According to Jack, the dynamic seems to have shifted when it comes to the way development lenders look at insurance. What was once simply something to get out of the way before moving to the heavyweight issues of a scheme, insurance has become something that deserves further patience, especially during a tougher economy.

“What we've seen is the development market or the whole economic landscape has hardened and intensified over the past couple of years,” noted Jack.

“[Lenders are] looking at it and [thinking], ‘Where we've got main contractors, specialist subcontractors, and even developers, in some instances, falling into insolvency, we need to be thinking a little bit further ahead; prevention is better than cure.”

Jack explained this has led to insurance moving to the forefront of a scheme, with more care and attention being taken in selecting the correct policy.

He claimed that when interest rates were lower, lenders were not as cautious with where they placed their money. Now, however, even with improving sentiment, those lenders are looking to protect their positions following bad debt seen over the past two years.

After speaking with lenders over the past 18 months, the insolvencies of certain contractors and sub-contractors has led lenders and developers to ask serious questions about insurance policies.

“[They want to] learn from what's happened over the past 18 months where [they have] possibly had an expensive or scary experience on insurance where there were inadequate levels of cover — or no cover in place in certain instances — and they've had to navigate that and bear the cost of it,” highlighted Jack.

Meanwhile, developers are keen to have insurance that the lenderis happy with but, in Jack’s words, the devil is in the detail, and sometimes that’s where issues can arise.

According to Jack, J3 has seen JCT contracts and development agreements, whereby details haven’t been updated for 10 years or so and sometimes feature companies which have long since left the market.

Nevertheless, this isn’t the only issue; Jack noted that naming a lender on a policy may have historically given them some comfort, but it in practice it doesn’t actually mean anything.

At J3, it is recommended that the lender is co-insured on a policy so as to retain a level of control capital source, meaning that if the lender needs to step in or the contractor ceases to exist, the lender can take over the policy and prevent additional future insurance cost, if a new contractor needs to be appointed.

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Additionally a co-insured policy means a lender has the right to control the claim, if there any, and in some cases receive the claim proceeds to ensure reinstatement of their asset.

According to The Insolvency Service, over 4,000 construction companies fell into insolvency in the 12 months leading to April 2024.

Before insolvencies became more prevalent,  schemes were more fundable and viable said Jack, with high interest rates and the rising cost of capital, there are now less new sites starting up as a result of these conditions — more fundable deals meant more deal velocity for all those involved, said Jack.

“What we've seen with tougher economic conditions is people can't realise the exit. It forces the developer or main contractor into insolvency, and that cascades down and the lenders are left holding the baby.

“That's why we're now seeing lenders saying, 'What are we doing on the construction insurance, how does that impact us, and how are we named? If there is a big claim on the site, does that money go to us as the lender for us to distribute, or does it go to the main contractor? Do we want £250,000 going to the main contractor to rectify, or do we want to distribute that if there is a claim?’”

Jack believes that if a lender doesn’t take a “prescriptive” approach when it comes to what insurers they do or don’t accept and instead leaves this to the developer to potentially enact an inadequate provider and policy, it risks the warranty not being fit for purpose. Consequently, a retrospective warranty will need to be purchased when the units are ready for sale or refinancing, potentially costing twice as much.

As Jack sees it, insurance providers make up part of the team and are something a lender will rely on. It can also save developers weeks on a scheme. “It gives them peace of mind and makes sure they pay the right money for the right policy. And that is the ultimate aim of the game.”

For developers, an ill-fitting coverage can also cost them more than just time and money. “If you're going to buy an investment property in Manchester and you're borrowing the money from HSBC and they say, ‘Yes, you check out, we're fine with lending you the money, you've got the deposit, but the warranty you have put forward is inadequate and we don't accept it.’“

According to Jack, if the mortgage provider sees the warranty on a building as inadequate, this can lead to a damaged reputation for the developer in the eyes of a perspective buyer:

“You lose confidence in that developer and maybe you go and buy from their competitor down the road who has taken the right advice.”