The UK Construction industry is continually seeking to develop more efficient and cost effective methods of construction. The government expects developers to turn to new technologies and offsite solutions to ensure buildings are constructed faster, to a higher standard and in greater numbers.
The Mergers and Acquisitions (M&A) activity around development projects and construction companies has increased dramatically over the last few months. In addition, in the pursuit of yield, buyers are entering new, untapped jurisdictions and sectors that may previously have been dismissed as being too risky. At the same time, sellers are becoming less patient when it comes to offering high liability caps as they are unwilling to accept residual liability, and buyers are concerned that certain risks will not be addressed if the seller makes that ‘cleaner exit’. Even commissioning external advisors to undertake diligence does not always mean that sufficient comfort can be obtained on areas such as title, tax, and construction, especially in newer jurisdictions.
Warranty and Indemnity (W&I) insurance is ever evolving. It has traditionally been very popular within the real estate sector as it effectively allows the seller to limit their liability to £1 and make a completely clean exit from a transaction. The buyer policy allows the purchaser to claim directly from the insurer in the event of a breach of warranty by the seller, regardless of any rights they have in the Sales & Purchase Agreement (SPA) to pursue the seller.
In recent months, the insurance market for W&I and tax risks has soared. Market capacity has tripled in two years with 23 insurers offering W&I cover in almost all jurisdictions and sectors globally. Insurers can no longer ‘pick and choose’ the deals that they want to underwrite and have had to become more commercial when it comes to price, coverage and process. As such, development acquisitions (such as green field and brown field sites) are viewed by most insurers as easily insurable and so are subject to substantial competition.
Insurers will still pay particular attention to external diligence done on areas such as planning and financial accounting (due to the planning and construction aspects), but they are becoming more accepting of internal financial and tax due diligence, provided these are in a report form and carried out by individuals with the necessary qualifications to do so.
When it comes to construction companies being acquired, underwriters will expect to see robust due diligence around financial, accounting, contracts and employment. It is therefore essential that a broker is involved at an early stage of the deal to assess the feasibility of W&I insurance and to quickly find the right market for the deal. Rates are slightly higher on these deals due to the operational aspects, but we would always aim for circa 1% of the amount of insurance needed.
Due to the influx of new insurers into the W&I insurance, covering the M&A surrounding construction developments and companies is becoming easier and cheaper to insure; on timing, insurers are usually able to get fully tailored, fully negotiated policies in place within 5-7 working days of the first contact.
Furthermore, the premium rates and excess levels for these policies have dropped to almost match those attributable to clean real estate acquisitions. Premium rates have dropped to below 1% (of limit) and average excess levels have dropped from 1% to nil on most deals.
Our advice would be for buyers and sellers to test the market, and to talk to us, so we can advise on the most strategic deployment of this specialist product.
Why Gallagher?
Our specialist team offers all you’d expect from one of the world’s largest brokers – broad coverage, market influence, and a breadth of deal experience spanning a range of industries. This enables us to help our clients see their risk profile in a different light - and for us to provide greater levels of strategic insight.
- Our team consists of qualified lawyers, brokers and insurance professionals to advise on the placements of policies from a range of perspectives.
- We have some of the most experienced brokers in the industry and have been involved in the formation of the W&I sector.
