Unsold Apartment Inventory – Insurance and Liability Aspects
Jul 16, 2020
By: Kati Zisser, Insurance Companies Service Manager
One well-known phenomenon in the construction industry occurs when, despite the project being completed and the building receiving a Certificate of Completion (Form 4), not all apartments or units have been marketed or handed over. The reasons for this can be numerous and varied.
Whether marketing efforts did not yield full results, or partial occupancy occurred alongside delays in handing over other apartments or units (for example, due to incomplete payment by the buyer or individual construction adjustments), it is important to understand that apartments or units that have not yet been handed over or sold may be “uninsured.”
Unsold or undelivered apartments/units have significant value and fall under the developer’s responsibility. The developer may find themselves liable for damages to buyers and third parties due to risks such as fires, electrical short circuits, flooding, break-ins, malicious damage, and so on. Since the Contractor’s All Risks (CAR) policy is no longer valid and the risks facing the developer are substantial, it is crucial to arrange insurance coverage for the “waiting” units.
This is not a trivial matter. Companies operating on a large scale are often simultaneously responsible for dozens (if not hundreds) of unsold units in projects that were completed some time ago. In many cases, the requirement for insurance is dictated directly by the lending bank’s conditions. If the project’s loans have not been fully repaid, it is likely that the lender will require insurance for the unsold apartments.
From: Kati Zisser, Insurance Company Service Manager
One of the well-known phenomena in the construction industry is a situation where, even though the work on the project has been completed and the building has received Form 4, not all of the apartments/properties have been marketed and delivered. The reasons for this can be many and varied.
Whether the marketing efforts did not bear full fruit, or whether partial occupancy was carried out in parallel with a delay in the delivery of other apartments/properties (for example, due to the buyer's failure to complete payment or making individual construction adjustments), it is important to understand that the apartments that have not yet been delivered or have not yet been sold may be "uninsured."
The apartments/properties that have not been sold or have not yet been delivered are of great value and are under the responsibility of the developer . The developer may find himself liable for damages to buyers and third parties due to risks such as fires, electrical short circuits, flooding, burglaries, malicious damage, etc. Since the contractor's work policy is no longer valid, and since the risks facing the developer are significant, it is important to arrange insurance coverage for the "pending" apartments.
This is no small matter. Companies operating on a large scale are at almost any given moment responsible for dozens (if not hundreds) of apartments that have not yet been marketed in projects that have long since been completed. More than once, the requirement for insurance is derived from the direct instructions of the lending bank. Assuming that the loans for the project have not been fully repaid, it is likely that the lending bank will require insurance for the apartments that have not been marketed.
The insurance solution
Since we are dealing with a common phenomenon, we at the insurance agency receive many inquiries on the subject. First, we point out to the client that there are situations in which these apartments still benefit from the coverage of the contractor's work insurance.
The rule in construction work insurance is that the policy ceases to be valid according to the earlier of the two – the date of commencement of use and/or delivery, or the date specified in the policy. However, to the extent that some of the apartments have been delivered for use and some have not yet been sold, and to the extent that the work on the unsold apartments has not yet been completely completed, it may be possible to apply the protection of the construction work insurance policy to them. If the work on the apartments has been completed and they are only awaiting the delivery of the key that is delayed for one reason or another (such as payment), the construction policy will not be able to provide a solution. In these situations, there are two main solutions:
- Purchase standard home insurance – Purchase standard home insurance for each of the unsold apartments. This is home insurance that is not expensive. This solution is usually suitable for small and medium-sized entrepreneurs who do not "own" many apartments in this status.
- Purchasing "Apartment Inventory Insurance" as part of business insurance - purchasing business insurance that also includes property insurance for the company's entire apartment inventory. This solution may be suitable for large companies that frequently hold dozens/hundreds of apartments in pre-sale or pre-delivery status.
In conclusion,
Construction companies and developers frequently face insurance challenges that do not always receive full attention. Such is the situation described above, which describes the challenge of liability for unsold apartments, or apartments that have not yet been delivered to their buyers, whatever the reason.
Since we are dealing with assets that are of great value, this should not be taken lightly. Entrepreneurs and contractors must ensure at all times that their work, as well as assets under their responsibility, are covered by an appropriate insurance policy.
Since this is a common phenomenon, our insurance agency receives many inquiries on the subject. First, we inform clients that in some cases, these apartments may still be covered under the Contractor’s All Risks (CAR) policy.
The general rule in CAR insurance is that the policy expires on the earlier of two dates – the start of use or handover, or the date specified in the policy. However, if some apartments have been handed over and others remain unsold, and if work on the unsold apartments is not yet fully completed, it may be possible to apply the CAR policy’s coverage to those units. If the work on the apartments is complete and they are simply awaiting handover of keys that is delayed for some reason (e.g., payment), the CAR policy will not provide coverage. In these situations, there are two main solutions:
1. Standard home insurance – Purchasing a standard home insurance policy for each of the unsold apartments. This type of insurance is relatively inexpensive and is usually suitable for small to medium-sized developers who do not hold a large number of units in this status.
2. “Apartment inventory insurance” within a commercial policy – Purchasing a commercial insurance policy that also includes property insurance for all of the company’s apartment inventory. This solution may be suitable for large companies that regularly hold dozens or hundreds of apartments in a pre-sale or pre-handover status.
In conclusion:
Companies and developers involved in construction frequently face insurance challenges that do not always receive full attention. One such challenge, as described above, is the liability for unsold apartments or apartments that have not yet been delivered to their buyers, for whatever reason.
Since these are high-value assets, this issue cannot be taken lightly. Developers and contractors must ensure at all times that both their work and the assets under their responsibility are covered by an appropriate insurance policy.
מסמכים
