Will in perpetuity coverage last the test of time in the Rights of Light insurance market?

What is Rights of Light Insurance?

Rights of light insurance is a type of insurance policy that protects property owners from the financial risk of rights of light infringements caused to third parties. A right of light is a legal right to receive natural light through windows and other apertures in a building and a property generally obtains rights of light after their property has been in situ for 20 years or more. Claims usually occur if a new development is built which blocks or reduces the amount of light that reaches a third-party neighbouring property. This is assessed by RICS qualified right of light surveyors during the feasibility stage of a development.

If a property owner's right to light is infringed, they may be able to obtain an injunction to prevent the development from going ahead or to claim compensation for their loss of light and claimants can technically bring forward a claim at any time. Insurance can help to protect property owners/developers from the financial risk and provides certainty of the balance sheet for all stakeholders. The insurer will typically pay for the legal cost of defending a right of light claim and any compensation that is awarded to the neighbouring property owner. The policy may also extend to cover the cost of interruption of delay to the development which can arguably be one of the most important elements of coverage, especially for a time sensitive development. The main elements of the policy will be active in perpetuity and run with the title of the property.

What does in perpetuity means?

In the insurance industry, "in perpetuity" means that an insurance policy is in effect for as long as the policyholder paid the premium, or until the policyholder cancels the policy. This is in contrast to term insurance policies, which have a specific expiration date.

What are the benefits of in perpetuity coverage?

·???????? Guaranteed coverage for future owners

·???????? No long tail liabilities

·???????? Low administrative needs once the policy is place

·???????? Long term certainty for all stakeholders.

What is the drawback of in perpetuity coverage?

·???????? High Premiums

·???????? Lack of Insurer Appetite to provide new capacity

·???????? Lack of insurer competition

·???????? Long term and complex actuarial modelling

·???????? A perceived lack of understanding in the insurer market as to what in perpetuity means

Given the economic climate I suspect that pricing of policies will be high on their list of concerns. Rights of light has gone through a hardening market and premiums are significantly higher than they have been in the past. Why have premiums risen?

• Claimants are becoming more aware of their rights of light and are more likely to challenge developments that could infringe on those rights.
• Developments are becoming increasingly complex, and this can make it more difficult to assess the potential impact on neighbouring properties' rights of light.
• The cost of compensation for rights of light infringements has increased in recent years. This is due to several factors, including the rising value of property, construction and debt and the increasing complexity of cases.
• As a result of the above factors, there has been an increase in the number of rights of light claims, this has led to insurance companies increasing their premiums or leaving the market altogether.
• Ambulance chasers are targeting property owners who have or may have been affected by a right of light infringement. They approach properties on mass and offer to help them make a claim against the developer responsible for the infringement for free in exchange for significant upside, some of which are not actually infringed upon.

So, does the market really need in perpetuity coverage and what would happen in the market if a policy was available for a fixed number of years, perhaps 10? Would this ease rising premiums and bring the market back to a competitive landscape?

What other insurance products can we learn from with long tails liabilities?

Structural warranties seem to be very synergistic although not specifically a legal risk. It aligns in the sense that it is provided to unlock funding and is also purchased to protect future buyers of the asset for an extended period.

?Why are these policies not provided in perpetuity? Is it because the product is more mature and has experienced the consequences of a hard market and heavy claims many times? In the last 5 years have we seem capacity availability shrink; providers going bust and a lack of appetite from the insurer market all whilst having a cap on the policy period.

Can the Rights of Light market adopt a policy period to ensure the long-term success of the market, or can we act least provide a capped policy period/cheaper option that will improve commercial availability and viability that will capture 99% of claims?

There are several reasons why a structural warranty typically only lasts for 10-12 years:

• Construction materials and methods have improved significantly over the years. As a result, newer buildings are generally more durable and less likely to develop structural problems.
• Structural warranties are insurance policies, and insurance companies need to be able to price their premiums in a way that covers their expected costs. By limiting the warranty period to 10 years, insurance companies can keep their premiums relatively affordable.
• The likelihood of a building developing structural problems decreases over time. This is because the building has time to settle, and any defects are likely to have been identified and repaired.

Comparative to rights of light:

·???????? The awareness of Rights of light has increased over the years and the consensus among insurers is that major developers are aware and willing to proactively engage. They deal with rights of light in conjunction with their third-party advisors early on to avoid delays and manage costs. Does this reduce the likeness of a claim beyond 10 years even further?

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·???????? Rights of light is dominated by a hand full of insurers that are willing to take in perpetuity risk on their balance sheet, but it can and does take many years for insurer to come round to this and they have therefore monopolised the market. Existing insurers in this space will be receiving higher than average returns as a result and supply vs demand takes effect. If we had additional insurers in the market with a capped policy period, would it create a more competitive landscape and improve choice for developers and funders?

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·???????? Now given how Rights of Light has evolved, I believe we can also say that the likeliness of a claim does in fact decrease over time. This is because the vast scale and impact of a scheme will naturally be known after its completed and claimants would have raised their concerns during the planning stage or at the point the structure is at its peak height during construction. This is why many insurers are willing to have excesses fall away upon practical completion.

So, what does removing in perpetuity coverage really achieve?

The claims experience will likely remain the same as most claims occur within 10 years, and there will therefore still be a significant loading due to the increased number and significance of claims. However, it could unlock new capacity in the market who will not have a historic claims history and have appetite due to a newly proposed fixed policy period. It is therefore important to partner with existing MGA experts in the space who can apply their historic knowledge, data and experience to new capacity.

What risks would to bring to clients?

Should a claim occur after 10 years no coverage will be in place. But this risk should in theory be very remote as I suspect it would be very challenging to bring forward a claim and explain why it has taken 10 years to challenge a loss of light.? At this point a property would have been habited by tenants for many years and the courts would take this into consideration.

What are your thoughts, would a fixed policy period product be viable in today’s market as a competitive alternative, or would this be something that many lawyers would actively advise against due to the very remote but real risks? And if there was appetite from clients, would this actually attract a new wave of insurers to the market with an ability to price the product significantly more competitively based on a fixed policy period?

Looking forward to many thoughts from insurers, MGAs, Lawyers and Developer Clients.