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 Since the Contractor’s All Risks (CAR) policy is no longer valid and the risks facing the developer are substantial, it is crucial to arrange insurance coverage for the “waiting” units.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.
The insurance solution
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.
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