Real estate development is a multidimensional process that comprises a wide range of activities, which include land acquisition, financing, renovations, or home and building construction, as well as the sale or lease of commercial, residential, and industrial property.
Property developers will sometimes undertake just part of the process. Some developers will acquire properties and get the plans and permits approved before selling the properties to builders for a profit. Likewise, real estate development is from management and construction, even though many developers also have their own projects that they build and manage.
Real estate developers usually work with various professionals who include surveyors, city planners, leasing agents, lawyers, contractors, inspectors, engineers, and other industry professionals, which means that they are exposed to unique risks and insurance needs.
Real estate developers must never assume that a commercial general liability (CGL) policy is enough to cover all their risks. Developers should consider consulting their insurance broker regarding additional coverage types. Here are some of the commonly overlooked forms of coverage Property Developer Insurance and endorsements that developers should consider.
Professional Liability Insurance (PLI)
PLI insures against the services and transactions that real estate developers conduct that aren’t typically covered under CGL. Real estate developers usually have staff who include real estate agents/brokers, attorneys, accountants, and engineers, which is why they require PLI to limit liability relating to any errors or omissions that may be committed by their employees while conducting their professional services.
Professional liability policies usually only apply to financial/economic loss and don’t include bodily injury or even property damage claims that a CGL policy typically covers. Furthermore, PLI policies usually limit the amount of available coverage for discrimination claims brought by potential buyers and tenants. It is always important to understand these policy limits as is the case with any insurance policy.
Employment Practices Liability (EPL)
EPL is a form of professional liability insurance. It protects against lawsuits that potential job candidates, former employees, and current employees file for claims under Title VII of the Civil Rights Act of 1964, the Family and Medical Leave Act (FMLA), the Americans with Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA). Depending on the policy, EPL may even apply to independent contractors, leased employees, and seasonal employees.
EPL typically does not cover claims by customers and other third parties, but there’s a growing trend to increase the coverage of such types of claims.
Environmental or “pollution liability” insurance is another important form of coverage that developers should consider. Standard CGL policies typically have a pollution exclusion that environmental insurance aims to address. Experienced environmental insurance brokers can obtain coverage enhancements customized to the operational risk, individual history, and liability concerns of a specific project.
Underground storage tanks, lead paint, mold, asbestos, and other pollutants are some of the common exposures covered under this type of policy. Potentially hazardous operations include photography development centers, auto repair facilities, gas stations, dry cleaners, or any business that either uses or has used hazardous chemicals.
Property developers will often renovate a particular section of the project while it is business as usual in other areas and this increases the risk of third-party exposure from the spreading of contaminants. It can be caused by demolition or removing materials containing asbestos, lead, and other hazardous substances, or by gasses and vapors. Legionella or mold can form in the plumbing and HVAC systems of a residential or commercial facility and even just one release of those pollutants can have wide-reaching consequences.
You should not only have your own pollution liability insurance, but it is also important to ensure that contractors have pollution liability coverage to ensure that any pollution conditions either caused or increased by workers’ activities are covered.
Flood insurance coverage can be incredibly helpful when it comes to limiting the exposure of a real estate developer to flood damage. This form of insurance coverage typically covers loss for physical damage to buildings along with the personal possessions within the building, but only up to a certain limit.
Flood insurance usually does not cover economic loss for the interruption of business, living expenses, or even the loss of use of the property during reconstruction and cleanup. Flood insurance coverage is usually limited for any areas below grade.
If a real estate developer has a property located in an area that’s prone to flooding, it is important that they have a contingency plan in place for protecting against significant reconstruction delays and/or extensive underground construction.
It is equally important to note that mortgagors usually require mortgagees to get flood insurance if the property is situated within a flood-prone area as designated by FEMA. Real estate developers need to first determine whether a property is situated in a FEMA-designated flood area before they purchase the property.
A single amount of coverage is applied to all the exposures or property insured under it under a Blanket Insurance Policy (BIP). A BIP may specifically cover various types of properties in the same location, the same type of property but in various locations, or various types of properties in various locations. Due to the wide range of applicability, a BIP usually contains significant limits of coverage.
The limits generally include a per-occurrence limit that applies to all the insured properties, a per-occurrence limit based on a percentage of the property’s insurable value, as well as a limit based on the predetermined schedule of the property’s insurable value. The definition of occurrence may vary depending on the insurance provider, which is why real estate developers need to be mindful of the definition used in a particular policy.
Construction insurance is of several different types, but any business working in a construction trade needs to consider obtaining construction or “builder’s risk” insurance. Even when property developers hire builders or general contractors that may carry their own construction policy, the developer, the landowner (if not the same as the developer), as well as all the subcontractors, should all be named as insureds.
A builder’s risk policy may cover damage to the developer’s own property, unlike CGL policies that cover risks to third parties. The policies usually insure against accidental loss or damages to the work and property of a contractor during construction and extend that coverage to supplies, material, and equipment. Builder’s risk policies are aimed at providing a speedy resolution if a property claim occurs during a construction project, thus avoiding construction delays.
Extended Period of Rental Income
It is sometimes referred to as “business interruption” coverage and it provides for the payment of lost rental income in case the lost rent is due to some type of covered loss that leads to an interruption of business operation.
It is important to consider purchasing an “extended period” since, in some situations, a tenant may decide to terminate their lease if the business is interrupted for an extended period of time. Under extended period coverage, the carrier will continue paying the tenant’s rent until a new lease is in place.
Real estate developers need to analyze their potential risks carefully and ensure that they have the right coverage, which usually requires more than a basic CGL policy. Coverage needs to be regularly reviewed in case risks change.
Practitioners that represent real estate developers should always look into potential coverage for liabilities and losses since, under these specialized policies, coverage may be available for losses that would otherwise devastate the developer’s business operations. It is also advisable to put your insurance carrier on notice of potential claims if you aren’t sure whether the claim is covered.