Handing over a structure without Form 4 – Insurance aspects for contractors/developers
Jul 12, 2022
By: Itzick Simon
The reality in the real estate industry in Israel creates quite a few situations in which apartments and buildings are delivered or transferred to buyers before Form 4 has been received for them. That is, before the building permit holder has submitted all the relevant documents to the local authority and received final approval for occupancy and connection to infrastructure.
Since the handover of apartments before Form 4 is done (too frequently), it is important to shine a spotlight on the issue in terms of the insurance aspects involved. We will try to do this briefly in the list below.
Why do contractors and developers ask to submit before receiving Form 4 and occupancy approval?
A common example of a situation where delivery is made before Form 4 and occupancy approval can be when a developer leads a TAMA 38/1 project and allows a tenant who purchased one of the developer's apartments (the new apartments built on the roof of the building) to enter the property and make renovations and adjustments.
Contractors and developers often fall behind schedule and find themselves "pushed to the wall" in terms of late deliveries, fines, and the fear of being sued for "breach of contract." Often, they seek to deal with the situation by allowing tenants to enter the property and perform various (non-residential) activities.
This is doubly evident when the delays do not stem solely from the construction work but are rooted in administrative obstacles (related, for example, to dealing with the local authority and/or the Planning and Building Committee). The contractor who is delayed feels helpless and believes that submitting Form 4 ahead of time will slightly reduce the level of pressure he is under.
It should be emphasized right away that, from an insurance perspective, delivery before Form 4 is problematic, to say the least . On the one hand, contractor work insurance is still valid, but not for private work ordered by tenants, and on the other hand, in most policies accepted in Israel for product liability insurance, the condition for coverage is "Form 4 and occupancy approval."
This is a kind of gray interim period that puts the entire project at risk. For example, the lack of a clear identity of an insurer following a fire in the new buyer's apartment that caused heavy damage to neighboring apartments, the common property, and even the entire building.
A common example of a situation involving handover before Form 4 and occupancy approval can occur when a developer leads a TAMA 38/1 project and allows a buyer of one of the developer’s new apartments (built on the building’s roof) to enter the property to carry out renovations and adjustments.
Often, contractors and developers experience delays in their schedules and find themselves “pushed against the wall” regarding late delivery, fines, and the risk of being sued for “breach of contract.” Frequently, they try to manage the situation by allowing residents to enter the property and perform various activities (not for habitation).
This situation is particularly noticeable when the delays are not caused purely by construction work but are rooted in administrative obstacles (for example, dealings with the local authority and/or the planning and building committee). A contractor who is delayed feels helpless and believes that handover before Form 4 may slightly reduce the pressure they are under.
It should be emphasized immediately that, from an insurance perspective, handover before Form 4 is problematic, to say the least. On the one hand, contractors’ works insurance is still valid, but it does not cover private work commissioned by residents. On the other hand, in most standard liability insurance policies in Israel, the condition for coverage is “Form 4 and occupancy approval.”
This creates a kind of gray interim period that puts the entire project at risk. For example, there may be no clear identification of the insurer in the event of a fire in the new buyer’s apartment that causes significant damage to adjacent apartments, common property, or even the entire building.
At our insurance agency, which has been dealing with construction insurance for over 30 years, we are sometimes asked to find creative solutions for contractors and developers who are interested - despite the risks - in handing over the building or part of it before Form 4.
The best course of action here is to encourage the contractor/developer to avoid the move and to expedite the receipt of an occupancy permit form as much as possible. If there is no escape, the developer is required to handle the legal aspects and seek the advice of his lawyers, and we are sometimes asked to prepare an insurance supplement that may be appropriate to reduce the risk.
For example, it is necessary to require the buyer who enters the property before receiving Form 4 to declare his responsibility for damages and even ask him to present proof of insurance for the work he is planning upon handing over the key. This is an incomplete solution but can be helpful.
Another important rule is to make sure that the work done in the apartment by the buyer will not delay the receipt of Form 4 for the entire building. It is advisable to limit them to a clear and predefined time period that corresponds with the pace of the work and the schedules for receiving the occupancy permit form for the building.
Why does the buyer's private insurance not provide full coverage? There could be several reasons for this, and a "classic" example can be given. Private insurance will likely be purchased against the property value of an apartment whose construction cost (for the purpose of this article) is approximately 1 million shekels. This is while damage from events in the apartment that exceed the common property or to other apartments (such as a fire or flood) could damage the entire building, which is worth tens of millions of shekels. In other words, the apartment owner will not be protected for the entire aforementioned amount, and things are clear.
Is there a solution for insurance before submitting Form 4?
An important issue that must be emphasized is that renovation work can be just as dangerous as "regular" construction work, and even more so . Studies that examine the construction industry in terms of work accidents repeatedly find the renovation industry to be one of the most dangerous in Israel.
According to data from the Israel Renovation Contractors Association, every year 1 in 10 renovation contractors is injured at work, either by themselves or their employees. In 60% of cases, this is due to the use of tools, in 30% of cases due to a fall from a height, and in about 6% due to electrocution.
This means that the tenant who takes possession of an apartment before Form 4 and brings in renovation contractors to make adjustments is " in a risk group ." Whether he contracts with a main renovation contractor (and is defined as the "work commissioner") or whether he works with several professional contractors (and is defined as the "construction operator").
In this regard, it is also possible to mention a solution that can eliminate the need to hand over the apartment before Form 4, which is the performance of the private adaptation and renovation work by the main contractor, while increasing the value of the work and including it under the umbrella of the contractor's policy for the entire project. This is a correct and common solution in TAMA 38/1 projects that are based on strengthening and expansion, when tenants want to do private renovation in their apartment alongside the renovation work on the property and building.
The big risk in renovation work before Form 4
In conclusion,
Handing over a building without Form 4 is a move that should be avoided. Bodily or property damage that occurs in the interim period between handing over the key and receiving the final occupancy approval form may fall between the chairs and onto the shoulders of the tenants and/or contractors/developers.
While there are certain insurance solutions that can reduce exposure if there is no choice, it is best not to resort to them. In any case, it is advisable to consult with the entrepreneur's legal advisor, who specializes in the subject and is knowledgeable in the field beyond his or her knowledge.
Handing over a building without Form 4 is a move that should be avoided. Bodily or property damage that occurs in the interim period between handing over the key and receiving the final occupancy approval form may fall between the chairs and onto the shoulders of the tenants and/or contractors/developers.
While there are certain insurance solutions that can reduce exposure if there is no choice, it is best not to resort to them. In any case, it is advisable to consult with the entrepreneur's legal advisor, who specializes in the subject and is knowledgeable in the field beyond his or her knowledge.
