When a contractor causes damage negligently to your neighbour’s property, are you responsible or is the contractor? Are all construction contracts the same in relation to risk, insurance and damage responsibilities? Does the builder arrange insurance for their works alongside or separate from the policyholder? These are just a few relevant questions one of the 2.8 million millionaires across the UK may have prior to undertaking a major renovation. It is critical for high-net-worth (HNW) customers to understand the risks of construction, be aware of the contractual responsibilities of key parties and stakeholders, and ensure they obtain the correct policy to protect their assets.
The re-modernisation boom
The modern renovation market has seen a rapid, meteoric rise across the UK and major global economies. Investors have long foreseen the potential for property growth in the UK market. And, thanks to substantial collective focus on overseas buyers investing in UK capital — particularly large-scale constructions and renovations — the luxury property boom has arrived.
In cities like London, where space limitations in desirable areas prevent horizontal buildouts, and local planning and building restrictions prevent vertical ones (capped at single-story in many cases), a structural trend has emerged: building downward. London has seen a resulting increase in so-called iceberg homes, or mega-basements, built inconspicuously below the ground’s surface. Such renovations infuse significant value into a home; in Chelsea and Kensington, adding a basement can increase a home’s value by £15,000 per square meter.
Though inflation has given way to decreased appetite, many international investors are keen to ride out the economic turbulence — using properties as nursery homes or alternative establishments until the time comes to capitalise on unexpected returns through rent or sale. Homes across the UK are now worth more than prior to the COVID-19 pandemic. HNW clients consistently seek to impose their own character on their properties to achieve a more dominant stature of wealth, and so long as the trend of embellishing living spaces persists, the rise of modern renovations is not likely to disappear — and the insurance industry must be prepared.
The value of understanding each insurance element
When a client begins a rebuild — say, to add character — the project begins in the pre-works stage. Start with engaging an architect, then designers and structural engineers to help facilitate the vision and ensure the works are pliable. Then the planning commission at your local planning office must allow for planning permission through an agreement. These are often long, drawn-out processes that should be completed as early as possible. While awaiting results, obtain a contractor and outline a comprehensive budget. In the case of heritage properties and more demanding projects, specialty surveys may be required to assess suitability of the works.
Contract works
During the project’s infancy stages, HNW clients should invest in a framework contract to maximise protection for all stakeholders. Arguably the easiest standardised contracts to navigate from a customer’s perspective are the Joint Contracts Tribunal (JCT) — a suite of standard forms of contract that cater to varying degrees of complexity and cost for all building projects. A contract’s key function is to allocate the risks and responsibilities of all parties involved — most importantly, those of the employer and the contractor.
The JCT outlines several agreed-upon elements of the works: the project’s value, start and completion dates, relevant insurance options, etc. The risk and insurance responsibility allocations are based on one of three insurance options chosen within the contract. Regardless of option choice, all weigh heavily on the contractor in the event of an injury or damage caused to the property.
Under the JCT contract, the insuring responsibilities typically are : Option A, when the contractor is responsible for insuring the works in joint names with the employer, on an all-risks basis; option B, when the employer is responsible for insuring the works in joint names with the contractor, on an all-risks basis; and option C, when the employer is responsible for insuring the works jointly with the contractor re: existing structures.
It is however a common misconception that niche HNW policies will cater to all eventualities. If a homeowner calls their insurer last-minute during a renovation — after local planning is approved and contractor readied — and they expect approval to extend their existing home insurance, that person may be out of luck. Either the insurer agrees to extend the policy, with an inflated premium and a conversely reduced cover (effectively diminishing its protection), or the extension is denied altogether due to risk.
To approach this situation correctly, we encourage communicationwith your broker from the outset of the pre-works planning stage, and secure a recommendation for a specialist underwriter or insurer who can provide a comprehensive all-risk policy. Specialist policies are specifically designed to cover the risk allocations of the entirety of the works, ensuring control and maximum protection of the asset.
What can go wrong?
Homeowners often make the mistake of relying upon their contractor’s insurance policy for protection. Doing so, in some cases, could result in substantial financial and emotional consequences. In a standard contractors’ all-risk policy, a common exclusion holds that any damage to an existing structure is not insured, and can therefore leave the claim exposed.
In one case — a full ground-floor refurbishment — a large double-length steel beam served as the central point of the works’ extension. Shortly after the beam’s installation, the client had noted an opening within the brickwork above the beam, and there was later found to be damage materialising within the structure’s internal and external fascia and blockwork. The cause was determined to be a failure to adequately support the load during the beam’s installation. Despite the beam being placed correctly, the damage related solely to the existing structure — and was therefore excluded from protection. Due to the absence of specialist cover, the client was forced to absorb the substantial financial repercussions of the damages and re-works that followed.
Risks and mitigation, key strategies
When a property is structurally altered, a range of events can occur that can lead to damage or injury, including escape of water, storm/flood, fire and theft. Of all physical risks, accidental damage (which includes non-negligent and fortuitous damage as well as structural collapse) is the costliest damage type to renovations, accounting for 29% of all costs, according to leading product supplier Renovation Underwriting. Accidental damage claims also tend to be the most far-reaching and complex in nature.
It is vital to mitigate and prevent risks wherever possible, such as deploying leak-detection systems and ensuring proper workmanship to combat future escape of water damage. Even more importantly, the importance of acquiring the right insurance coverage for the adequate sums insured in the event of a claim must not be neglected; nor should the contractors’ insurance be relied on. Finally, it is wise to engage the services of specialist claims professionals at the very earliest stages — particularly those with proven expertise relating to the complexities associated with HNW constructions and property losses.
There are numerous moving parts related to contract works and renovations, that, if misunderstood or unacknowledged throughout the construction process, can cause consequential insurance-related dilemmas down the line. To that end, it is critical to aid customers in understanding each insurance element and any possible implications to allow a smooth, cost-effective renovation project void of conflict.
Even if the damage is caused by negligence or admission of fault, whilst the works are ongoing, the contract requires the contractor and sub-contractors to be considered as joint insureds for the losses.
Tags: Claims, contractors, Damage, high net worth, Insurance, international, Policies, Policy, Property, Property claims, Property damage, UK, United Kingdom