Insurance Requirements in Development Finance: Costs You Can't Avoid

Insurance is not optional in development finance. Every lender requires the borrower to maintain comprehensive insurance cover throughout the facility term, and the lender's interest must be noted on each policy. The rationale is simple: the lender is advancing significant sums against a construction project, and if something goes wrong, whether fire, flood, structural collapse, or third-party injury, the insurance cover protects both the lender's security and the borrower's ability to complete the scheme. Failure to maintain the required insurance is typically an event of default, which can trigger default interest and other penalties.

The insurance requirements are usually detailed in a schedule to the facility agreement, and the lender's solicitor will verify that all required policies are in place before the first drawdown. This verification process can itself cause delays if the borrower has not arranged insurance in advance. We recommend engaging with a specialist construction insurance broker at the same time as your finance application so that the insurance evidence is ready when the legal team needs it.

The total cost of insurance for a development project typically ranges from £5,000 to £25,000 depending on the size and nature of the scheme, the location, and the level of cover required. These are genuine costs that must be factored into your development appraisal, and they are in addition to any insurance the contractor carries under their own policies. The borrower and the contractor both need insurance, and understanding the interaction between the two is essential for avoiding gaps in cover or paying for duplicate policies.

Contract works insurance, also known as contractors all risks insurance, is the primary policy required by every development finance lender. It covers the physical works being constructed against damage or loss from insured perils including fire, storm, flood, theft, vandalism, and accidental damage. The policy should cover the full reinstatement value of the works at any point during the construction, plus any existing structures on the site.

The cost of contract works insurance varies depending on the construction method, the site location, and the sum insured. For a standard residential development with a build cost of £1,500,000, expect to pay between £3,000 and £6,000 for contract works insurance. For larger schemes with build costs of £5,000,000 or more, premiums of £10,000 to £20,000 are typical. Timber frame construction, which is increasingly common in residential development, tends to attract higher premiums than traditional masonry construction due to the increased fire risk during the build phase.

It is essential that the sum insured under the contract works policy is adequate at all stages of the build. Underinsurance is a common problem on development projects because the value of the works increases as construction progresses. If the sum insured is based on the initial build cost but does not account for variations or cost escalation, you may find yourself underinsured at the point when a claim is most likely. Most lenders require the sum insured to reflect the full reinstatement value of all works at the point of completion, plus an allowance for demolition and debris removal costs.

Public liability insurance covers claims from third parties who are injured or whose property is damaged as a result of the construction works. This includes members of the public, neighbouring property owners, and visitors to the site. Most lenders require a minimum of £5,000,000 in public liability cover, although some require £10,000,000 for larger or more complex schemes. The annual premium for public liability insurance on a development project typically ranges from £1,500 to £5,000.

Employer's liability insurance is required if you directly employ anyone on the project, including labourers, site managers, or administrative staff. The minimum level of cover is £10,000,000, as required by law under the Employers' Liability (Compulsory Insurance) Act 1969. If you are using a main contractor who employs all site workers directly, the contractor's employer's liability policy will cover their employees, but you still need your own policy if you have any direct employees involved in the project.

Many developers assume that the main contractor's insurance is sufficient to cover all liability risks, but this is not the case. The contractor's policies cover the contractor's liabilities, not the developer's. If a member of the public is injured due to the developer's negligence, such as inadequate site security or failure to maintain a safe boundary, the contractor's insurance will not respond. The developer needs their own policies, and the lender will insist on seeing evidence of both the developer's and the contractor's insurance before releasing funds. Reviewing insurance requirements carefully at the outset prevents costly delays during the legal process.

Professional indemnity insurance covers claims arising from professional negligence in the design or specification of the development. This includes errors or omissions by architects, structural engineers, and other design professionals appointed on the project. Most lenders require that all design professionals carry professional indemnity insurance of at least £1,000,000, and some require higher levels for larger projects. The cost of professional indemnity insurance is borne by the individual professionals and is reflected in their fees, but developers should verify that adequate cover is in place as part of their appointment process.

Structural warranty or building guarantee insurance is required by most lenders for new-build residential schemes. The most common providers in the UK are NHBC, LABC Warranty, and Premier Guarantee. A structural warranty provides a 10-year guarantee against defects in the structure of the building, and it is essential for the eventual purchasers of the completed units. Without a structural warranty, mortgage lenders will not lend on the completed properties, which would prevent your exit strategy from functioning.

The cost of structural warranty insurance ranges from £1,500 to £3,000 per residential unit, depending on the provider and the type of construction. For a 10-unit scheme, that equates to £15,000 to £30,000, which is a significant cost. The warranty provider will also carry out inspections during the construction phase, which adds a further layer of quality assurance but also creates potential for delays if the inspector identifies non-compliance. Budget for structural warranty costs in your appraisal from the outset, and factor in the registration timeline because warranty providers typically require notification before ground works begin. Developers working in Greater London, Kent, and Sussex should be aware that some warranty providers have longer processing times in high-demand areas.

Beyond the core policies, lenders may require additional specialist cover depending on the nature of the project. Environmental liability insurance is increasingly required for developments on brownfield or formerly industrial sites, where there is a risk of contamination claims. Premiums for environmental cover range from £2,000 to £10,000 depending on the site history and the level of remediation undertaken.

Latent defects insurance, also known as inherent defects insurance, provides cover for structural defects that are not apparent at completion but emerge during the first 10 to 12 years of the building's life. This is distinct from the structural warranty and is sometimes required by lenders in addition to, or instead of, a standard warranty. The cost is typically 1% to 1.5% of the build cost, paid as a single premium at completion. On a £2,000,000 build, that equates to £20,000 to £30,000.

Non-negligence cover, sometimes called JCT 21.2.1 insurance, protects against damage to neighbouring properties caused by the construction works even where the contractor is not negligent. This is particularly important for development sites in dense urban areas such as Greater London where construction activity can affect adjacent buildings. Premiums depend on the nature of the works and the proximity of neighbouring structures, but typically range from £3,000 to £8,000. If your project involves basement excavation, piling, or demolition adjacent to party walls, expect the premium to be at the higher end of this range. Submit your project details through our deal room and we can connect you with specialist construction insurance brokers who work with development finance clients.

The key to optimising insurance costs is to use a specialist construction insurance broker rather than a generalist. Specialist brokers have access to construction-specific underwriters who understand the risks and can price policies competitively. A generalist broker may place your cover with a standard commercial insurer who does not fully understand construction risk, resulting in higher premiums, restrictive terms, or inadequate cover.

Consider a composite policy that bundles contract works, public liability, employer's liability, and other required covers into a single package. Composite policies are typically 15% to 25% cheaper than purchasing each policy separately, and they simplify the administration because you have one policy document, one renewal date, and one point of contact. Most specialist construction insurance brokers can arrange composite policies tailored to development projects.

Review the interaction between your insurance and the contractor's insurance to avoid paying for duplicate cover. If the contractor carries contract works insurance that covers the full value of the works, you may not need a separate policy, although you will need to verify that the contractor's policy meets the lender's requirements and includes the lender's interest. If the contractor's policy is inadequate, you will need to arrange supplementary cover to fill the gaps. A thorough review of the insurance position before drawdown can save £2,000 to £5,000 in unnecessary premiums. For further guidance on the full cost of insurance in the context of your overall finance package, see our comprehensive guide on the true cost of development finance.