They may be easy on the eye and stand out from dull skylines, but iconic buildings give insurers major headaches. Take the Gherkin in the City of London for starters. All that bespoke glass – and that’s before the risk of terrorism. We investigate why each needs its own tailormade policy

The glass-enveloped, Lord Foster-designed ‘erotic gherkin’ – or 30 St Mary Axe to give the skyscraper its formal title – looms proudly over London’s Square Mile financial district. Along with the giant Ferris wheel that is the London Eye, the 41-floor pickle-shaped building has been the great addition to the capital’s skyline of the past decade.

But while its iconic design is world-famous, it has been a pain to insure. A fully glazed skin meant that additional risk had to be factored into the building’s insurance, as fires can be conducted upwards through glass. This risk also altered the amount of reinsurance that the insurance team, which included Zurich, needed to purchase.

The panes of glass are unique so, should they be damaged, owners Evans Randall and IVG Immobilien AG, the Mayfair-German combination that paid £630m for the Gherkin three years ago, would have to order substitutes from the original suppliers. With few options, replacements are costly and therefore cover is substantial.

On a lighter note, the window washing system altered the engineering assessment of the policy. Typically, washing platforms can move vertically, in straight lines, up and down a building. The Gherkin’s curvature meant clever engineers had to come up with other ideas on how to get to the windows to give them a good scrub.

Iconic buildings by their nature are more complicated to insure than other types of commercial property. They aspire to be different, which means that their insurance needs are necessarily more comprehensive and potentially more expensive.

And with the 230 metre-high Heron Tower, the brainchild of property tycoon Gerald Ronson, and the 72-floor Shard of Glass, designed by Italian architecture legend Renzo Piano, due to open in and around the City over the next two years, iconic buildings will soon present major opportunities for insurers.

But iconic buildings tend to have iconic features. For example, if a statue in the atrium is damaged, a marble floor or wall to which it is fitted may also have to be replaced.

RSA property underwriting director Graham Heale warns: “The cost of replacing a part might be disproportionate to the cost of the part itself. In a bog-standard building it will be straightforward, but if it’s tailormade the whole [area around the damage] might have to go.”

As a result, underwriters require a huge amount of information to evaluate the risks necessary in the cover. Heale says that “real detailed information on the nature of the construction”, such as the materials and how the openings between floors are protected from damage, is particularly important. Also, these buildings tend to have vast atriums, so there needs to be a thorough assessment on how fire might spread.

It also means that underwriters and brokers are involved early in the construction process; typically they would start their assessments close to completion.

Heale points to his experience underwriting the £86m, Sir Nicholas Grimshaw-designed Eden Project in Cornwall, the multi-domed attraction that houses plants from around the world. Insurance surveyors and Heale’s team took several weeks to inspect the building before it opened in 2001, to get a feel for the potential risks before writing business.

“It was a prototypical building,” Heale says. “Normally you’re talking about a presentation on a large building over a day or two [to evaluate the risks]. But with Eden there was the sheer scale of the construction with those large domes, looking at what exactly is going on in there, the restaurant facilities, and plant and equipment needed to keep the domes at the right temperature and humidity.”

Icon means target

The Eden Centre is outside a major conurbation, meaning that it is charged less for terrorism reinsurance than the likes of the Gherkin and Tower 42 in the City. Pool Re, the mutual insurer, provides terrorism cover for insurers of buildings in London and other cities at an annual premium of 0.06% of the property’s value.

A relatively small cost, but one that is necessary as a consequence of the 2001 World Trade Center attacks in New York. Until then, many property developers insured on a first loss basis, meaning that they did not cover the full value of the building as it was unlikely ever to be completely destroyed.

The attacks turned iconic buildings into potential terrorist targets. “Until 2001, the assumption was that you couldn’t lose the whole of a building,” Grant Thornton’s head of the financial services group, Peter Allen, says. “First loss was the orthodoxy. For example, I know of a large ecclesiastical building insured up to £100m, though the total rebuild would be much larger.”

Trevor Seymour is director of insurance services at commercial property adviser DTZ, basically an in-house broker. He agrees with Allen, pointing out that banks backing developers will not let them scrimp on cover. “Funders will now always insist on full value. Previously, developers might well have been able to persuade funders otherwise [to use first loss cover], but not now. No way after the two towers came down and in the current economic conditions.”

The 9/11 attacks have also led to questions over whether it is worth risking an insurer’s reputation on iconic buildings. Developer Larry Silverstein battled with seven insurers for six years over the value of the policies covering the twin towers, until a $2bn settlement was reached. Only when that deal was agreed did Silverstein have the cash to redevelop Ground Zero.

Peter Fice, head of London markets at the property division of QBE Insurance Group, says that once it gets into the press that lead insurers have mishandled a policy, any public relations benefit from winning iconic building work is lost.

Heath Lambert’s real estate division managing director, Matthew Bates, says that this has led to “more investigating” at the underwriting stage. “Insurers are more wary as a result of the [Silverstein] case. Those kind of legal wrangles add legal costs, delays to reinstatement of the building, and additional loss of rent. Both the client and the insurer lose out if there is a delay.”

Even without court battles, bringing an iconic building back into use following damage takes longer than a simple office block,

as specialist contractors need to be found and hired to undertake the repairs.

Spreading the risk

Note that seven insurers covered the World Trade Center. The same is true of all major buildings, as the cost can be extremely high. For example, it is estimated that HSBC tower in Canary Wharf is covered for £1.5bn.

Bates says that the heavy financial exposure means that many insurers buy more reinsurance than they would normally.

They also take a close look at unusual details to mitigate the risk as far as possible. For example, if all building security is provided in-house, this would require a higher liability limit than if this were outsourced. Should security collapse for any reason, it would take longer for the company to bring in replacements than a contractor could.

Bates also points out that there is an “aggregation risk” if an insurer provides costly cover for several major buildings close to one another. If there is damage, be it by man’s hand or the result of, say, weather conditions, it would mean that the insurer risks having to pay out on several claims at once.

Better for the insurer to spread its cover for iconic buildings geographically, so that it insures one building in the City and another in Canary Wharf, rather than in clusters.

Listed buildings

Andrew Jackson is used to working on London’s icons, having been at Zurich when it covered the Gherkin.

However, Jackson – now Brit’s portfolio manager for property and packages – says that the difficulties of covering older landmarks should not be ignored. Many of the City’s grandest buildings are listed, some of them grade 1, so they are given a great deal of protection when they are redeveloped.

Jackson says that small claims can turn into vast sums on a listed block. “A typical water damage claim might cost £2,000, but it could be four or five times that in the City,” he says. “It becomes an attritional claim that the insurer has to increase the price [of the policy] for.”

This is because materials must match the original feature and urban planners will not allow the design to be compromised. Jackson says that he knows disused quarries that have had to be reopened for the original stone. “With grade 1 buildings you have to put things back exactly the same, and that means [replacement] costs disproportionately more.”

Iconic buildings, both old and new, are by their nature unique. This means that each needs its own tailormade policies. With this comes a series of wide-ranging risks, including terrorism, which makes them fascinating, yet difficult projects to cover. IT