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JLT Real_Estate Building Blocks JLT’s Real Estate Insurance Magazine Edition 4, 2012

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JLT Real_Estate Building Blocks JLT’s Real Estate Insurance Magazine Edition 4, 2012 Powered By Docstoc
					Building Blocks
                     JLT’s Real Estate Insurance Magazine

                                          Edition 4, 2012




                  In this issue
                  Can Political Violence be
                  covered in Australia?
                  API Article on Risk Management
                  A Risk Manager’s Perspective…
                  Construction Insurance
                  For Property Developers
                                                                                                                                        This however does not extend to
                                                                                                                                        include coverage for Residential
                                                                                                                                        Property owners as residential
                                                                                                                                                                                       •	    Rioting over an extended period
                                                                                                                                                                                             of time resulting in property
                                                                                                                                                                                             owners facing significant
                                                                                                                                                                                                                                      JLT’s strategic
                                                                                                                                        properties are not covered by the
                                                                                                                                        Terrorism Insurance Act. For Residential
                                                                                                                                                                                             interruption to their businesses
                                                                                                                                                                                             due to denial of access/reduced          solutions for
                                                                                                                                        Property owners some of the Strata
                                                                                                                                        Insurers and General Insurers are
                                                                                                                                                                                             trading and property damage.
                                                                                                                                                                                                                                      Political Violence
                                                                                                                                                                                                                                      and Political Risks
                                                                                                                                        starting to again provide an element           The most basic cover is available by
                                                                                                                                        of cover for Terrorism. These are              a write back for Strike, Riots and Civil
                                                                                                                                        typically minimal limits of $1m and $2m        Commotion. The write back simply
                                                                                                                                        depending on the building’s location. It       cancels the standard exclusion of              JLT has vast experience in arranging
                                                                                                                                        is likely that in the next few years we will   these perils in conventional property          the appropriate Political Violence and
                                                                                                                                        see insurers in Australia increasing their     and cargo policies, in exchange                Political Risks solutions to suit the
                                                                                                                                        limits for terrorism and the affordability     for additional premium, thereby                needs of any business and has one
                                                                                                                                        of this cover.                                 providing cover for strike, riot and civil     of the most successful political/credit
                                                                                                                                                                                       commotion. Many disturbances in                risk teams in the markets handling in



    Can Political Violence exposure                                                                                                     Riot and Civil                                 recent times may appear to fall within         excess of US$60bn in premiums at
                                                                                                                                                                                       the definition of a riot or civil commotion.   any one time.

                                                                                                                                        Commotion cover                                An alternative option is to purchase           Drawing on our political and credit



    be covered in Australia?
                                                                                                                                                                                       a Political Violence insurance policy          risk experience, JLT has developed

                                                                                                                                        for property owners
                                                                                                                                                                                                                                      the World Risk Review, a strategic
                                                                                                                                                                                       which will provide comprehensive
                                                                                                                                                                                                                                      decision making tool designed to
                                                                                                                                                                                       coverage tailored to the risks the
                                                                                                                                                                                                                                      help corporations, banks and other
                                                                                                                                                                                       business faces. This coverage can
                                                                                                                                        A summary of the definition of what                                                           organisations involved with international
                                                                                                                                                                                       include Strikes, Riot, Civil Commotion,        trade and investments. It provides a
                                                                                                                                        a terrorist act is under The Criminal
                                                                                                                                                                                       Terrorism, Sabotage, Insurrection,             short to medium term assessment of
                                                                                                                                        Code Act 1995 includes an action
                                                                                                                                                                                       Revolution, Rebellion, Coup d’etat,
    Recent events around the world have generated a number of questions                                                                 or threat of action where the action
                                                                                                                                                                                       War and Civil War. These policies are
                                                                                                                                                                                                                                      the level of risk associated with a range
                                                                                                                                                                                                                                      of political and economic perils that
                                                                                                                                        causes certain defined forms of harm
    as to how insurance policies will respond to certain types of politically                                                           or interference and the action is done
                                                                                                                                                                                       particularly important if your Australian      could cause financial loss and is the
                                                                                                                                                                                       domiciled companies are trading or             most comprehensive risk assessment
    motivated events. JLT revisits the exposure and how these risks may be                                                              or the threat is made with the intention
                                                                                                                                                                                       investing in other parts of the world          tool of its type.
                                                                                                                                        of advancing a political, religious or
    transferred.                                                                                                                        ideological cause.
                                                                                                                                                                                       especially in the emerging markets.
                                                                                                                                                                                                                                      Nine perils are rated in 197 countries
                                                                                                                                                                                       In Australia, we have experienced              and territories under the broad
                                                                                                                                        Riots and Civil Commotion can have
                                                                                                                                                                                       extremists participating within                categories of Political Violence,
                                                                                                                                        a direct impact on property owners in
    The global financial crisis has had
    an impact on the level of social
    unrest in countries where the level of
                                               Terrorism cover                            Until then insurers had excluded
                                                                                          liability for terrorism losses by including
                                                                                          clauses to that effect in their insurance
                                                                                                                                        many ways. Some examples are:
                                                                                                                                        •	   Properties being set on fire and
                                                                                                                                                                                       demonstrations which have ultimately
                                                                                                                                                                                       led to dangerous riot situations and
                                                                                                                                                                                       the Australian Government believes
                                                                                                                                                                                                                                      Trading Environment and Investment
                                                                                                                                                                                                                                      Environment. This provides a starting
                                                                                                                                                                                                                                      point for clients to devise effective
    unemployment is rising to dizzying
    heights. This is coupled with the          for property                               contracts. The Terrorism Insurance
                                                                                          Act overrides those terrorism
                                                                                                                                             windows smashed in order to
                                                                                                                                             steal goods resulting in potentially
                                                                                                                                                                                       that Australia is now a target of
                                                                                                                                                                                       transnational extremist groups.
                                                                                                                                                                                                                                      strategies to manage these risks
                                                                                                                                                                                                                                      with greater granularity, rigor and

                                               owners
    friction caused arising from other                                                    exclusion clauses in ‘eligible insurance           significant property damage and           The National Terrorism Public Alert            sophistication.
    politically motivated groups and                                                      contracts’ where they are considered               rental losses if the abetment             System, which is run by the Australian         The World Risk Review website
    extremists. We are now living in a                                                    ‘eligible terrorism losses’ arising from           clause of the lease is triggered.         Government, currently, at date of              includes your personal ratings table,
    world where tension from one side          A summary of the definition of what        a ‘declared terrorist incident’. Insurers                                                    publication, maintains an alert level of       historical ratings, user ratings, country
                                                                                                                                        •	   Properties being damaged and
    of the world can promptly trigger the      a terrorist act is under The Criminal      may reinsure this additional risk                                                            ‘Medium’ dictating levels of precaution        comparisons, key insights and
                                                                                                                                             business trading interrupted
    acts locally via the use of social media   Code Act 1995 includes an action                                                              following police lockdown in              and vigilance to minimise the risk of a        country reports, heat mapping and
                                                                                          with ARPC.
    leading to rapidly developing situations   or threat of action where the action                                                          response to extremely large               terrorist incident occurring. (Source –        user opinion and discussion blog.
    where peaceful demonstrations can          causes certain defined forms of harm       The Terrorism Insurance Act covers                 numbers of rioters in the area.           http://www.nationalsecurity.gov.au/ )
    quickly become something more              or interference and the action is done     contracts that insure:
    sinister if joined by those with other     or the threat is made with the intention   •	   loss of, or damage to, eligible
    than peaceful intent.                      of advancing a political, religious or                                                                                                       For more information contact
                                                                                               property that is owned by
    General insurance does not typically       ideological cause.                              the insured;                                                                                 Asia                                      Australia & New Zealand
    respond to either an act of Terrorism                                                                                                                                                   Matthew Strong                            Stephen Cooper
                                               The Australian Government established      •	   business interruption and
    or Riot as these are general exclusions
                                               the terrorism insurance scheme                  consequential loss arising from                                                              on +65 6411 9343 or email                 on +61 (0)2 9290 8123 or email
    from a property insurance policy that
                                               through the Terrorism Insurance Act             loss of, or damage to, eligible                                                              Matthew_Strong@jltasia.com                Stephen.Cooper@jlta.com.au
    property owners rely upon to protect
                                               2003, to replace terrorism insurance            property that is owned or
    their investments and revenue streams.
                                               coverage for commercial property                occupied by the insured or an
    Whilst there is no coverage within the
                                               and associated business interruption            inability to use such property; or
    standard property insurance policies,
    there are levels of protection provided    losses and public liability claims.        •	   liability of the insured that arises
    by the Australian Government and           The Terrorism Insurance Act also                out of the insured being the owner
    the Insurance Industry to provide          established the Australian Reinsurance          or occupier of eligible property.
    the property owner with a level of         Pool Corporation (ARPC) as a statutory
    protection. These include Acts of          authority to administer the scheme. The
    Terrorism and Riot and Civil Commotion.    scheme commenced on 1 July 2003.

1
                                                                                                                                                                                                                                       JLT Real Estate Building Blocks Magazine  2
    Risk Management for Property Owners
    Featured in the September 2012 edition of Australian Property Institute




    In 2010, a well-known organisation embarked on a major investment by
    acquiring an old warehouse with the intention of developing the site for residential                                            Property and                               insurance premiums and deductibles
                                                                                                                                                                               and reduced policy limits. Mitigate,
                                                                                                                                                                               Finance. Mitigation of risk by proper
                                                                                                                                                                                                                            removing fuel loads surrounding
                                                                                                                                                                                                                            property, as well as ensuring that
                                                                                                                                                                                                                            adequate sprinkler protection systems
    accommodation. Through their due diligence it was identified that the site had, as                                              Business                                   design and physical protection of
                                                                                                                                                                               CRE properties in exposed locations
                                                                                                                                                                                                                            are in place both inside and, where
                                                                                                                                                                                                                            appropriate, outside the premises
    part of its history, been used for printing and publishing. Although management
    undertook a high level risk assessment of the acquisition, focus was largely on the                                             Interruption Risks                         is key. Ensuring adequate insurance
                                                                                                                                                                               protection is purchased is essential –
                                                                                                                                                                               cover, valuations, business interruption
                                                                                                                                                                                                                            (rooftop). When all else fails, close
                                                                                                                                                                                                                            scrutiny of your property and business
                                                                                                                                                                                                                            interruption insurance, well before you
    financial viability of the development, rather than a wide-ranging assessment of                                                Increased Insurance Taxes - The
                                                                                                                                    Victorian Government proposes to
                                                                                                                                                                               reviews and policy limits are key            sight the encroaching bushfire,
    the risks which may have potentially impacted the investment. This narrow focus                                                 abolish the Victorian Fire Services Levy
                                                                                                                                                                               focus areas. Insurance costs can
                                                                                                                                                                               be minimised by working with your
                                                                                                                                                                                                                            is advisable.

    on the venture’s potential risks would come back to haunt them.                                                                 (FSL) on 1 July 2013, to be replaced
                                                                                                                                    by a levy via council rates, spreading     broker to “sell” your risk to insurers.
                                                                                                                                                                                                                            Damage to unoccupied properties
                                                                                                                                                                                                                            - Unoccupied properties pose an
                                                                                                                                    the cost against a broader base and        Preparation for major weather events
                                                                                                                                                                                                                            increased risk of damage for property
                                                                                                                                    lowering the cost of insurance. In         is also essential to protect life and
                                                                                                                                                                                                                            owners and insurers. The current
    Within nine months of the purchase,         against each new investment. Risk                                                   the interim period, certain FSL levies     property. Having a current Crisis
                                                                                                                                                                                                                            business environment can lead to
    site excavation led to the discovery of     management for CRE is a mature               Treatment(s):                          have been increased, making the            Management Plan which responds
                                                                                                                                                                                                                            increased vacancies depending on the
    the presence of toxic levels of PBTs,       discipline, with many owners /                                                      cumulative impact of all government        to weather and other catastrophic
                                                                                                                                                                                                                            property and surrounding economic
    halting all development. The property       managers having developed robust             Risk avoidance - action is taken       charges in excess of 100% of the base      events, accompanied by staff training,
                                                                                                                                                                                                                            environment. Mitigate, Finance.
                                                                                                                                    premium in certain instances. Avoid        is paramount.
    was ultimately sold at a substantial loss   processes to minimise risk to their          to simply avoid or remove the risk;                                                                                            Prevention of damage is the primary
                                                                                                                                    (if possible). If you have property
    and remains undeveloped today. This         organisation. This article provides a                                                                                          Climate Change, Fire Risk -                  protection. Owners facing long term
                                                                                                                                    insurance covering Victorian properties
    story of an unsuccessful investment         high level overview of some of the           Mitigation - implementing controls                                                Climatologists are currently predicting      vacancies need to take appropriate
                                                                                                                                    expiring between 1 July 2012 and
    would no doubt strike a chord with          more traditional risks CRE owners and        which seek to minimise or reduce                                                  a potential reversing of our climate         measures to reduce risk of damage
                                                                                                                                    30 June 2013, avoidance of double
    many Commercial Real Estate (CRE)           managers face, together with other                                                                                             from La Niña (characterised by high          through vandals. Long term vacancy of
                                                                                             the risk exposure;                     fire-service related charges may be
    owners and managers; reflective of          emerging risks and some tools available                                             possible if your insurer allows you to     rainfall in Australia) to El Niño, marking   a property is generally deemed to be a
    failed investments which may have           to manage them.                                                                     pro-rata the FSL applicable.               a return to drought conditions.              fact requiring material disclosure to an
                                                                                             Risk transfer - the risk is                                                       The result is a period of prolonged          insurer. Failure to implement adequate
    been avoided if a more rigorous risk
                                                For the sake of brevity, JLT has             transferred contractually or           Natural Catastrophe Risks - Natural        vegetation growth, followed by a             prevention measures may also make it
    assessment process was undertaken.
                                                grouped risks into three main                otherwise to another party; and        Catastrophe activity over the past few     prolonged dry spell resulting in high        difficult to insure the property, or result
    Development of a risk register, where       categories – Property and Business                                                  years has heightened the exposure          fire fuel loads and, hence, fire risk        in increased cost.
    the risks are identified and quantified,    Interruption, Liability and Commercial       Risk finance - the risk is financed    of properties in earthquake and flood      to properties. Mitigate, Finance.
    is an essential process for any CRE         Risks. It is also convenient to group risk   through either funding or insurance.   zones with increases in property           Treatment is one of prevention,
    portfolio which should be re-tested         treatments into four general areas:


                                                                                                                                                                                                                                              CONTINUED OVERLEAF.

3                                                                                                                                                                                                                             JLT Real Estate Building Blocks Magazine 4
                                                                                                                                                                                                                             JLT Real Estate Building Blocks Magazine  10
    Liability                                   Avoid, Mitigate, Finance, Transfer.
                                                Property owners and managers have
                                                many tools in their arsenal to mitigate
                                                                                          economic loss. Mitigate, Finance.
                                                                                          Adherence and monitoring of
                                                                                          inspection and maintenance regimes
                                                                                                                                      the Global Financial Crisis with debt
                                                                                                                                      facilities for new developments difficult
                                                                                                                                      to raise without a substantial balance
                                                                                                                                                                                  behaviour. Mitigate, Finance. It is
                                                                                                                                                                                  difficult to mitigate risk in the long
                                                                                                                                                                                  term unless CRE owners / managers
                                                                                                                                                                                                                             combat some of the emerging, more
                                                                                                                                                                                                                             chronic commercial risks which may
                                                                                                                                                                                                                             have some short term solutions, but
    Gradual Pollution - Strict liability on     exposure in this area including:          is essential, as is an appropriate crisis   sheet, a solid business plan and pre-       adapt their property portfolio. However,   in the longer term may only be treated
    property owners for environmental                                                     management plan. Again, public              committed sales. Mitigate, Finance.         short to medium term risk mitigation       through a change in the commercial
                                                •	   Analysis of incident / claims,                                                                                                                                          property landscape.
    contamination. Avoid, Finance. The                                                    liability insurance provides an essential   Ensuring that potential purchasers and      strategies could include:
                                                     their cause and identification
    best defence is undertaking adequate                                                  backstop if all else fails.                 tenants have the financial capacity to                                                 In our experience, effective
                                                     of trends and implementing                                                                                                   •	   Changing the selection criteria
    due diligence to avoid ‘surprises’.                                                                                               underpin their contractual obligations                                                 risk management enhances an
                                                     corrective measures                  Crisis Management - CREs have an                                                             of tenancies. Identify businesses
    Historically, environmental insurance                                                                                             with developers / owners is vital. Often                                               organisation’s resilience and
                                                                                          obligation to personnel, contractors                                                         which are adapting well to the
    was relegated to specialist insurers                                                                                              these obligations should be supported                                                  preparedness against the impact on
                                                •	   Ensuring any slip or trip hazards    and third parties to protect them                                                            on-line shopping threat.
    providing limited protection to owners                                                                                            by substantial means such as through                                                   its health and reputation as well as its
                                                     are identified and rectified         from injury. Mitigate, Finance.                                                                                                    financial, operational and environmental
    for liability or clean-up costs. Major                                                                                            bank guarantees, credit insurance or        •	   Ensuring that the tenancies have
                                                                                          Prevention, proper planning and                                                                                                    success. Developing risk strategies
    insurers now offer bespoke, broad                                                                                                 surety bonds over the tenure (or part            adequate collateral to withstand a
                                                •	   Protocols and training including     training are paramount. Owners /                                                                                                   and treatments can prevent or mitigate
    coverage with realistic limits at very                                                                                            thereof) of the agreement.                       poorer trading environment.
                                                     inspection programs, signage and     managers should have an up-                                                                                                        these risks to a tolerable level.
    competitive prices. If your decision not
                                                     use of sheaths for wet umbrellas     to-date Crisis Management Plan              Capital Diminution - Decline in             •	   Seeking stronger guarantees from      An effective risk-management strategy is
    to insure against this exposure goes
                                                                                          documenting procedures for each             commercial property values. Mitigate.            tenants to pay rent.                  therefore a vital component of successful
    back a few years, it may be worth your      •	   Developing incident and claim        site for major events such as weather,      Avoiding a downturn in CRE values                                                      property management. Not only does it
    while reinvestigating.                           intervention strategies              fire, earthquake, etc. At the end of the    requires substantial foresight. Generally                                              make accidents or losses less likely, but it
    Slips and Trips - Liability arising
    out of injury through slip, trips and       •	   Thinking long term – developing
                                                                                          day, such losses can be potentially
                                                                                          catastrophic in nature and having
                                                                                                                                      CRE owners need to have the financial
                                                                                                                                      capacity to ‘ride out’ the cycles of the
                                                                                                                                                                                  Risk Management                            can help property owners and managers
                                                                                                                                                                                                                             sleep better at night.
    falls is typically a chronic risk for CRE
    owners / managers. Unfortunately,
    there appears to be a growing trend
                                                     strategies that will have lasting
                                                     impact
                                                                                          adequate public liability insurance
                                                                                          is important.
                                                                                                                                      property market, however, the impact
                                                                                                                                      can be diminished by ensuring that you
                                                                                                                                      invest in prime investments where lease
                                                                                                                                                                                  builds resilience
                                                                                          Commercial Risks
    for increased public liability claim        •	   Transferring risks under                                                         or rental returns (and hence values) are
                                                                                                                                                                                  The risk for CRE property owners /               For more information
                                                                                                                                                                                  managers is an evolving one with
    costs in this area. Add to this our              contractual arrangement.                                                         less volatile.                              constantly increasing and more
                                                                                                                                                                                                                               contact Stephen Cooper on
    courts’ relaxing attitudes to tort law                                                                                                                                        onerous regulatory and governance            +61 (0)2 9290 8123 or email
    reform, and proceedings where               Legionella - A familiar risk which        Liquidity - Liquidity remains a high        Loss of Tenancies - There is clear
                                                                                          risk concern for property owners and        evidence that on-line shopping will         requirements. The impact of climate          Stephen.Cooper@jlta.com.au
    workers’ compensation claim costs           potentially exposes building owners
                                                                                                                                                                                  change will continue to be felt.
    are recovered against a CRE owner’s         and managers to significant liability,    developers. The banking sector in           ultimately cause a quantum shift in
                                                                                                                                                                                  Strategies must be developed to
    / manager’s public liability insurance.     including potential injury or death and   Australia has not fully recovered from      market dynamics, changing buyer




5                                                                                                                                                                                                                             JLT Real Estate Building Blocks Magazine  6
    A Risk Manager’s Perspective…                                                Traditionally there has been a reliance on managing agents and property managers,
                                                                                 along with the relatively infrequent surveys performed by insurers, to manage risk and
                                                                                 recommend improvements. Although not wrong, there are a number of shortcomings
                                                                                 with this approach:



                                                                                 1                                                                                              5
    The protection of assets against loss, damage and destruction, and the               Insurers primarily undertake these      the management of other risks such as                   We believe that an insurer’s
                                                                                                                                 liability, engineering, business continuity
    continuity of rental income, has always been of significant importance to            surveys for their own purposes
                                                                                         – e.g. Reinsurance (insurance           and reputation.
                                                                                                                                                                                         annual survey, in isolation, is not
                                                                                                                                                                                         really adequately managing the
    property investors. JLT’s European Real Estate team employs an ex-industry

                                                                                                                                 3
                                                                                 for insurance companies), estimated                                                            risk. This is something which should
                                                                                                                                          Often the site visits of insurers
    property investment risk manager, John Searing, who shares with us some      maximum loss calculations, checking
                                                                                                                                          are based on an annual
                                                                                                                                                                                be done, and should be evidenced
                                                                                 sprinkler systems still qualify for reduced                                                    as having been done, on a day to day
    practical risk management tips for property investors…                       insurance ratings, etc. Also, it is rare that
                                                                                                                                          timetable commencing at
                                                                                                                                                                                basis, 24/7.
                                                                                                                                 renewal. Therefore, they only see each
                                                                                 insurers make their full report available


                                                                                                                                                                                6
                                                                                                                                 property at a similar time of year, thus
                                                                                 for clients.                                                                                           Managing agents and
                                                                                                                                 missing seasonal variations in the risk
                                                                                                                                                                                        on-site property managers might


                                                                                 2
                                                                                                                                 profile of properties.
                                                                                          Insurers will normally issue                                                                  then seek to take this role on.


                                                                                                                                 4
                                                                                          a list of risk improvements.                    Most insurers focus on the            However, this is something which is not
                                                                                          However, these will usually                     physical aspects of risk and          usually a core part of their offering and in
                                                                                 be limited in their usefulness in terms                  whilst significant, JLT feels it is   our experience, they do not usually have
                                                                                 of a comprehensive client driven risk           also critically important to review wider      the focus on risk, the training or the
                                                                                 management program, since more often            risk management aspects such as                systems to adequately meet standards
                                                                                 than not they will be focussed purely           procedures, systems, documentation,            of best practice.
                                                                                 on fire risks and will fail to comment on       training, etc.

                                                                                 Your insurance broker should be able to provide additional assistance to improve the adequacy of your risk management
                                                                                 framework. By employing a structured risk management programme property owners are able to fully understand the
                                                                                 exposures of their operations and maximise the impact of their risk management strategies. Risk management and audit
                                                                                 programmes should include Occupational Health and Safety reviews, environmental risk reviews, insurable risk profiling
                                                                                 exercises, incident management system improvements and claims management reviews. At JLT we include these services
                                                                                 under our Property Risk Audits and our Public Liability Risk Audits.




                                                                                 Why is this more important now?
                                                                                 The list of concerns, issues and                e) Possible increased voids due to              collectively established a framework for
                                                                                 topics to which property investors                 occupier bankrupcies, requiring              property investors through a system
                                                                                 need to respond is constantly                      improved risk management                     of risk auditing.
                                                                                 expanding. This is no less the case                techniques to satisfy insurer’s
                                                                                 within the area of risk management,                requirements.                                JLT employs over 100 specialist
                                                                                 where there now needs to be                                                                     consultants nationally with extensive
                                                                                                                                 f) Assisting with the broking of the
                                                                                 added focus on subjects such as:                                                                experience and expertise in Risk,
                                                                                                                                    insurance program in a hardening
                                                                                                                                                                                 Occupational Health & Safety and
                                                                                                                                    market with insurers requiring
                                                                                                                                                                                 claims management across Australia.
                                                                                 a) Protecting brand and avoiding                   clients to demonstrate that they
                                                                                                                                                                                 Should you wish to learn more about
                                                                                    damage to reputation.                           have a wider structure and a
                                                                                                                                                                                 JLT’s Property Risk Audits and our
                                                                                                                                    more proactive approach to the
                                                                                 b) Demonstrating added value and peer                                                           Public Liability Risk Audits please
                                                                                                                                    management of risk, so as to
                                                                                    group differentiation to occupiers              reduce claims or maintain them               contact Stephen Cooper.
                                                                                    and prospective occupiers.                      at acceptable levels.
                                                                                 c) Health and safety and the
                                                                                    management of liability risks to             JLT recognises a strong risk                           For more information
                                                                                    avoid the huge financial fines and           management culture provides for
                                                                                                                                 the successful management of a real                contact Stephen Cooper on
                                                                                    penalties available to courts.
                                                                                                                                 estate investment portfolio. JLT’s Real            +61 (0)2 9290 8123 or email
                                                                                 d) Other additional legislative                 Estate team in Australia works closely
                                                                                    requirements such as fire risk               with the European team to share                    Stephen.Cooper@jlta.com.au
                                                                                    assessments and asbestos registers.          risk management strategies and has




7                                                                                                                                                                                JLT Real Estate Building Blocks Magazine  8
    Construction Insurance                                                                                                         Other benefits of principal arranged contract works insurance include:

                                                                                                                                   1
                                                                                                                                           It will allow your broker to         contractors’ insurances. The process of     the premiums to be paid in instalments



    For Property Developers
                                                                                                                                           provide better advice on cover,      checking and administering contractors’     should they choose.
                                                                                                                                           as they will be involved over the    insurances can be time consuming and


                                                                                                                                                                                                                            9
                                                                                                                                   whole life of the project, not just before   may lead to items being missed or not               Providing the Principal the
                                                                                                                                   it commences and after it is completed.      insured correctly.                                  option to purchase Advance



                                                                                                                                                                                5
                                                                                                                                                                                                                                    Business Interruption insurance


                                                                                                                                   2
                                                                                                                                           The importance of maintaining                It will ensure that construction
                                                                                                                                                                                                                            should the project be delayed
    Property owners are all involved in development work of some sort                                                                      control over the insurances to               policies phase in with
                                                                                                                                                                                        subsequent operational policies
                                                                                                                                                                                                                            generating a loss. Without control over
                                                                                                                                           enable the Principal to structure                                                the insurances it becomes questionable
    whether minor repair and renovation projects or ground up developments.                                                        the insurances in accordance with their      to take the pressure off the Practical
                                                                                                                                                                                                                            whether this insurance can be
                                                                                                                                   objects and risk tolerance. Contractors      Completion dates especially for phased
    It is important to consider your options when arranging suitable cover.                                                        may purchase insurance with significant      development sites.                          purchased on a standalone basis. If
                                                                                                                                                                                                                            available the Principal will have no say


                                                                                                                                                                                6
                                                                                                                                   retentions which may not be suitable to
    The standard Industrial Special Risks (ISR) insurance policy will provide minimal coverage against minor construction                                                               The ability, to comply with         over the carrier as it will need to be the
                                                                                                                                   your business.
    activities as long as the policy has not been amended. The ISR generally allows works up to a value of $500,000                                                                     financiers’ requirements            same as the Contractor and may not


                                                                                                                                   3
    before the contract works exclusion kicks in. Above that amount, a separate contract works insurance policy should                                                                  enabling the Principal to           be desirable to the Principal.
                                                                                                                                           Greater control over the financial
                                                                                                                                                                                control the process.


                                                                                                                                                                                                                            10
    be purchased through a broker experienced in dealing in Construction Insurance. Construction Insurance can be                          security of the insurer as this is


                                                                                                                                                                                7
    arranged by either the Principal or the Contractor depending on a number of factors. Here we examine in more detail                    chosen to meet the requirements                                                                 The claims process
                                                                                                                                                                                       Protection of the Principal                         is more streamlined by
    insurances arranged by the Principal.                                                                                          and criteria of the Principal rather than           against the Contractor becoming
                                                                                                                                   the contractor who may purely be driven                                                                 eliminating the
                                                                                                                                                                                       insolvent as the Contractors

    Benefits of “Principal Arranged”                                                                                               by price.                                                                                opportunity for disputes between
                                                                                                                                                                                insurance will be invalidated and the
                                                                                                                                                                                                                            different insurers (and loss adjusters)


                                                                                                                                   4
                                                                                                                                                                                contract works will be uninsured.
                                                                                                                                         Improved administration                                                            and claims monies are paid direct


                                                                                                                                                                                8
    It is becoming increasingly common for construction insurance to be “principal arranged” as developers want to maintain              as there can be difficulty                     Providing the Principal with the    to the principal, removing the
    control of the insurance coverage arranged on their projects. A principal controlled program will clarify who is responsible         and cost in controlling a large                knowledge that the insurance        accumulation of deductibles.
    for what, avoid wasted cost in terms of superfluous cover being purchased, and give certainty and control to the developer     number of contractors and sub-                       premiums have been paid and
    when the project is most risk exposed.




                                                                                                                                   Components of                                insurance broker who is well versed and
                                                                                                                                                                                experienced at arranging Construction
                                                                                                                                                                                insurance policies. When arranging
                                                                                                                                                                                                                            •	
                                                                                                                                                                                                                            •	
                                                                                                                                                                                                                                  Home Warranty
                                                                                                                                                                                                                                  Delay Risks – such as liquidated

                                                                                                                                   the cover
                                                                                                                                                                                                                                  damages and force majeure
                                                                                                                                                                                Contract Works insurance you should               insurances
                                                                                                                                                                                ensure your broker is a construction        •	    Residual Value Guarantees – a
                                                                                                                                   The traditional construction insurances      insurance expert and is able to:                  bespoke product structured around
                                                                                                                                   for property developers which can be                                                           the project funding arrangements
                                                                                                                                   arranged on either an annual or project      •	   Analyse all relevant contractual
                                                                                                                                                                                                                            •	    Environmental Impairment/
                                                                                                                                   basis include;                                    requirements, e.g. construction,             Pollution Liability
                                                                                                                                                                                     sub-contract, funding, etc.
                                                                                                                                   Contract Works – physical loss and/
                                                                                                                                   or damage to the permanent and/or            •	   Draft contractual insurance            JLT has an established national
                                                                                                                                   temporary works.                                  conditions                             Construction division which provides
                                                                                                                                                                                •	   Liaise with contractors, suppliers,    specialist insurance broking and
                                                                                                                                   Public Liability – legal liability to                                                    consultancy services for Property
                                                                                                                                   third parties for personal injury and/or          consultants, joint venture partners,
                                                                                                                                                                                     financiers, etc.                       Developers. Working with the JLT Real
                                                                                                                                   damage to property                                                                       Estate team, the JLT Construction
                                                                                                                                                                                •	   Prepare underwriting submissions       team offers you access to an extensive
                                                                                                                                   Advance Business Interruption – loss
                                                                                                                                                                                     for insurers                           selection of insurance products and
                                                                                                                                   of anticipated revenue/profits and/or
                                                                                                                                   holding costs and/or other additional        •	   Market the project to specialist       services which range from traditional
                                                                                                                                   costs incurred as a result of a delay             construction insurers                  to innovative. We have considerable
                                                                                                                                   in completion of the works caused by         •	   Negotiate with insurers to secure      experience placing insurances for
                                                                                                                                                                                                                            Property Developers on a “principal
                                                                                                                                   physical loss and/or damage insured               cover at optimum terms
                                                                                                                                                                                                                            arranged” basis.
                                                                                                                                   under the Contract Works policy.                  and conditions
                                                                                                                                                                                •	   Produce project insurance and

                                                                                                                                   What else is                                      claims procedure manuals


                                                                                                                                   important to                                 Other construction insurances which
                                                                                                                                                                                JLT can assist with include;
                                                                                                                                                                                                                                    For more information
                                                                                                                                                                                                                                  contact Jonathan Frost on
                                                                                                                                   consider?                                    •	   Professional Indemnity – whether
                                                                                                                                                                                     on a project or annual basis
                                                                                                                                                                                                                                 +61 (0)2 9290 6706 or email
                                                                                                                                                                                                                                 Jonathan.Frost@jlta.com.au
                                                                                                                                   In addition to taking control of your        •	   Construction Plant & Equipment
                                                                                                                                   insurances it is important to engage an      •	   Workers’ Compensation


9
                                                                                                                                                                                                                             JLT Real Estate Building Blocks Magazine  10
JLT Real Estate Contact Details

New South Wales and ACT

Stephen Cooper (Australia & New Zealand Practice Leader)
Tel: +61 (0)2 9290 8123 or 0467 486 421
Email: Stephen.Cooper@jlta.com.au


Northern Territory and South Australia
Gary Okely
Tel: +61 (0)8 8235 6410 or 0411 206 496
Email: Gary.Okely@jlta.com.au


Queensland
Michael Woolley
Tel: +61 (0)7 3246 7545 or 0417 769 451
Email: Michael.Woolley@jlta.com.au


Victoria
Richard van Velzen
Tel: +61 (0)3 9613 1481 or 0409 340 230
Email: Richard.VanVelzen@jlta.com.au

Western Australia
Alan Meadows
Tel: +61 (0)8 9426 0447 or 0437 050 903
Email: Alan.Meadows@jlta.com.au


New Zealand
Deb Fisher
Tel: +64 (0)9 300 3763
Email: Deborah.Fisher@jlt.co.nz




Any advice contained within Building Blocks is general advice and does not take into account
your objectives, financial situation or needs. You should consider the relevant Product
Disclosure Statement and your objectives, financial situation or needs before acting on
this advice. Please contact the JLT Real Estate team for the relevant Product Disclosure
Statement, or for further information. Published by JLT and no part of this document may
be reproduced without permission from JLT.

				
DOCUMENT INFO
Description: JLT Real_Estate Building Blocks JLT’s Real Estate Insurance Magazine Edition 4, 2012. The global financial crisis has had an impact on the level of social unrest in countries where the level of unemployment is rising to dizzying heights. This is coupled with the friction caused arising from other politically motivated groups and extremists. We are now living in a world where tension from one side of the world can promptly trigger the acts locally via the use of social media leading to rapidly developing situations where peaceful demonstrations can quickly become something more sinister if joined by those with other than peaceful intent. General insurance does not typically respond to either an act of Terrorism or Riot as these are general exclusions from a property insurance policy that property owners rely upon to protect their investments and revenue streams. Whilst there is no coverage within the standard property insurance policies, there are levels of protection provided by the Australian Government and the Insurance Industry to provide the property owner with a level of protection. These include Acts of Terrorism and Riot and Civil Commotion.