Understanding the impact of insurers' concerns about fire risk is fundamental to managing property insurance effectively for a client
This article originally appeared in the RICS Property Journal
Grenfell has understandably heightened insurer anxiety alongside broader market trends including an increase in vacant properties; underinvestment in maintenance and security as economic challenges bite and the growing use of new materials to improve sustainability. Those responsible for insuring property on a client's behalf must arrange appropriate insurance and take all reasonable steps to ensure the policy responds to a loss. This may be obvious, but remember:
- policy coverage varies
- one size does not fit all – insurance requirements are affected by asset class, funding structure and lease terms, for example
- you must comply with the policy requirements.
Poor insurance management can mean a loss for the owner is not covered. This can lead to reputational damage for the professional concerned, and a likely allegation of negligence against them.
The impact of a hard insurance market
We are currently experiencing a 'hard insurance market'. Insurers' appetite to underwrite many types of insurance has constricted which limits supply. This, in turn, increases premiums, reduces the limits of indemnity available for higher risk assets and can restrict the breadth of coverage available. A hard market also enhances the chances of a claim being repudiated as insurers increasingly strictly interpret policy wordings.
Maintaining an understanding of insurers' appetite combined with an awareness of how to mitigate emerging risks is vital to effectively managing insurance. Retaining regular contact with your insurance broker and sharing information with peers and key stakeholders will help facilitate the proactive management of both insurance spend and policy coverage.
Understand the policy
Ensure you understand the coverage available under the policy and your ongoing duties as laid out in the policy requirements.
Do not rely on the policy remaining unchanged at renewal and be aware that adding a new asset to the policy may not be straightforward, particularly if you're managing a small portfolio and the new asset is considered higher risk. If you are unsure, seek advice from your insurance broker.
Making a fair presentation
Failing to make a 'fair presentation of the risk' is one of the most common reasons for a claim being declined. The requirement applies to all forms of business insurance. It means that those seeking insurance must disclose to insurers, during the policy period and at renewal, all information that is or ought to be known that is material to the risk.
In the context of property insurance, disclosure is required across four key areas: construction, occupation, protection and exposures.
Given the invisible nature of some factors which enhance combustibility, for example compartmentation, insurer scrutiny has increased since Grenfell.
Accurately describing construction is, therefore, vital. A detailed reinstatement valuation or a pre-acquisition technical due diligence report should include all the details required.
Accurately describing tenant activity is a key requirement across all asset classes. It is highly pertinent for industrial assets, especially on lower grade multi-unit sites where high-risk occupations often co-exist. Higher risk activities include hot works; waste handling; the storage of materials with a high combustible load and food cold storage units which may be lined with combustible panels.
Irrespective of asset class, though, don't make assumptions about tenant activity. Regular, thorough site inspections are key to understanding fully how a tenant is using a building, and to the ongoing assessment of fire risk mitigation.
The requirement to disclose material information lasts for the life of the policy, so you must notify insurers if tenant occupation changes or a property becomes vacant.
Mitigating fire risk is a moral obligation. It will also be a requirement of the insurance policy that fire safety systems and procedures are fully operational and regularly checked. In the context of fair presentation, insurers will also require, at renewal, an accurate appraisal of the protections in place.
'Exposure' is defined by the cost reinstatement valuation. Recent increases in the costs of raw material and labour are resulting in properties being underinsured. The policy holder is obliged to declare adequate cost reinstatement sums. Failing to do so can result in insurers applying the average clause, effectively reducing the limit of indemnity available by a percentage equivalent to the rate of underinsurance.
Most policies will state that, if a cost reinstatement valuation is provided by an RICS member, every three years insurers will account for inflation at each renewal and will not penalise the policy holder for underinsurance. However, the building declared value remains the maximum amount that insurers will cover (plus any policy allowances for inflation); a £5m building declared value will never result in insurers paying out more than £5m, plus any allowances for post-policy inception inflation.
Ensure compliance after renewal
In addition to making a fair presentation of the risk, you must comply with the policy's requirements. Obligations can vary from policy to policy, with specific requirements sometimes applying to individual assets.
Unsurprisingly, the most common reasons for claims being voided include failure to prevent fire or mitigate its impact, so you should pay particular attention to the following areas.
- Comply with health and safety and fire safety legislation, and be prepared to provide evidence of doing so. Maintaining accurate, up-to-date fire risk assessments and fire management strategies for each property is vital.
- Ensure everyone involved in managing the property understands and fulfils their responsibilities. Simply providing training is unlikely to be sufficient; the team must have the skills, equipment and time to carry out their duties, and should be monitored on an ongoing basis.
- Put appropriate procedures in place for managing all forms of change, including but not limited to a change in tenant and refurbishment works.
- Ensure the intent of the original design features are appropriately managed and maintained throughout the building's lifespan, particularly if there's a change in use.
- Develop, implement, and regularly review the standard suite of building management documents. These should incorporate insurers' requirements so risk control standards across a property portfolio are consistent.
- Ensure there is an agreed set of procedures in place for the management of contractors attending site to undertake works, such as a rigid policy for hot works, and contractors' liability insurance.
The legal and regulatory landscape
Irrespective of the policy terms, everyone associated with the building, including the manager, owner and tenants must comply with the applicable legal duties. Failing to do so can result in a civil or criminal prosecution, with potentially more far-reaching consequences than an uninsured loss.
The regulatory landscape is changing significantly, following Grenfell, with the implementation of the Fire Safety Act 2021 and the Building Safety Bill which is anticipated to gain Royal Assent and become law in 2022.
The Building Safety Bill
The Building Safety Bill (BSB) introduces new regulatory measures for residential buildings deemed higher risk with a new dutyholder regime applying during the lifecycle of in scope buildings. During occupation, the dutyholder will be the accountable person, which is a new role under the BSB. The accountable person must ensure that someone (whether a person or corporate entity) is responsible for building safety.
The bill will impose statutory duties on the accountable person. It also provides for enforcement and sanctions when accountable persons and responsible persons – the latter being those with control of a property under article 3 of the Regulatory Reform (Fire Safety) Order 2005 fail to fulfil their duties. The statutory duties for an accountable person include but are not limited to the following:
- Assessing the building safety risks, taking reasonable steps to mitigate them and limit the severity of any incidents on an ongoing basis.
- Maintaining up-to-date documentation that proves building safety risks are proactively identified, managed and mitigated, as well as a safety case report summarising and justifying all safety measures in place.
- Registering in-scope buildings with the building safety regulator (BSR) before residents move in; higher risk buildings already in occupation must be registered within a set period once the new regime is in force. Once registered, apply to the BSR for a Building Assessment Certificate.
- Maintaining the 'golden thread' of safety information from all dutyholders.
- Appointing a building safety manager (BSM) with accountability for the day-to-day management of building safety
- Establishing a structured process as part of their mandatory occurrence reporting obligations and provide reports of such occurrences to the BSR.
The accountable person's obligations are anticipated to take effect later this year or early next. Although this leaves time to prepare, planning should begin now.
As with all areas of risk management, documented procedures are only effective if people comply with them. Merely assuming compliance is an approach that is highly unlikely to withstand scrutiny should a claim arise. All those responsible for mitigating risk must be trained, equipped and managed in a way that ensures compliance is an intrinsic part of their role.
Emma Vigus is a business development director in the Real Estate Team at Aon
Contact Emma: Email
Alexandra Anderson is partner at RPC
Contact Alexandra: Email