What is the status of apartment owners with regard to insurance, when the developer/contractor abandons the project? Do they have to bear a deductible for third-party damage?
Jan 25, 2024
Question:
The residents contacted a developer to carry out a TAMA 38 project, and according to the commitment in their agreement, the developer is required to obtain contractor’s all-risk insurance (which would also cover the apartment owners, of course). In the insurance section for third-party liability, there is a deductible of up to 100,000 NIS.
If the developer runs into difficulties and has to "withdraw from the project," and a third party files a property damage claim, can the residents request in advance a clause in the insurance policy exempting them from paying the deductible?
Question :
Tenants contracted with a developer to carry out a TAMA 38 project and, in accordance with the commitment in the agreement between them, he was required to purchase contractor work insurance (which also protected the apartment owners, of course). In the third-party insurance section, there is a deductible of up to 100,000 shekels.
If the developer runs into difficulties and is forced to "exit the project," and a property damage claim is filed by a third party, can the tenants request in advance an exemption clause in the insurance policy from paying the deductible?
answer:
The answer is no and even more so. Here is the explanation.
Contractors and entrepreneurs in the field of urban renewal in Israel sometimes encounter financial and professional difficulties, and in some cases are forced to "abandon the project."
Therefore, in urban renewal projects, our recommendation is unequivocal - tenants should ensure that there is a clause in the contract that allows them to step into the shoes of the developer/contractor (the primary insured) in the insurance policy. Also remember that the departure of contractors and developers does not have to be due to financial circumstances alone, and sometimes it stems from disputes between the parties (regarding project management, schedules, turnover, etc.).
This is no small matter from the point of view of the tenants ( see more on this subject here ).
In such cases, when it comes to insurance, the interest of the apartment owners is that the insurance for the project will continue uninterrupted. However, as the contractor exits the project and the tenants "step into his shoes," this means receiving full rights (the very existence of the insurance) and also the obligations arising from the policy, including also bearing the burden of deductibles in the event of damage, in all sections of the policy, including in the event of third-party damage.
The transfer of ownership clause of the policy does expose tenants to co-payments and liabilities arising from the policy, but without it, their situation would be much worse. In its absence, apartment owners could find themselves not only with a project without insurance, but also with a project for which it is very difficult, if not impossible, to obtain new insurance.
In light of the changes that have occurred in the world of construction insurance in recent years, insurance companies are making it very difficult to provide insurance for an abandoned project. There are quite a few projects scattered throughout the country that have stalled due to a lack of insurance. In an urban renewal project, which concerns residential buildings in a dense and populated environment, this is doubly important due to the increased dangers in projects of this type, to passersby, to the built environment, and to the residents themselves in populated TAMA projects.
Answer:
The answer is negative, and even beyond that. Here’s the explanation.
Contractors and developers in the field of urban renewal in Israel sometimes encounter financial and professional difficulties, and in certain cases may be forced to “abandon the project.”
Therefore, in urban renewal projects, our recommendation is unequivocal: residents should ensure that the contract includes a clause allowing them to step into the shoes of the developer/contractor (the primary insured) under the insurance policy. Keep in mind that contractors or developers may leave a project not only for financial reasons but also due to disputes between the parties (regarding project management, timelines, compensation, and more).
This is not a trivial matter for the residents (see further discussion here). In such cases, regarding insurance, it is crucial that the project’s coverage continues uninterrupted. However, when the contractor exits the project and the residents “step into their shoes,” this entails assuming all rights (including the existence of insurance) as well as the obligations arising from the policy, including bearing any deductibles in case of damage, throughout all sections of the policy, including third-party liability.
The clause for transferring ownership of the insurance policy does expose residents to deductibles and obligations under the policy, but without it, the situation would be far worse. Without it, residents could find themselves not only with a project without insurance but also with a project for which obtaining new insurance is extremely difficult, if not impossible.
Due to changes in the construction insurance market in recent years, insurance companies have made it very difficult to provide coverage for abandoned projects. Across the country, many projects have stalled because of lack of insurance. In urban renewal initiatives involving residential buildings in dense, populated areas, this issue is even more critical due to the increased risks to passersby, the built environment, and the residents themselves in occupied strengthening projects under the TAMA framework.
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