The Dangers of Self-Insuring High Value Building Projects
Dec 11, 2024
Financial Exposure to Large Losses – HNW projects often involve high-value properties and complex architectural details, meaning losses can be substantial. Self-insuring could expose you to paying large sums out of pocket if there’s damage, theft, or an accident. A single major incident such as a fire, structural damage, or natural disaster—could result in losses that far exceed initial estimates, straining liquidity and potentially requiring the sale of other assets
Cash Flow Challenges – With self-insurance, costs for repairs, replacements, or project delays need to be paid from cash reserves. If multiple incidents occur, cash flow could become severely constrained, impacting both the project and other financial commitments. The need for liquid cash could also lead to asset liquidation at an unfavourable time, which could impact the broader portfolio.
Project Delays and Additional Costs – Without insurance cover to quickly address issues like construction damage or theft, repairs may take longer and could lead to project delays. This may cause additional costs due to extended contracts, permit renewals, and potential penalties for missed completion dates. Delay-related costs, such as those stemming from interrupted work or loss of income, can escalate significantly on high-value projects.
Inadequate Risk Assessment – Insurance companies employ professional risk assessors to identify and mitigate potential hazards on high-value projects. Without their oversight, risks like design flaws, material deficiencies, and security weaknesses may go unnoticed until they cause a problem. A lack of risk assessment could increase the likelihood of unanticipated expenses and legal liabilities.
Lack of Access to Specialised Resources – High-value building projects benefit from specialised expertise, which insurers often provide in the form of contractor recommendations, quality control, and loss prevention guidance. Without this support, there may be greater susceptibility to project mismanagement and increased risk of loss.
Legal and Liability Risks – High-value projects often involve multiple parties (e.g., contractors, architects, and consultants). If accidents or disputes arise, liability can be complex and costly to address without adequate insurance. Potential liabilities extend to worker injuries and neighbouring property damage, which can result in lawsuits and additional financial exposure.
Higher Opportunity Cost – Funds reserved for potential claims and repairs could otherwise be invested in income-generating or growth-focused opportunities. Self-insuring ties up capital that may yield better returns if deployed elsewhere.
For most high-net-worth clients, insurance products tailored to cover high-value construction projects (contract works insurance) provide not only financial protection but also essential support and expertise. The costs of such policies are usually outweighed by the mitigation of risks, ensuring the project’s financial and operational stability.
