Insurance for Real Estate Developers

Real estate is an industry that is within the large property industry. It is inclusive of buildings, land and even natural resources. This industry is categorized into three namely residential, commercial and industrial.

DEFINITION of 'Real Estate'

Property comprised of land and the buildings on it as well as the natural resources of the land including uncultivated flora and fauna, farmed crops and livestock, water and minerals. Although media often refers to the "real estate market" from the perspective of residential living, real estate can be grouped into three broad categories based on its use: residential, commercial and industrial. Examples of residential real estate include undeveloped land, houses, condominiums and townhomes; examples of commercial real estate are office buildings, warehouses and retail store buildings; and examples of industrial real estate are factories, mines and farms.

Sourced from: http://www.investopedia.com/terms/r/realestate.asp

As the economy continues to grow in countries such as the United States, most of their cities experience a boom in real estate. Before any project is embarked upon there is need to understand insurance coverage and if it is enough.

While most developers have a commercial general liability policy, such liability policies, even though broad in scope, may not fully protect a developer against all of the risks it may face during development. For example, commercial general liability policies respond to claims involving bodily injury and property damage to third parties, but often do not provide coverage for damage to the developer's own property.

Below are four types of insurance every real estate developer should consider before beginning a new development project:

Real Estate Development Professional Liability Insurance

Large and small real estate developments can take months or even years to plan. Often there are several officers, directors, and employees involved in the inception, negotiation, and implementation of these projects. Real estate development professional liability insurance is unique in that it insures against those usual services and transactions conducted by real estate developers. More specifically, a real estate development professional liability insurance policy can provide coverage for “wrongful acts”[1] committed by a developer during the preparation, negotiation, transmittal, and awarding of design and construction bid packages; while obtaining proper permits, variances, consents, and easements; related to management, supervision, and coordination of design and construction; and regarding other issues with real estate agents, title companies, and property managers.

Environmental Insurance

In many major cities, residential and commercial real estate developers have turned to redeveloping abandoned industrial spaces as a way to transform cities and command large returns on investment. (An example of this type of project is Washington, DC’s soccer stadium slated for Buzzard Point in the Southwest quadrant of the city.) The EPA has labeled many of these sites brownfields. Not only do these unused and underperforming lots require special remediation, but the EPA imposes additional demands aimed at safeguarding the environment when developing these projects.

The risks for brownfield sites are unique and numerous, such as: the risk of finding unknown environmental contamination that requires clean-up; the risk of being found liable for damage to natural resources; the risk that contaminants may be inadvertently released from the site during the clean-up process; the risk of cost overruns due to unforeseen contaminants or an ineffective remediation plan; plus government regulation that adds or requires additional remediation.

Sourced from: http://www.policyholderinformer.com/2015/09/03/what-real-estate-developers-need-to-know-about-insurance-coverage/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original

It is important that real estate developers purchase errors and omissions insurance. This is to ensure the balance sheet is alright and lowers the costs of anything unexpected.

The downside of not buying insurance is simply exposing the balance sheet and ultimately the return to investors. Insurance acts as a smoothing vehicle and lends greater predictability to financial performance by minimizing the unexpected costs of periodic litigation. The amount of coverage a real estate professional requires should be determined by the nature of the firm’s operations, and whether the risk is primarily ‘operational’ (meaning management related) or ‘financial’ (meaning investment related). The size of the transactions and the financial complexity will be important considerations as well.

A claim under an E&O policy must allege negligence in either the performance of or failure to perform professional services. Errors and omissions insurance policies have a specific limit of liability and usually include both defense cost and damage awards or settlements within the limit of liability. Keep in mind that almost all E&O policies will not cover intentional, fraudulent or illegal activities but they will defend against these allegations until they are proven in a court of law.

Sourced from: https://www.linkedin.com/pulse/20140527193121-13380468-common-mistakes-made-with-real-estate-errors-and-omissions-insurance

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