Industrial boom brings hidden insurance risks

Lockton is urging property stakeholders to reassess their insurance arrangements as Australia’s industrial real estate market moves into a growth phase.

This expansion – encompassing manufacturing sites, warehouses, and logistics facilities – is expected to gain momentum through 2025, according to Knight Frank’s Australian Horizon 2025 report.

The report highlighted strong investor sentiment in the sector, prompting increased activity among developers and asset managers.

Lockton has identified the need for targeted risk strategies as a result of this heightened market engagement.

Operational and structural risks

The firm has outlined a set of key exposures linked to industrial operations. These include:

• Fire and explosion hazards – the presence of flammable materials and mechanical equipment raises the potential for fire or explosion incidents. These may stem from electrical faults or chemical mishandling.
• Equipment malfunction – unanticipated failures in electrical or mechanical systems can halt production, creating operational and financial setbacks.
• Environmental contamination – accidental discharges or pollution incidents can attract regulatory scrutiny and costly remediation obligations.
• Security-related losses – remote or lightly secured industrial properties are vulnerable to criminal activities, including theft and property damage.
• Business continuity threats – disruptions from physical damage or mechanical failure can stall operations, highlighting the role of business interruption insurance.

Tenant activities and risk mitigation

Lockton advised that insurers closely examine the nature of activities conducted by tenants.

Properties used for the storage or handling of combustible goods, such as lithium batteries or hazardous chemicals, often require detailed risk documentation to support underwriting.

Essential information may include:

• Thermal imaging and diagnostics
• Sprinkler layout diagrams and test records
• Fire safety impairment and hot works protocols
• Onboarding programs for contractors
• Response plans to underwriter recommendations

Facilities featuring flammable construction materials, like expanded polystyrene (EPS) in cool rooms, should disclose material types, coverage areas, and fire control systems.

Additionally, buildings built before the 1990s should be evaluated for asbestos. If found, an asbestos register and management plan are necessary for insurance purposes.

Lockton noted that vacant sites pose a higher claims risk, as the absence of staff increases the chance of loss or damage. Insurers often respond with higher premiums, more restrictive conditions, and increased excesses.

Industrial special risk (ISR) insurance remains central

To safeguard industrial assets, ISR insurance policies provide a comprehensive risk management solution. These policies typically address property damage, business interruption, and other significant hazards.

Lockton recommends ISR coverage be customised to reflect the unique risk profile of each facility, aligning with broader asset protection strategies.

Demand for latent defects insurance on the rise

Lockton also reported growing interest in latent defects insurance (LDI), particularly for construction stakeholders.

Unlike traditional liability coverage, LDI offers first-party protection for structural defects without assigning fault. Coverage activates upon proof of material, design, or construction issues emerging post-completion.

Phil Clauzel, Lockton’s client director, noted credible capacity entering the Australian market.

“For the first time in years, we’re seeing meaningful capacity enter the local market, and we’re excited to bring that opportunity to our clients,” he said.

He added that building a solid history of claims performance is key, especially if regulations make this type of coverage mandatory in the future.