Creating Coverage for 'Ghost Building' Escalation Costs
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The first question is what is a 'ghost building'? During the course of building construction, the future part of the building 'to be completed' is the ghost building. Why does this need to be insured? Because, a traditional Builder's Risks policy only covers the cost and extra cost to rebuild that portion of the building that was actually built and damaged. When a construction project incurs significant damage, such that the project essentially starts over, that portion of the building which was 'to be built' at the time of damage (the ghost building) will now be built at a later point in time and will most often be subject to increased costs. All sorts of perils effect engineering and construction projects, including the collapse of a structure to a fire or natural catastrophe.
A traditional builder's risk policy covers the costs to bring the project back to its partially completed state, while simultaneously covering the fees associated with the restoration. Often it does not respond to cost increases of the ghost building. Insuring the ghost building against the increased costs of these and other risks need unique underwriting and policy forms. Properly structured plans can respond to these increase costs due to completion at a later date at higher fees.
While working with Aon's Construction Services Broking team, Swiss Re innovative Risk Solutions team was asked to develop an offer traditionally not covered by builders' risk policy, the increased costs associated with the completion of the 'ghost building' owned by Prometheus Real Estate Group upon a covered event.
Aon faced a need a develop a strategic partnership to protect against the costs of a challenging labor market coupled with higher than usual inflation in building materials. It needed a partner that was able to understand the challenges Prometheus faced.
With over 95 years of combined engineering and construction underwriting experience, the Swiss Re underwriting team was uniquely qualified to consider all aspects to extract just the right information to carefully underwrite and craft an offer.
Aon noted, "Swiss Re was the partner we needed. It helped develop a product that provided balance sheet protection for a risk that previously was being silently self-insured."
Scott Caripinteri, senior vice president and senior structurer, Swiss Re Corporate Solutions coordinated a cross-functional expertise of client, broker and insurer to create a solution for risk not previously covered and delivered a final policy.
Outlining his needs and concerns, the client, Paul Boatman, senior director of risk management, Prometheus Real Estate Group, Inc. stated.
- Often, there is a lack of understanding of coverage under a builder's risk policy. We found out when our President John Millham, asked if the coverage provides cover for escalation costs and learned it is not.
- "Strategic" approach versus transactional (pure insurance).
- The process of obtaining a product that worked for all parties was a collaborative effort between all parties involved, Aon, Prometheus and Swiss Re. The final offering was truly a "team" effort.
Boatman also stated, "This product, from Prometheus' perspective, provides leverage against a risk that would typically be considered a business risk in traditional insurance transactions. We believe this is the beginning of a long partnership with Swiss Re and Aon in which all parties continue work together addressing construction risks and creative and strategic ways."
"We developed a replicable coverage which can be offered on a stand-alone basis or with a traditional policy. Swiss Re, Aon, and Prometheus are engaged in structuring cover for several upcoming projects," noted Carpinteri.
Swiss Re Corporate Solutions developed a hybrid indemnity / parametric product solution. Upon a significant damage event the policy can pay up to a pre-agreed amount – agreed value – of funds which offset the Escalation cost of the Ghost Building faced by the owner. The amount mirrors the client need at various time periods of the construction project.
Marc Kane, vice president, senior engineering underwriter, Swiss Re Corporate Solutions said, "Our ghost escalation offer is the answer to a traditionally unfilled need in the construction industry. We listened, committed resources, collaborated internally and externally to give the marketplace a long-awaited solution."
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