Insurance is a fact of life for real estate investors. From start to finish, each project needs to have the proper insurance. The time to wonder whether you’re properly insured is before there’s an issue. To be safe, hiring a qualified professional to help you conduct an insurance coverage audit may be necessary. Coverage audits can reduce the odds of an uncovered incident undermining the project’s profitability — or worse.
Types of Policies
Risk management is as integral to a successful project as the construction materials and crew. Insurance coverage is the building block of risk management. How do you know if you have the right type for your project? And how much is enough?
Before launching a project, you’ll need to assess what types of insurance are needed. Some common insurance policies include:
Builder’s Risk Insurance. This is designed to temporarily insure buildings and structures while they’re under construction. It also may cover materials, supplies, fixtures, and equipment that are on site, in transit, or temporarily located at other locations. Some policies may cover loss of income from the property’s rent or sale when the construction project is delayed.
General Contractor Insurance. If you decide to act as the general contractor for a project in addition to investing in the property, you’ll need insurance before you begin the project.
Liability Insurance. This includes general liability, workers’ compensation/employer’s liability, and commercial vehicle coverage, as well as covering payment and performance bonds.
Wrap-Up Insurance. With this insurance, a developer provides a single source for project-specific liability insurance. The policy covers the developer, general contractor, subcontractors, construction managers, and possibly design professionals. The developer is designated as the named insured, and the other parties become additional insureds.
Understand Your Coverage
For all insurance policies, obtain proof of coverage with certificates of insurance for your own policies, as well as any policies under which you might pursue coverage as an additional insured or intended beneficiary. Keep in mind that your policies are secondary to the policies that list you as an additional insured. Thus, if you have a claim, you’ll make it under the policies that list you as an additional insured before turning to your own insurer.
In addition, change-in-coverage notices should be sent to both the named insured and you on policies that list you as an additional insured. Where necessary, ask that coverage terms be amended so that innocent intended beneficiaries (such as you) aren’t adversely affected by the conduct of others whom they don’t control (such as a named insured contractor who fails to comply with a requirement of the insurer).
Occurrence-based policies are generally preferable to claims-made policies. With the former, coverage extends to claims deemed to have occurred during the insured period, no matter when a claim is made. A claims-made policy protects only against claims made during the insured period. For claims-made policies, coverage needs to be extended beyond the project completion date, customarily 12 to 36 months longer. Otherwise, you’re exposed to problems discovered postconstruction.
Policies shouldn’t include any objectionable exclusions, such as completed operations exclusions. Be particularly mindful of sacrificing costly claims because of exclusions and coverage period restrictions. Coverage can be severely curtailed, if not eliminated, by exclusions for mold, owner-owned property, and contractual liability, among others. Consider supplementing your policies with excess or umbrella coverage, as appropriate.
The Big Picture
There’s more to your insurance coverage than just insuring a specific project. Be sure to consider your business as a whole, including your financial standing. Work with your insurance and financial professionals, along with ASL’s Real Estate Group to evaluate your coverage and achieve holistic coverage for your business.