Craig Johnson, Real Estate Leader, Manchester
Construction and real estate development projects are complex undertakings that involve multiple stakeholders. One crucial aspect of these ventures is the choice of suppliers. As the quality and reliability of materials and services directly impact the project's success.
When developers engage unapproved suppliers, they expose themselves to significant risks. This can also happen if a supplier becomes unapproved by a testing and research body, for example. This includes adverse effects on their insurance coverage.
Let’s explore how unapproved suppliers can influence a construction or real estate developer's insurance. We will also discuss the potential consequences they may face.
1. Quality and safety concerns
When developers work with unapproved suppliers, they compromise the quality and safety of the materials used in their projects. Inferior materials can lead to:
- construction defects;
- structural weaknesses;
- or safety hazards.
These issues increase the likelihood of accidents, injuries, and property damage.
Insurance providers take these risks into account when underwriting policies. Any incidents arising from substandard materials may result in reduced coverage or even claim denials.
2. Compliance and regulation issues
The construction and real estate development industries are subject to various regulations and building codes. These regulations are aimed at ensuring safety and compliance. Unapproved suppliers may not meet these requirements. They may also fail to provide the necessary documentation, certificates, or warranties.
By using materials from these suppliers, developers risk violating regulations. This can lead to:
- legal penalties,
- fines,
- delays,
- and, in severe cases, project shutdowns.
Insurance policies often exclude coverage for non-compliant or unauthorised materials. As a result, developers may be exposed to potential losses.
3. Delayed or disrupted projects
Unapproved suppliers are more likely to cause delays or disruptions. This is often due to their inability to meet project deadlines or deliver the required materials on time. Construction and real estate development projects often operate on tight schedules. Any interruptions can lead to significant financial losses.
Insurance policies may include specific provisions to cover project delays. However, the use of unapproved suppliers could invalidate this coverage. This includes:
- extra labour costs;
- extended construction loan interest;
- and potential liquidated damages.
4. Increased liability exposure
Getting inadequate materials or services from unapproved suppliers can lead to:
- accidents;
- property damage;
- or personal injuries.
The developer may face increased liability claims from third parties. This includes claims from workers, tenants, or neighbouring properties.
Insurance policies typically include provisions for liability coverage. However, if the insurer discovers that the developer used unapproved suppliers, they may argue that the developer acted negligently. This could result in a denial of coverage or a reduction in the amount payable.
5. Reputational damage
Developers' reputations are crucial in the construction and real estate industries. Engaging unapproved suppliers can harm a developer's professionalism and commitment to quality. This practice may damage their brand image. The consequences can be far-reaching and may include:
- difficulty securing future projects;
- strained relationships with clients;
- and diminished investor confidence.
Insurance providers also consider reputational risk when assessing coverage. Therefore, negative publicity resulting from unapproved suppliers can impact future policy terms and premiums.
How to mitigate the risk
- Prioritise due diligence
- Establish robust supplier vetting processes.
- Give careful consideration to materials being used.
- Review insurance policy wording to ensure adequate cover of the materials and services used
- Start the insurance renewal process early and submit a detailed underwriting submission
- Employ a surveyor to test materials and provide this report to your broker
- Notify your broker if any supplier or material becomes unapproved. This will allow them to review the situation with future insurers to ensure that coverage can be sourced after completion.
These steps can significantly safeguard your investments. They also help protect your reputation and mitigate potential losses.
Don’t leave yourself vulnerable. Reach out to your Marsh Commercial adviser to see how we can help. Or feel free to contact me personally at Craig.W.Johnson@marshcommercial.co.uk
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