Sustainable construction
The refurb revolution
20 May 2022
Refurbishment offers a range of benefits over new construction. When it comes to insurance, however, it can be a challenge.
As discussions about sustainable building materials and modern methods of construction continue, one challenge – perhaps even the largest of the lot – is the ‘vast stock of existing building that need to continue in use – but which must be operated more efficiently’. In the UK, for example, new regulations will require all commercial buildings to have an energy performance certification (EPC) rating of B or higher by 2030. Making this a reality is going to need an extensive renovation work.
At the same time, the volume of construction and demolition (C&D) is huge. Globally, C&D waste is estimated to account for more than 25% of the total generated each year. In the EU, that proportion rises to about 35% of the total waste produced.
"refurbishment poses some significant complexities"
Even when C&D waste is effectively recycled, demolition is usually followed by new construction, with the associated resource and emissions profile. Slowing the cycle of demolition and reconstruction, in favour of repurposing and refurbishing existing structures, therefore offers distinct sustainability advantages. This is recognized in BREEAM scoring systems, for example, which are ‘weighted to refurbishment over rebuilding’ with ratings ‘vastly improved’ by re-utilization of existing structures. Post-COVID working patterns are also changing the nature of the office environment to suit more flexible working arrangements, which may also drive refits as landlords seek to make office spaces more attractive to this new style of working. Ironically, then, when it comes to urban spaces, any revolution in construction may alter the actual landscape of a city very little; the change will occur within the fabric of existing buildings, as they are repurposed, renovated, and reborn. But for all its benefits and attractions, refurbishment poses some significant complexities that make knocking down and rebuilding the easier of the options.
Choosing Refurbishment: The Insurance Implications
The current construction insurance market remains relatively hard compared to conditions five or so years ago. One result of this is that there is significantly less flexibility on the part of insurers to underwrite projects that fall out of their appetite. At the same time, refurbishment projects are under scrutiny thanks to a number of large fire-related losses incurred in recent years.
When it comes to insuring refurbishment products, complicating factors include:
- The potential for a significant day-one loss, as well as large imbalances between the estimated contract value of the refurb work and the value of the existing structure. This can make it difficult to obtain coverage within construction markets, and require coverage through the property market.
- Latent defects insurance is almost impossible to obtain for non-structural or minor refurbs (e.g., when retaining 90% of the structure), since latent defects policies normally only cover new structures.
- Environmental liability: owners, funders, lenders, developers and tenants of real estate can all be held liable for environmental clean-up, claims and associated losses, even if they were not the original polluters. Parties who would not usually be held liable under environmental law may face risks due to the increasing contractual allocation of environmental liabilities in transaction agreements.
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Latent defects insurance is almost impossible to obtain for non-structural or minor refurbs
Gaining Coverage: Getting the Message Right
Given the insurance market for refurbishment projects, designing and articulating adequate risk management is crucial to obtaining coverage. This requires an in-depth knowledge of the risks associated with the project, and the best methods available for mitigation.
Taking fire safety as an example: it’s essential to design in systems that minimize the risk of fire – and prevent the spread of fire in the event it occurs – during renovation work (bearing in mind that the building will unoccupied for periods of time, e.g., over night and at weekends). According to the Fire Protection Agency, potential fire mitigation measures include:
- Using non-combustible, non-flammable building materials to reduce fire load.
- Avoiding the need for hot work on site.
- Applying design details to prevent the spread of smoke and flames during renovation.
- Ensuring access and egress routes are planned to retain safe evacuation routes.
- Designing firefighting and fire detection systems to allow for their early use.
As the use of risk engineers to review underwriting submissions is becoming more common, it’s important to engage with a specialist broker, such as Gallagher, at an early stage to ensure submissions are as comprehensive and effective as possible, showing appropriate due diligence when it comes to risk management and transfer. It’s also true that there is no one-size-fits-all insurance strategy for refurb projects. A specialist broker will be able to help tailor the insurance programme to the unique requirements of the project, based on their expert knowledge of what’s available in the market.
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