As the property industry begins to adapt to life with the virus, we are seeing an increasing number of landlords considering alternative uses for their buildings, either because tenants have exited due to financial difficulties and turnovers are down, or lucrative government contracts are on offer to inject revenue onto the balance sheet.
From cathedrals and retail/industrial units being transformed into temporary vaccination centres, to hotels being used for compulsory quarantine, we have seen a range of occupation changes in the short term. Looking further ahead, if the trend of office workers adopting a more agile approach to working life continues, will we see a similar pattern for office buildings in the cities? In this article, we look at what the requirements are under insurance contracts relating to change of use and offer some key points for client consideration.
Client Requirements – The Duty of Fair Presentation
Most contracts are based on the principle that all parties have an equal opportunity to understand what the effects of the contract will be. Insurance is different because the proposer of the risk (the policyholder) is likely to know far more about the risk than the insurer.
As a result of this, under the 2015 Insurance Act, as an insured you are required to make a fair presentation of the risk to insurers which discloses every material circumstance which you know (or ought to know), so that the insurer can make an informed decision as to whether or not to provide insurance for the risk and, if so, on what terms.
First and foremost, it is therefore imperative that any change in building occupation is disclosed to the insurer in good time, so that the underwriter has all of the information they need when considering their terms.
Below we have detailed a selection of the key considerations when changing the use of a property. From a Real Estate perspective, there are two main areas insurers will look at when assessing their position:
The underwriter will consider anything that may increase the risk of physical damage to a building. Fire is one of the most expensive property insurance claims in the UK, but Malicious Damage and Escape of Water are generally smaller quantum but greater frequency exposures. This list is not exhaustive, and it is important to think about any increase in risk from the insured perils when changing a building occupation, and consider any steps that may be taken to mitigate the risk of loss.
Liability insurance covers you for claims made against your business by third parties relating to injury or property damage. Claims can come from a member of the public (insured under Property Owners’/Public Liability) or employees (covered under Employers’ Liability). If a change in occupation increases the risk of claims being made against you, it is again important to think about any steps that can be taken to reduce this risk.
There may be other points that need to be addressed with insurers, such as the severity of any potential losses and the resultant interruption to business, but the above is certainly a good place to start giving an idea of the trail of thought an underwriter is likely to have.
For short-term contracts, such as temporary vaccination centres and quarantine hotels, we have seen a number of clients take the approach of contracting the risk of loss out to the third party that will be using the building – be that for physical damage to the building, or liability claims that may arise. This is an approach that is well received by insurers, as it means that the third party that is now managing the property on a daily basis takes the increased risk on their insurance policy or balance sheet, rather than relying on the landlord to pick this up.
Engage with Gallagher early
Early discussions are key. In the longer term, and in situations where it is not possible to contract out, insurers will need to reassess the risk and can potentially alter policy terms.
Your Gallagher team is readily available to discuss any changes you are considering, and provide insurance advice on all things that should be considered in order to resolve any concerns your insurer might have, and ensure that an acceptable agreement is achieved.