United States: What Kind Of Insurance Does The Project Need?

Last Updated: October 24 2017
Article by Adam Levine, CPA

Every business requires comprehensive insurance coverage to protect its assets and income. However, property owners and developers need to consider more than just general liability, workers' compensation and business interruption policies.

Professional Liability Insurance

Real estate development projects often span months with numerous officers, directors and employees pitching in. All of these people could incur some type of professional liability along the way. For real estate developments, a professional liability policy provides coverage for legal defense costs and damages incurred from wrongful acts committed in the course of development.

The term "wrongful act" typically refers to actual or alleged neglect, a tortious act, error, omission or breach of duty committed in the performance of real estate development activities. Such activities include:

  • The process of obtaining permits, variances, consents, easements and other rights;
  • Management and supervision of design and construction; and
  • Interactions with real estate agents, title companies and property managers.

The policies usually include a detailed list of exclusions for these situations, such as fraud, bodily injury, property damages and unlawful employment practices.

Environmental Liability Insurance

Developers increasingly target former industrial properties when they rejuvenate urban areas. The properties may have been designated by the Environmental Protection Agency as areas that contain hazardous substances, pollutants or contaminants.

Development of these properties may unearth environmental contamination that could:

  • Require cleanup;
  • Cause inadvertent release of contaminants; or
  • Lead to liability for damage to natural resources.

Cost overruns and missed deadlines could easily occur in these circumstances. Environmental liability insurance is essential for projects involving potentially contaminated areas, even for those developers that carry excess or umbrella policies. Such policies usually contain pollution exclusions that could leave a developer without coverage.

Owner-Controlled Insurance Program
Under an owner-controlled insurance program (OCIP), the owner purchases insurance for all of a project's contractors and subcontractors, including workers' compensation, general liability and professional liability coverage. An OCIP can be job-specific or cover multiple projects within a fixed period of time. OCIPs provide broader insurance coverage and higher limits, giving owners more protection. They can also provide substantial cost savings in the form of volume discounts, streamlined claims handling, and improved safety and risk management programs.

Builders Risk Insurance

This type of insurance applies to property in the course of construction and includes property on the construction site, at off-site locations and in transit. It can cover the owner, general contractor and subcontractors. Builders risk insurance minimizes costly delays by facilitating a quick resolution to property claims that occur during construction. This insurance typically covers damage done by fire, wind, theft, lightning, hail, explosions, vandalism and vehicles. However, it could also contain several exclusions, such as damage caused by earthquakes, employee theft, water, war or government action.

Do Your Research

Every project is different and may require different combinations of insurance coverage. Regardless of the policies you decide to purchase, always pay close attention to the details. Know the parties covered, liability limits, exclusions, deductibles and coverage dates before signing on the dotted line.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Adam Levine, CPA
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