of development land in key locations, combined with the demand for residential and commercial space, favours the refurbishment of existing buildings. With tackling climate change back in the spotlight, re-fits can offer sustainability advantages in comparison with demolition and new builds.

Post-pandemic working patterns could also boost the appeal of refurbishment projects. Some 72% of knowledge workers do not want to return to full-time office work, even when it is safe to do so, preferring a hybrid of remote and office working.[1] The function of the office environment is likely to be reviewed and changes planned — from minor fit-outs to major refurbishments.

Developers, owners, contractors, and landlords, however, need to be aware of the changes in the construction insurance market and the challenges involved with gaining insurance for refurbishment projects. While cover continues to be available for such projects, careful consideration should be given to managing and marketing the risks involved, in order to obtain the optimum construction insurance terms available.

In this article, you'll discover:

  • Why refurbishment projects are potentially a profitable option, especially in a landscape affected by COVID-19
  • An analysis of the current construction insurance market conditions
  • Examples of the huge claims that have caused the market to contract and triggered a reduction in insurer appetite.

Construction Insurance Market Conditions

From 2018, the construction insurance market has transitioned firmly out of a very soft market. A 15-year environment of falling insurance premiums and broadening coverage has combined with a dramatic increase in claims to pave the way for changes in the cover and cost of insurance available for all projects.

As a result of the tightening conditions, most of the market is amending and reducing both cover and benefits that were the norm for many years. Critically, the flexibility of insurers to underwrite projects that fall outside of their appetite has dramatically reduced. In both the construction and liability insurance markets, some leading insurers consider refurbishment projects to be higher risk than new-build projects and, consequentially, may have less appetite to provide insurance for them. The main reasons for this stance are twofold:

  • Across the insurance market, senior management are applying strict parameters for underwriters, such as increased minimum premium/rate thresholds and coverage conditions, prior to releasing terms; in many cases, individual underwriters require more internal approvals than in previous years.
  • Subsequent to the rewriting of business plans, the key focus of insurers is to underwrite profitably and underwriters are encouraged to avoid risks that they deem could negatively influence the achievement of this goal.

Insurers are scrutinising refurbishment projects more closely for a number of reasons:

  • The large losses incurred in recent years. Notable UK examples include:
    • Destruction of a landmark building: The delayed installation of a sprinkler system and the presence of obsolete ventilation ducts exacerbated a fire which led to estimated rebuild costs of more than £95million.
    • Nine-month building closure: Welding work apparently sparked a blaze that took more than 100 firefighters to extinguish, following the completion of a multi-million pound building refurbishment. The damage closed the business for a further nine months.
    • Roof partially destroyed: Nearly two years into its refurbishment works, a historic building suffered a fire that destroyed nearly a third of its roof.
  • The heightened potential of a large day-one loss, with a fire in the first few weeks of the project potentially causing significant existing structure and delay claims. For a new build, insurers’ exposure gradually increases throughout.
  • The insured values can fall outside of underwriters’ appetites:
    • The delay in start-up sum insured, where purchased, is often a high percentage of the estimated contract value due to the presence of an existing structure forming part of the building.
    • The value of the existing structure may be disproportionate to the estimated contract value. Where the balance is significantly in favour of the existing structure, construction insurers may deem this element of the risk to be better suited to an operational property programme.

With some insurers leaving the market, remaining underwriters have a pipeline of business that allows them to be selective with their risks.

Case Study: The Southbank Centre and the Tightening Construction Insurance Market

London’s Southbank Centre is a defiant cluster of 1950s brutalist arts venues hunkered down beside the River Thames. In 2018, £35million of refurbishment works were completed for three of its main venues, the Queen Elizabeth Hall, the Purcell Room and the Hayward Gallery. The project was feted as a success by many metrics, including sympathy with the original design, sustainability, and energy use. The RIBA Journal described the revamped Centre as: “…looking – and working – better than it has done at any time since it first opened”, and added that the project was “every bit the story of success and longevity”.

However, the construction insurance market has tightened dramatically since 2018, and cover for fit-outs is more difficult to obtain than for new build projects. Despite the promotion of and plaudits awarded for refurbishment projects, arranging insurance can potentially present more challenges. Had the Southbank project been commissioned today, it might have faced more hurdles, with the possibility that it might not have gone ahead.

Find Out More About Insurance for Re-fit Projects

With a full appreciation (and mitigation) of the risks, refurbishment and re-fit projects continue to have the potential to be a viable proposition for their stakeholders, Read part two of this blog, for an analysis of how to work with your construction insurance broker to gain the optimum insurance terms for refurbishment projects.

FOOTNOTE
[1] BBC Worklife: Coronavirus: How the World of Work May Change Forever

Meet the author

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Kate Fairhead

Vice President, Construction, Infrastructure and Surety Practice, Marsh JLT Specialty

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