Removing the Risk from Real Estate development How insurance can help

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Removing the Risk from Real Estate development
How insurance can help
Bill GloynChairman, Aon European Real Estate
Practice Group
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Aon and Bill Gloyn

• Aon is a Fortune 500 company, based in Chicago
  listed in NY and London 47,000 employees in 120
  countries
• Bill is Chairman of the Aon European real estate
  practice group
• He set up the Aon commercial property
  specialisation in 1983 extensive experience of
  major international developments
• The UK now has 40 specialist staff, based in
  London, Birmingham, Chelmsford, Glasgow, Leeds
  Leicester,
• Teams in Baltic States, Belgium, Czechia, France,
  Germany, Hungary, Italy, Ireland, Netherlands,
  Poland, Portugal Spain and US
• Vice-President, Insurance, Olympia York Canary
  Wharf Limited 1989/92 in-house consultant
  1992/2003
• BPF General Council and Chairman insurance
  committee
• Member of national construction contract
  insurance committee

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Aon European Real Estate Practice - 2006
SCANDINAVIA
BALTIC STATES
IRELAND
NETHERLANDS
UK
POLAND
BELGIUM
EASTERN EUROPE
CZECH
GERMANY
FRANCE
HUNGARY
ITALY
PORTUGAL
SPAIN
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Aon in the Baltic States
Total premiums processed in 2005 - Euro
25m Leading broker in the region
Aon
Aon
Aon
Aon
Aon
Aon
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Hold onto your hats - theres a lot of ground to
cover
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RISK MANAGEMENT
A four part process
Transfer or retention strategies
Risk analysis and quantification
REVIEW
Elimination or reduction of risk
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Good Risk Management

• Keep it Simple
• Be honest about risk awareness
• Implement fundamental controls
• Maintain awareness of business objectives
• Set up early warning mechanisms and quick
  response strategies
• Regular consultation with the team on the ground

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Transferring the Risk

• It can be passed on to other parties
• In contracts indemnities or guarantees
• By insurance arranged by you or a third party

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Dont worry - Were Insured!
Insurance is no substitute for effective risk
management
It will not cover all the loss
Insurance may not exist
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Indemnity and Insurance Provisions in Contracts

• Why are there insurance provisions?
• To provide financial support for
• Liability for injury to employees or third
  parties
• Liability for damage to property owned by others
• Damage to the contract works
• Consequential losses resulting from damage
• Neglect, omission or error in design
• Bonds and Warranties

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An indemnity or guarantee from another party is
often worthless without insurance
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Due Diligence Who Arranges the Cover?

• Important insurance is often arranged by a third
  party
• Freeholder
• Landlord
• Tenant
• Borrower
• Contractor
• Consultant
• Problems in getting interests correctly insured
• Often no procedure for checking and monitoring to
  ensure compliance
• Gaps in cover may prejudice the interest of the
  party at risk YOU?

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Even if the cover was correct when the deal was
done, are you sure that it is now?
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Why the Client should control insurance critical
to success

• The only party with a long-term financial
  interest
• Administration problems when split between
  contractors
• Major projects need specific covers
• Many developers already arrange

• Control over placing and cover
• Trusted relationships
• Secure insurers
• Banks requirements met

• Cost Control
• no administration overhead
• no additional charge from contractors

• Control over claims

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What banks and investors want at least US and
UK ones

• Protection of their financial interest loss
  payee
• Quality cover all risks inc. terrorism
• Sound insurers needed to support credit rating
• Reinstatement basis independent valuations
• Adequate loss of rent or operational income to
  secure the income stream vital for PPP
  contracts
• Notification of changes and non-payment
• Non-vitiation when they are innocent

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Insurance of the Contract Works

• Covers against any physical loss or damage to
  work executed and site materials
• Excludes wear and tear, obsolete, deterioration,
  rust or mildew and defective materials or design
• In the joint names of contractor and employer

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Income Protection

• Insurable losses
• Loss of Anticipated Rent (or Interest)
• Reduction in Sale Price
• Additional Cost of Construction of the Unbuilt
  Works
• Additional Overhead Costs
• Abortive costs letting and marketing

8m 7m 6m 5m 4m 3m 2m 1m
1st quarter
2nd quarter
3rd quarter
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Public Liability

• The Risks Insured
• The policy provides indemnity in respect
  of liability at law for damages arising from
  accidental injury to third parties (other than
  employees), or accidental damage to their
  property, resulting from the work on site

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Professional Indemnity Insurance what is it?
A policy to protect the insured in respect of
legal liability arising from a breach of
professional duty caused by neglect, error or
omission
An annually renewable contract
Possible changes to the terms and conditions at
each renewal
Cover is on a claims made basis
No cover following insolvency or new participants
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PI - The Basic Failure
It is there to protect those who caused the loss
Not those who suffered it!

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The Charles de Gaulle airport collapse - costs
estimated at Euros150 million!There has never
been a more appropriate time to consider Latent
Defects Insurance
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LATENT DEFECTS INSURANCE

• Covers damage to the building against inherent
  defects which originate in the structure
• An inherent defect is one which exists prior to
  the date of practical completion but remains
  undiscovered until afterward
• Weatherproofing and waterproofing
• Loss of rent if required
• Non-cancellable cover for 10/12 years
• Assignable to purchasers or funders

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Some major claims I have experienced

• Tower crane collapse on office development
• 3 dead, damage to surrounding properties, loss of
  rent
• 6 months delay to project
• Broken water main on retail development
• 100,000 gallons of water in railway tunnel
• 3 months delay while new monitoring equipment
  installed
• Air-conditioning plant failure
• Fan propeller spun out of unit, 4 injured, tenant
  forced out
• Ceiling collapse in shopping mall
• Building new floor, major tenants closed for 12
  weeks
• Burst pipe in office block near end of
  construction
• Damage to structure and tenants fit-out
• 12 months delay to occupation and rental income

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How to manage a claimto your best advantage

• Understand the conditions of the policy
• Always use your broker to help
• Notify any circumstances likely to be a claim
• Collect evidence witness statements, photos
• Keep damaged property until inspected
• Do not start work until the insurers agree
• Cooperate with the insurers representatives
• Maintain full and accurate records of costs
• Insurers may need them for recovery action

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Remember

• An insurance company is not a charity.
• All claims payments reduce their profits
• Make certain that you preserve yours!

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Good times are just around the corner!
A properly arranged insurance programme will give
you the chance to enjoy them!
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Thanks for Listening
Bill GloynChairman, Aon European Real Estate
Practice Group
bill.gloyn_at_ars.aon.co.uk
Aon Limited6 Devonshire SquareLondon EC2M 4PL