Property development can be a long and complicated process that can put property developers in a high-risk situation. Be it a small-scale residential property project or a large-scale commercial project, a property developer has to deal with an array of issues throughout the development process. They may also need to deal with multiple industry professionals such as reputable builders, contractors, financiers, investors, surveyors and many others. The higher the involvement of multiple parties, the higher the risk of something going wrong.
As it is famously said, high risks often lead to high rewards. However, that does not mean that these risks can’t be managed or mitigated. Every project is unique and so should the techniques of protecting the project and the developer. Thorough due diligence and the right insurance for property developers can prove to be some of the best ways to mitigate property development risks.
The risks can vary depending on the project’s type, scale and level of involvement the developer has in the construction. Consequently, the level of due diligence and type of insurance for real estate developers will vary accordingly too.
How can property developers identify the need for insurance?
Due diligence is the practice of carrying out research to be aware of the potential risks around property development projects. Consulting insurance brokers during the due diligence phase is a good idea to ensure you are appropriately covered before beginning the project.
While the due diligence phase is a good time to chat to your insurance broker, there is never a bad time to do it. Even if you’re in the middle of a development project, it’s always worth getting an insurance review.
Property developers, just like other business owners, need to protect their assets, income and liabilities from unexpected events. In today’s world, they need to consider more than just simply Worker’s Compensation or General Liability Insurance. Other risks such as Cyber-crime, Professional Indemnity and Management Liability need to be covered too.
Common risks property developers face and ways to help mitigate those risks
Below is a list of some of the risks faced by developers along with the different types of insurance available to help safeguard those risks:
Loss of Profit
A business interruption insurance policy could cover your cash flow temporarily if your property suffered damages due to an insurable event. It could cover relocation costs, loss of revenue and even additional increased cost of working.
Pollution liability insurance can cover personal injury and property damage from exposures arising from various types of harmful pollutants. It also covers site clean-up costs. General Liability Insurance usually offers limited Pollution Liability Protection, mainly covering personal injury or property damage from the unexpected release of pollutants into the local council area (and wider environment!). However, the policy may contain certain exclusions. Some pollutants may require a unique policy of their own, such as an Asbestos Liability policy.
Cyber-crime insurance protects a business from first party and third party claims that arise from a breach or attack to your I.T. network. First Party losses are summarised as losses that affect your business, whilst Third Party losses are more focused on your liability to your clients.
Cyber-crime can arise from phishing, cyber fraud or social engineering activities that can hack your company’s internet, bank accounts, client data or other systems. Most policies required certain covers to be added as optional inclusions, such as Cyber-Crime, Social Engineering, Contingent Business Interruption and Tangible Property.
With business processes and data increasingly moving online, cyber-crime is becoming a much more common threat, making insurance for cyber risk more important.
Damage of Contract Works
A builder’s risk insurance or contract works insurance is to protect a construction project at various stages. It covers delay in project commencement, material damage to property (caused by vandalism, or property defects), contract work theft, property damage by third parties, equipment and structural damage, and legal liability. Some policies also cover natural disasters such as fire, flood, earthquake, storm, wind and water damage. Public Liability Insurance may also be included if not insured separately.
Professional Negligence risk
Professional Indemnity Insurance is one of the most common insurances taken up by all kinds of business owners. A property developer’s business can be safeguarded against claims arising from professional misconduct (design, certification or consulting), breach of contract or even breach of fiduciary duty. It can cover your legal costs and any compensation payment that may arise due to a claim. It isn’t common for developers to outsource professional services to third parties to assist with mitigating some of the risk to other professionals who specialise in this space.
Management Liability/Directors & Officers Insurance
Property development is rarely taken on by an individual. There are often a variety of directors, shareholders and investors that contribute to the development process. Directors & Officers Insurance, which is also commonly insured within a Management Liability Insurance policy, is for claims brought against past, present and future directors and officers of organisations for claims of wrongful acts or breaches of their duties while they held their roles. Wrongful acts and breaches often arise from the decision they have made, which in turn affect a third party and have an impact on other directors and shareholders.
It is vital for property developers or a project manager to assess the risks involved in their projects and take steps to mitigate them. If you’re looking for insurance brokers who can help you understand your insurance requirements and provide a comprehensive tailored solution to meet your specific needs, look no further than Hunter Broking. High rewards don’t need to come with high risk — we can help you manage and mitigate risk so you can focus on the capital growth of the completed development and increasing the market value of your property.