The perils of unapproved suppliers and materials: Impact on construction and real estate developer's insurance

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, or a supplier becomes unapproved by a testing and research body for example, they expose themselves, or become exposed to, significant risks. This includes adverse effects on their insurance coverage.

Let’s explore how unapproved suppliers can influence a construction or real estate developer's insurance and 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, which 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

Construction and real estate development industries are subject to various regulations and building codes aimed at ensuring safety and compliance. Unapproved suppliers may not meet these requirements or 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 don’t include coverage for non-compliant or unauthorised materials, leaving developers exposed to potential losses.

3. Delayed or disrupted projects

Unapproved suppliers are more likely to cause delays or disruptions 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, and any interruptions can result in significant financial losses.

Insurance policies may have specific provisions to cover project delays, but the use of unapproved suppliers could invalidate this coverage. This includes additional 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, including 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, potentially denying coverage or reducing the amount payable.

5. Reputational damage

Developers' reputations are crucial in the construction and real estate industries. Engaging unapproved suppliers reflects poorly on a developer's professionalism and commitment to quality, potentially damaging their brand image. This can have far-reaching consequences, such as difficulty securing future projects, strained relationships with clients, and diminished investor confidence.

Insurance providers also take reputational risk into account when assessing coverage, so negative publicity resulting from unapproved suppliers can impact future policy terms and premiums.

How to mitigate the risk

1. Prioritise due diligence
2. Establish robust supplier vetting processes
3. Give careful consideration to materials being used
4. Review insurance policy wording to ensure adequate cover of the materials and services used
5. Start the insurance renewal process early and submit a detailed underwriting submission
6. Employ a surveyor to test materials and provide this report to your broker
7. Notify your broker if any supplier/material becomes unapproved so they review this with future insurers to make sure cover can be sourced at post completion.

These steps can go a long way to safeguarding your investments, protecting your reputation, and mitigating your 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