Real estate development is a comprehensive process that includes acquiring land, financing, renovating or constructing houses and buildings, leasing or selling residential apartments, commercial and industrial property. Every stage of the real estate development process exposes a company to unforeseen liabilities. From purchasing the land to building on the property to selling the apartments, there is always the possibility that something might go wrong. With all of these unique risk concerns, having a right insurance coverage in place is critical to keeping your business goals on track.
Even though many developers build and manage their own projects, some real estate development differs from construction and management. They will sometimes only undertake a part of the process. Example: Some developers buy land, get the plans and approvals authorized, and then sell it to a builder for a profit.
A real estate developer often interacts with many professionals, including planning authorities, engineers, surveyors, contractors, lawyers, leasing agents and other stake holders of the industry. With so many exposures & complexity, Insurance is always a wise move for managing the risk in the Real Estate Industry. This blog provides a brief summary of some commonly overlooked risk coverage’s that a real estate developer may want to consider.
Professional Indemnity Insurance
Professional indemnity insurance protects real estate developers against common services and transactions that are not generally covered by a Commercial General Liability Policy (CGL). Various Governments, Principals, Lenders etc are increasingly demanding Professional Indemnity Insurance to cover construction plus maintainence periods of their projects. This policy covers combined legal liability exposures of all concerned parties like contractors, sub contractors, consultants etc involved specifically relating to any actual or alleged negligent act, error or omission committed in the lifecycle of the project. Ideally upto 10 Years cover is granted by insurers in India presently for specific projects & specially designed annual coverage also can be opted for including multiple projects for identical professional services. The total cost of premium can be apportioned to the various parties & can be included in the budgeted cost of the project.
Professional indemnity usually cover just economic/financial loss and do not cover physical injury or property damage claims, which are covered by separate policies. Although claims made by customers and other third parties are normally not covered, there is a rising tendency to expand coverage for these sorts of claims.
Environmental Risk Protection (Pollution Legal Liability)
Environmental or “pollution legal liability” insurance is another important risk cover for developers in todays scenario. A pollution exclusion is included in many basic CGL policies & this insurance fills that coverage gap.
With the rise in environmental concerns & various legislative changes imposed by the regulators & governments, active scrutiny by NGO’s & Media, Pollution Legal Liability Coverage enhancements customized to the developers history, operational risk, and liability issues of a certain project can be obtained.
It is usual for a developer to rehabilitate one component of a project while other areas of the project continues to operate in the vicinity, raising the danger of third-party exposure from spreading contaminants. This can occur as a result of demolition or removal of items containing lead, asbestos, or other hazardous substances, or as a result of fumes and gases. Various other exposures may include:-
- Soil – Construction Waste/Toxic Waste/Burried Materials
- Air – Incineration, Dust, Metal Recovery
- Surface Water – Storm Water runoff
- Ground Water Contamination – Boring/Drilling.
In addition to having your own pollution legal liability coverage, ensuring that contractors have one can help ensure that pollution conditions created or exacerbated by contractors’ actions are also covered. Coverage’s can also include present, past and future environmental exposures depending on the project requirements.
Contractors All Risk (CAR)
This is a must have cover for all the projects & it should be in force for the entire project life cycle i.e. Construction as well as defect liability period. Even if a developer hires a general contractor or award works to various sub contractors who may in turn have their own construction insurance for their scope of works, the developer & the landowner (if different from the developer) should be identified as additional insureds or Principals (as applicable). Unlike CGL policy, which cover risks to third parties, a Contractors All Risk policy covers damage to the developer’s own property if properly designed. These policy often cover accidental loss or damage to a contractor’s work and property during construction and extended coverage to equipment, materials, and supplies. CAR policies are designed to give a quick settlement if a property claim arises during a construction project, thereby eliminating delays.This insurance plays most important role in guaranteeing the success of the project where insurers shares the burden of losses resulting from natural disasters and other contingencies covered in CAR.
Business Interruption (Loss Of Rent)
This policy offers payment for lost rental income if the building(s) or any part thereof is unfit for occupation in consequence of its destruction or damage by the covered loss. It is important to think about acquiring an “extended period” since, in some cases, a tenant can terminate its lease if their business is disrupted for an extended period considering the time taken for reinstatement of damaged property.
Umbrella Commercial General Liability (CGL)
This is primarily a premises liability coverage where in various risk’s like third party bodily injury and or property damage, breach of duty of care, slip/trip/falls/explosions/electrocution/failure to warn & various other liabilities arising out of work done by contractors and subcontractors are covered. This can be extended to cover Employer’s Liability insurance in conjunction with worker’s compensation insurance and provides the insured with broad coverage for personal injury or death of an employee. This can be utilized by the employee when the injury is not covered by the worker’s compensation policy. Such instances may occur when the employer did not use proper safety equipment required by law, and the employee elects to sue for damages under common law. Here coverage territory can be India & jurisdiction can be extended on Worldwide Basis. Umbrella cover signifies the inclusion of all active under construction premises as well as operational sites which are falling under the control of the developer before handing over to the society. Apart from various commonly known covers under this policy, Tenant Legal Liability provides coverage’s to the insured for their legal liability as a tenant to pay compensation to the landlord of the property rented out to the insured where as such liability arrises out of an accidental damages to the rented premises fittings and it resulted from fire caused by negligent act of the insured. This is helpful where developer occupying the operational premises on lease/rental basis.
Real estate developers should carefully evaluate their future risks and ensure that they have enough insurance coverage, which usually demands more than a standard CGL policy. In case the risks changes, coverage should be reviewed regularly.
Real estate developers should constantly research potential loss and liability coverage because, under these specialized policies, coverage for damages that would otherwise cripple a developer’s company operations may be available. It is also advisable to notify your insurance company of potential claims, even if you are unsure if the claim is covered.
Investacc Insurance Insurance Brokers are one of the leading practitioner in Real Estate, Construction & Infrastruture Risk’s. Our team has deep understanding & unparalleled experience of handling claims in these sectors which can help you in determining exactly what coverages you require for your prestigious projects. We are also prepared to provide you with personal, commercial, employee benefits and risk management solutions for achieving targeted premium savings without compromising on the risk covers which are detrimental to the success of your business.