W&I Insurance: The Answer to BSA "Associated Company" Risks in the UK?
In Short
The Situation: Buyers of real estate companies holding real estate in the United Kingdom need to be aware of "associated company" risk under the Building Safety Act 2022 ("BSA")—the potential for BSA liabilities of other companies in the seller's group applying to the target company.
The Development: Warranty and indemnity ("W&I") insurers are increasingly stepping in to address this risk on real estate corporate transactions.
Looking Ahead: Buyers should be aware that W&I insurance, while helpful, may not offer a complete solution to the long-term risks posed by the BSA, and careful consideration of the gaps in coverage will remain essential in real estate transactions.
BSA issues remain a major factor in UK real estate deals. The enhanced regulatory burdens and additional "gateway" approvals in respect of the development of "high-risk buildings" are now well understood by real estate investors. Less well appreciated is the impact of building liability orders, remediation orders and remediation contribution orders which can "pierce the corporate veil" on real estate transactions.
The introduction of these orders means that when purchasing real estate via corporate special purpose vehicles, there could be potential BSA liabilities lurking within a seller's corporate structures that could be inherited (see further detail in our "Guide to the UK Building Safety Act 2022"). This is commonly known as the BSA "associated company" risk (i.e., risks of the buyer/target taking on liability by being "associated" with the seller group, if BSA liabilities exist within that seller group). Sellers often seek to impose a cap of £1 for all liabilities on corporate sales and are hesitant to provide any contractual protection for these risks.
A Solution?
W&I insurers are increasingly stepping in to address BSA associated company risk on these transactions:
Nature of the Insurance. Protection can be provided via warranties or a specifically drafted indemnity in the sale and purchase agreement. Where the seller's liability under such warranties and/or indemnity is capped at £1, insurers have offered coverage for breach of the warranties and indemnity beyond that cap within the W&I policy. Sometimes the cover is placed on a "synthetic" basis if the sellers are not willing to give the warranties and indemnity at all—the insurer, not the seller, provides the warranties and indemnities for the deal via the W&I policy. Buyers should aim to secure coverage that provides indemnity-style protection. This approach offers the dual benefits of stronger contractual rights and more precisely tailored policy wording, ensuring that the insurance responds effectively to the specific risks identified.
Insured Limits. There are various options. The insured limit for the BSA cover can either be: (i) within the W&I limit (i.e., any BSA-related loss erodes the standard W&I cover); (ii) within and in addition to the W&I limit (i.e., the W&I limit stands on its own, then there is further cover to top up for BSA only); or (iii) a separate BSA limit in parallel to the W&I limit (i.e., BSA loss is ring-fenced).
Time Periods. Liability under the BSA can potentially last for 30 years. The longest W&I cover period currently available is 10 years. Once the cover period on a policy has expired, an insurer may agree to insure the same risk for another 10 years, but there is no guarantee of that at inception of the first policy.
Cost of Insurance. The cost is likely to be an additional premium of 10–25% (meaning the net premium for the W&I will be grossed up by that percentage). Premiums may be higher (even as high as a 40% additional premium), usually where the seller's portfolio outside the target group is particularly large (and therefore the "associated company" risk is greater).
Gaps Remain
W&I insurance coverage is still materially shorter than the potential 30-year liability under the BSA, any renewal language is inherently noncommittal, and insurers' appetite for fully synthetic protection is conditional and not guaranteed. Furthermore, a buyer will still need involvement and cooperation from the seller when incepting the policy, as the insurer will seek to understand:
- The activities and operations of the seller group (to gauge the extent of their development and possible quantum of risk);
- What the fire safety provisions and cladding look like at the target properties (to gauge the quality of the construction and processes at the seller/developer level);
- The reputation and risk perception of the seller group (e.g., any negative press reports); and
- The seller group covenant—are they a small outfit, or a large developer with deep pockets? This is because the "associated company" risk becomes live only where there is no recourse against the relevant member of the seller group.
Early engagement with brokers and solicitors to draw up the W&I package and raise due diligence questions with sellers is therefore key.
Three Key Takeaways
- Some liabilities under the BSA can pierce the corporate veil, meaning buyers of real estate companies need to be aware of the risk of potential BSA liabilities in other companies in the seller's group.
- W&I insurance is increasingly being used to address this risk.
- While W&I insurance can be helpful in this context, gaps in coverage may remain, and careful consideration of these gaps remains essential for buyers.
