Insurance-Backed Guarantees (IBGs) are a fact of life within the Japanese knotweed industry and have been for several years. They are as much a feature of the conveyancing process as the plethora of other indemnities available to mitigate against every little issue that ever marred the balance sheet of a mortgage lender.

It is the unique aversion of the mortgage market to Japanese knotweed rather than the particular properties of the plant which have driven the sizeable demand for Japanese knotweed IBGs; demand for IBGs to cover any other plant species is virtually non-existent, despite the problems that other plants cause – a point which was strongly made in the recent update to the RICS guidance for property surveyors regarding Japanese knotweed.

A variety of insurance products have come and gone in the market since the 2000s, varying in specification, value, price and rating. The products insure principally against the potential for contractors’ insolvency. Some only cover re-growth after completion of a successfully completed treatment, some have very tightly-limited coverage and some seem more permissive – but one thing that has not really been tested for many of these products is what happens when anyone actually makes a claim.

It might surprise you to learn that across all of the five major industry-wide insurance schemes, INNSA is not aware of a documented example of a Japanese knotweed IBG having a claim made against it. This would require an insured contractor to dissolve, leaving its clients in the lurch. So far as we are aware, the only companies to have gone bust in our industry have not been among those who have offered their clients bona-fide IBGs.

Some now-defunct companies have lured clients with so-called “coverage” along the lines of ‘£5 million coverage including structural damage’. Rather than an IBG policy which covers the contractor’s guarantee, these statements seem to refer to the company’s PI insurance.

PI insurance basically covers deficiencies in professional advice; it does not underwrite a contractual liability to deliver a service as promised. A client may have a claim against such a company if damage arises because they carry out works in such a reckless or negligent manner as to cause damage to a property or a consequential loss suffered due to the advice of the contractor. However, in the event of the contractor going bust, any guarantee of their which states they will return if you get any re-growth after a chemical herbicide treatment program is likely to be worth less than the paper it was written on.

So, you might ask, if these IBGs haven’t paid out, then what is the logic behind having one – and why do mortgage lenders so vehemently insist on having them in place? This is a good question, and one worth exploring in a bit more depth.

Effectively, all insurance is a form of gambling – with the quirk that in the insurance game, you lose money (in the form of your premium) when things go well and you only get paid-out if something bad happens – so it’s a lose-lose for the consumer – but a relatively small loss (the premium) mitigates against the risk of a larger the loss if things go badly for you. In effect, this is similar to what a bookmaker would refer to as “hedging” a bet.

Another way of looking at an IBG is that, as a group, the insured (in this case, a large number of UK householders) have pooled their finances to cover the costs of all events that meet specific criteria. The pot pays out to cover any and all problems that any one party among the insured encounters, so long as the problems meet the criteria. In the case of an IBG scheme run by an insurer, it is incumbent on the insurer to take reasonable measures to ensure that the size of the pot is large enough to cover the costs of every single specific failure which might foreseeably occur (and this is part of what being a regulated financial service provider entails).

Insurers (just like bookmakers) are extremely good at quantifying risk and probability. What’s more, they go to significant lengths to ensure there is enough extra in the pot to cover their operating costs and other overheads. Whatever is left at the end of the period of coverage is forfeit by the consumers and taken by the insurer, effectively as profit. The house (almost) always wins.

In the example of an IBG, if 90%+ of all treatments are successful, then an insurer takes ten premiums for every one that they pay out against; for a 95% success rate, they take twenty premiums per payout and son on and so forth. With a 99% success rate the insurer takes one hundred premiums per payout.

In this case, similarly to buildings or motor insurance, the relatively low level of risk (lots of policies with relatively few claims) allows the insurer to provide cover by collecting a large number of relatively small premiums and providing cover for a large number of incidents with relatively low costs.

In the case of buildings or motor insurance, the insurer can also cover a small number of incidents which are vastly beyond what the insured could afford to pay.

For example, the insurance costs of a single tragic motor incident, the Selby train crash (where a driver fell asleep at the wheel and crashed down an embankment onto a train line, causing two trains to collide head-on), are estimated to have run to in excess of £30 million. However, to put this in context, with over 30 million insured vehicles on UK roads, the cost of this incident would be covered by roughly £1 from the insurance premium of every UK vehicle. Despite the huge costs of dealing with such a major incident, the value is relatively small in comparison to the pool.

It is important to note the difference between motor or buildings cover and a Japanese knotweed IBG here.

The first key point is that the value of the payout in Japanese knotweed IBGs is contractually limited, generally to the value of the spray element of the works; in some cases, limits may be significantly less. A basic Japanese knotweed IBG will cover only such treatments as are required to meet the terms of the contractor’s guarantee (which may be limited to one visit per year where re-growth is documented by the client) and provide no cover for works in progress (which usually represents the bulk of the client’s costs).

Policies rarely provide cover for consequential damages, such as damage to hard standing, buildings or other landscaping. And this is the base-line of the cover, before taking account of exemptions based on the policy wording or the terms of the contractor’s guarantee, which may invalidate claims where ground disturbance, fly-tipping or infestation from neighbouring properties has occurred.

The second key point is that while many motoring incidents would be covered by the insured under their excess or settled without recourse to the insurance, most drivers could not afford the bill for writing off a new vehicle or a serious personal injury claim; a similar logic applies to buildings insurance. However, for Japanese knotweed, the potential costs of treatment are very unlikely to reach such an unaffordable level.

As with pet insurance, while many people would feel fortunate to have enough money lying around to cover the headline figure on the insurance policy, the actual costs of a claim may be significantly less than this.

Because of the terms of the guarantee, the likelihood is that a small number of visits will be required to complete treatments and, given the fact that many contractors offer the option to pay annually, it is not unreasonable to suggest that over the course of ten years, the average homeowner could self-finance any additional treatments required, should their original contractor cease trading.

For this reason, as with all financial products, it is very much in the client’s interest to ensure that they are aware of what their IBG covers and to make an informed cost-benefit analysis of whether the product is right for them – although in practice it’s unsurprising that the critical selling point for many IBG customers is that they need this document to secure mortgage funding. After that, many domestic clients understandably lose interest and say “OK fine, we’ll get the IBG in place”.

So, we return to the question of the logic behind having an IBG in the first place – which is a question of risk versus reward.

For an insurer, adequately calculating risk relies on a number of factors, but the risk inherent in a Japanese knotweed IBG hinges on two principal factors – the financial stability of the contractor(s) involved and the reliability of the works. If no company ever went bust or if every company’s works were 100% reliable, then there would be no value in having insurance in the first place.

Financial stability is dependent on the business practices of the individual contractor as well as the wider economic climate. In a booming economy, companies with less-sustainable business practices may be able to survive but in more difficult economic circumstances, greater pressure on companies is likely to see less work available, stronger competition and some companies going to the wall.

INNSA carries out checks on its members to ensure that they meet certain minimum standards for financial stability – but of course, while this offers peace of mind to clients, it is not a guarantee.

The reliability of remediation programmes depends both on the maximum possible success rate of the eradication process in general and also the quality of the works by individual contractors (i.e. how close each instance of their works comes to the optimum approach in any given scenario).

As long-standing contractors will be well aware, the maximum success rate is not a constant. The withdrawal of the active ingredient picloram several years ago had an almost immediate impact on the success rate of certain types of treatment, and the potential withdrawal of glyphosate would cause significant changes to invasive species remediation (in all likelihood to the detriment of the environment, with no significant benefit to human health).

Individual contractors will all have experienced bad days for any number of reasons, so even the most conscientious and careful contractor will not reach the optimum possible success rate. Contractors in some areas of the country may be more exposed to issues like hard water and persistent rainfall or other local or environmental- or supply-chain issues which, though manageable in theory, may be ignored or overlooked and place a small-but-significant drag on their success rates.

What’s more, when considering a group of contractors, the reliability of treatment is going to depend on the individual contractors’ behaviour – but also can be influenced by who they are as a group. The INNSA Standards set out minimum specifications to ensure that INNSA Contractor members’ works meet a level of reliability higher than what could be expected of a group of contractors who did not follow the best practice guidance contained in the INNSA Standards.

For these reasons, trade body members are more of a known quantity and generally a better prospect for an insurer and a client than a group of contractors who are not audited, don’t subscribe to a code of practice and don’t work to a set of agreed and audited minimum standards. This is likely to be reflected in the price of insurance cover.

From a client’s point of view, it’s entirely possible that all of this is irrelevant, as the reward of mortgage funding is worth the sums paid to ensure that the mortgage lender is on board.

But if you’re assessing the insurance as a gamble, when we look at what potential scenarios are covered by an IBG; the possible financial damages to a client and the payouts available from most policies, the risks may be smaller than they seem; the damages covered less significant than expected given the prevalence of this type of insurance and the potential payouts smaller than one might infer from the headline information.

So, while an IBG is a legitimate product and provides meaningful cover, as well as in many cases being almost essential to secure mortgage funding, for many individuals it is not financially a “must-have” in the same sense that motor insurance or buildings insurance are.

In most cases, INNSA Contractor Members rightly continue to offer IBGs to clients, particularly for domestic properties, and while these policies do provide both peace of mind and real risk mitigation for clients, as well as being a hard requirement in some circumstances, INNSA’s view remains pragmatic.

While any pressure toward the remediation of invasive non-native species should be welcomed for its environmental benefits, INNSA does not consider that the industry should have a strongly negative outlook toward a reduction in the requirement for IBGs for invasive weed treatments.