Defective Title Insurance for Property Developers
QUESTION:
As a developer we rely on defective title insurance to address the title issues thrown up during the due diligence process. We do not want to wait until planning permission has been obtained to know whether insurance cover will be given to us but would rather have insurance to cover our exposure from Day 1 of our project. Premiums for this form of cover are often high. Can we can get insurance cover at a premium that appears to reflect the real losses that we are exposed to?
ANSWER:
Traditionally, premiums in this insurance market have been calculated using the full-developed value of the insured land. Insurers have also relied on the planning process to filter out potential problems before offering a policy hence many offers of cover were conditional on there being no material objections during the consultation period of the planning application. Many insurers now appreciate that developers and their lenders need insurance cover from Day 1 of a project to protect the significant levels of investment required to get a development to planning stage let alone beyond.
Some insurers will now take a view on their potential exposure and offer insurance capped at a sum significantly less than the full developed value. This approach certainly provides for lower premiums but the risks of underinsuring can be a lingering concern. The approach is also unattractive to many lenders.
More sophisticated structures are now available whereby cover is drawn down in stages. This has the effect of aligning the extent of cover at different stages of a development project more closely with the Insured's actual exposure to loss - cover eventually matches the full-developed value but the Insureds are not asked to pay for this until they are exposed to this level. Because cover is structured, so is the premium such that the Insured is not asked to pay the full premium at the outset.