High rise risk

In November, the government approved construction for the tallest tower block in Europe, the so-called 'Shard of Glass' at London Bridge, which, at 66 storeys high, will dominate the capital's skyline. It is exciting news for fans of dramatic architecture - but do ambitious tower blocks like this pose a headache for the insurer that agrees to provide cover?

It might appear that insuring a large office block with many tenants would be a logistical nightmare. But despite the tragic events of 11 September, the insurance industry continues to insure tall buildings, because most of them remain an attractive risk for a number of reasons.

A sound proposition

First, most office-block owners do not skimp on costs. They seek to attract the best tenants, which means office blocks in prime locations are generally well constructed and well maintained. This is good news for the brokers and insurers arranging cover for the premises because they are able to focus on providing the tenants with a high-quality insurance product rather than trying to economise at the customer's request.

Also, the property-owners' market is able to offer a very wide range of covers that can be tailored to suit customers' individual needs. In addition to the catastrophe-type perils (such as fire, explosion, aircraft, storm and flood), insurers can provide against loss of rental income due to the impact of infectious diseases (including Legionnaires' disease), bomb hoax, defective drainage and long-term failure of public utilities.

Furthermore, the owners will often be major institutions, including banks and insurers that own prestigious buildings as part of an investment property portfolio. A management company will normally be appointed to ensure rigorous building maintenance and the service and inspection of equipment, because a serious incident - for example a lift accident - could cause enormous damage in terms of public relations and leave a long-lasting negative reputation hanging over the property.

Assessing the risk

However, this does not mean that sound professional underwriting principles can be relaxed for such risks. The key to accurate underwriting is having as much information as possible. By working alongside brokers and applying a systematic approach, property-owners, managers and underwriters can gain a clear picture of the risks and can assist their customers in reducing or improving those that are present.

At this point, the input from the insurance property surveyor is vital. The surveyor will act as the eyes and ears of the insurer and, for example, will ascertain if a higher level of security is required in the building. But there are many other factors for the surveyor to consider, such as risks posed by any restaurants or retail outlets on the ground floor that could significantly impact on the likelihood of fire. Also, atriums and glass curtain walling offer limited resistance to fire spread between floors, increasing the scale of potential losses. However, sprinklers are an increasingly common feature in such buildings and can offset such reductions in fire resistance.

Depending on a building's location, improved security measures may be needed in the shape of access control and/or 24-hour staffing. These measures can also significantly reduce the risk of malicious damage, theft and arson.

The engineer's role

It is not only the property surveyor who has an interest in ensuring that a safe and secure working environment exists. Engineering inspection is often a cost-effective way to significantly reduce the risk of injury.

Engineering inspection regimes can determine the safety of fixed wiring as well as that of the plethora of electrical equipment and other plant in the modern high-rise building. For example, lifts are an indispensable part of a large office complex. Not only must they transport people efficiently and conveniently, they must, above all, be safe. Inspection of lifts is a legal obligation for building owners, but their general dependability will also be very high on the tenant's list of priorities.

Everything from the air conditioning plant and the central heating units to the cafe boiler in the ground floor restaurant can pose risks if they are not properly maintained. Independent inspection can be used to drive efficient maintenance regimes, particularly where health and safety are the crucial considerations.

Ultimately, those responsible for round-the-clock upkeep of the office will need to make sure that their knowledge and practices are up to speed. An engineer-surveyor may recommend to the owner that those responsible receive additional training in areas such as practice evacuations and minimising fire hazards.

Terror

When reviewing the risks facing tall office blocks, the threat of a terrorist attack must be a consideration. Terror risk is excluded from commercial property policies, so it needs to be purchased elsewhere, either as an add-on from the property insurer, from the government-backed terror-cover provider Pool Re, or from a small number of specialist insurers now offering this type of insurance. While exact parameters about when or where a terrorist will strike are virtually impossible to establish, this form of cover will undoubtedly be viewed as essential by property owners, particularly for risks in high-profile areas such as Canary Wharf or the City in London.

But prestigious addresses are not the only key factor when it comes to insuring office blocks. Buildings that are stunning or controversial architectural masterpieces are in the minority. For every Norman Foster 'erotic gherkin' (Swiss Re's new London headquarters), there are thousands of ordinary 1960s and 1970s blocks occupying town centres throughout the UK.

According to the Building Research Establishment, there are around 100 square kilometres of office space in the UK. As with any other type of building or trade, there is a minority in the estate management field that will make claims that are likely to arise from poor management practices or inadequate risk protection. Insurers need to identify these potentially bad risks and differentiate their terms accordingly.

Long-term vacancy can become a problem during periods of over-capacity in the office sector and buildings so affected will require commensurate risk management and security.

Asbestos

In older buildings, new regulations concerning the control of asbestos at work are putting additional responsibilities on building owners. Underwriters and surveyors need to be aware of such issues and the impact they can have on claims costs and reinstatement periods where removal is required during repair or rebuild.

Insurance will normally be purchased by the building owner through its broker or on its behalf by the management company. The premium will then be charged out to the individual tenants as part of their service costs.

The property owner will require public liability insurance to cover its responsibility as owner of the building, and this is usually available as part of the same policy. The individual tenants will remain responsible for buying employers' liability cover in respect of their own staff, business interruption insurance and for protecting their equipment, IT and office furniture, among other items.

The market for property owners' business is competitive. However, because of the large sums insured and the exposures that can be involved, there are few signs that insurers are about to cut rates in the foreseeable future.

Prudent insurers are well aware that there is a need to maintain realistic rate strength and avoid the excessive peaks and troughs of the past. And a large loss involving a prestige office building can run into many millions of pounds, so the premiums charged need to reflect that potential exposure.

Office blocks, if well managed, are good risks. For customers, adoption of and adherence to risk-management techniques can make affordable insurance more easily available; and brokers can advise on a range of deductibles that can affect the level of premium. In the UK, building regulations and health and safety requirements are strict - which benefits property owners, tenants and insurers. There is no doubt that the insurers involved in it have faith in the future of the commercial property market.