Insurance in property development
5 April 2008
Successful property development combines good business judgment and effective management. Identifying and managing risk plays an important part in overall project planning. Developers may face known risks which, if ignored, may force delay, design alteration or even cancellation. They also have to plan for the possible outcome of unknown risks.
Risks may be legal (relating to ownership or use of land), physical (the threat of contamination or unexpected archaeological discovery, or latent defect in a building) or financial (providing surety for performance, or protecting a warranty). This note looks at the legal risks, and particularly those related to the title to the land, but insurance for developers should be seen as part of a package designed to protect all aspects of the project.
Legal risks
Developers, and their lawyers, already use insurance to handle problems surrounding title to land. Where a problem or uncertainty relating to the ownership or the intended use of the land is found and cannot be removed through normal legal processes, insurance can usually protect against the risk of future loss and help ensure the project's marketability. Developers, lenders and final purchasers or tenants can all be protected.
A legal risk may threaten the developer's ability to begin the project or to complete it (for example, the planning permission may be subject to judicial review or the right of access may be challenged). It may affect the scale of development (as where a new use may cause an unacceptable intensification of use of an easement) and it may affect the type of use possible (as where a covenant may prevent the sale of alcohol from a proposed supermarket).
With all kinds of title-related risk the insurer has to assess whether the insured risk will ever happen and, if it does, whether a defence can be mounted at reasonable cost and with a good chance of success. The underwriter's job is to balance the likelihood of each, and the possible cost if the worst happens.
Both insurer and developer have to consider timing: whether the cover is needed pre- or post-planning, and when a challenge to the insured might arise. A pre-planning risk carries a greater risk, as the application for planning itself will alert possible objectors to what is being done. In some cases, the insurer may be willing to offer cover in stages, covering only the actual losses incurred at each stage but taking only part of the premium at each stage. Where the developer wants to make an early start on work, the risk of possible judicial review of the planning permission (and a substantial loss of land value and wasted expenditure if the permission is quashed) has to be addressed and is often insurable.
Any challenge which delays the project will cost the developer time and money, but one made after work has started will be more costly for developer and insurer. More money will have been spent, and planning permission may have enhanced the value of the land and the possible level of loss. The insurer will defend against a challenge, but the project may have to stop. If project interruption is a risk, the developer should ask if the insurer is willing to cover the costs which this will cause.
A title problem may create difficulty in selling or letting property, but this may be resolved if the insurer is prepared to allow cover to carry on from the original developer. In residential schemes, buyers of individual houses may be offered cover in their own names. This makes it easier to handle queries about title problems from their solicitors, reduces the demand on the developer's lawyers, helps buyers with their mortgage arrangements (as inflation cover is usually included) and so helps with marketability.