Abandonment of the TAMA 38 reinforcement project in the middle of the works - the insurance implications
Apr 4, 2020
By: Itzick Simon, CEO
"The inexperienced developer who entered TAMA 38 that is bigger than him" cried the headline in Calcalist (February 2020), "Victims of TAMA 38: The residents who have been living in a nightmare for 6 years," wrote Globes (June 2017), "The contractor of TAMA 38 abandoned - the residents lived for years among the ruins," reported in Walla (October 2015).
Projects according to TAMA 38 are indeed an excellent key to urban renewal, but are also considered "high-risk projects." The tempting opportunities on the part of the tenants, who are already imagining the luxurious lobby, the state-of-the-art elevator, the building management system, the external development and the increase in value, as well as on the part of the executive and economic factors - the contractor and the developer - make the outline very popular. The competition for the hearts of tenants on the part of developers results in unreasonable price offers, far-reaching promises, the phenomenon of "scammers," and more. As a result of this, we are unfortunately witnessing a widespread phenomenon of business failures and abandonment of projects by contractors or developers.
By: Itzick Simon, CEO
"The inexperienced developer who entered TAMA 38 that is bigger than him" cried the headline in Calcalist (February 2020), "Victims of TAMA 38: The residents who have been living in a nightmare for 6 years," wrote Globes (June 2017), "The contractor of TAMA 38 abandoned - the residents lived for years among the ruins," reported in Walla (October 2015).
Projects according to TAMA 38 are indeed an excellent key to urban renewal, but are also considered "high-risk projects."
The tempting opportunities on the part of the tenants, who are already imagining the luxurious lobby, the state-of-the-art elevator, the building management system, the external development and the increase in value, as well as on the part of the executive and economic factors - the contractor and the developer - make the outline very popular.
The competition for the hearts of tenants on the part of developers results in unreasonable price offers, far-reaching promises, the phenomenon of "scammers," and more. As a result of this, we are unfortunately witnessing a widespread phenomenon of business failures and abandonment of projects by contractors or developers.
Reasons for abandoning TAMA 38 projects
Abandonment of TAMA 38 projects can be on the part of the developer or the contractor, and the reasons are many and varied. From the developers' perspective, it often turns out that there is a huge gap between the high expectations and hopes regarding the economic profit, and the reality on the ground as the stages progress. More often than not, the developer realizes too late that the reality is far from the original plan. Financing difficulties are burdensome, management is oppressive, hopes have been dashed - and sometimes he finds himself losing out on the project.
As an insurance agency that has been working in the field of urban renewal for decades, we have unfortunately encountered and heard of quite a few entrepreneurs who entered into TAMA 38 projects without taking into account the complexity and entanglements along the way, which exist at almost every construction site. Lack of experience and lack of skill, as well as weak financial backing, constitute a sure recipe for the collapse of these entrepreneurs.
Sometimes abandonment stems from identical symptoms in contractors who seek to win a project with an attractive cost, but when they are required to perform the contract, they discover that the price quote given cannot afford the work.
Of course, there are also situations in which the tenants "abandon" the developer or contractor following disputes, and in general, it can be said that the triangle of the tenant-developer-contractor relationship is very delicate in TAMA 38.
Abandonment of TAMA 38 projects can be on the part of the developer or the contractor, and the reasons are many and varied. From the developers' perspective, it often turns out that there is a huge gap between the high expectations and hopes regarding the economic profit, and the reality on the ground as the stages progress. More often than not, the developer realizes too late that the reality is far from the original plan. Financing difficulties are burdensome, management is oppressive, hopes have been dashed - and sometimes he finds himself losing out on the project. As an insurance agency that has been working in the field of urban renewal for decades, we have unfortunately encountered and heard of quite a few entrepreneurs who entered into TAMA 38 projects without taking into account the complexity and entanglements along the way, which exist at almost every construction site. Lack of experience and lack of skill, as well as weak financial backing, constitute a sure recipe for the collapse of these entrepreneurs.
Sometimes abandonment stems from identical symptoms in contractors who seek to win a project with an attractive cost, but when they are required to perform the contract, they discover that the price quote given cannot afford the work.
Of course, there are also situations in which the tenants "abandon" the developer or contractor following disputes, and in general, it can be said that the triangle of the tenant-developer-contractor relationship is very delicate in TAMA 38.
An abandoned project – sometimes an insurance challenge
The consequences of a situation where work on the site stops are extremely significant. Especially in TAMA 38 (1-3) projects to strengthen the structure and build additional floors and apartments, where the residents continue to live on site. The residents are in fact living on a construction site where there are many risks and obstacles, lurking for them, their families, and visitors (passers-by, service personnel, guests, etc.). The quality of life of the residents is also affected. What was supposed to be a two-three-year disruption is becoming a routine with no end in sight.
Alongside the legal and contractual complexity, as well as the financial costs and understandable concerns, it is important to know that abandoning a contractor/entrepreneur has insurance implications. Sometimes dramatic and extreme. In order to bring some order to the issue, we will briefly explain the main points here.
Contractor turnover is, unfortunately, a common phenomenon in TAMA 38 projects. In this case, it is necessary to carefully check whether the contractor's insurance has been purchased by the contractor or developer.
To the extent that the policy was purchased by the developer , and he is defined as the primary insured , the developer must find an alternative contractor. Although this may involve a delay in the schedules, as finding a good and available contractor is a task that can take several months, the tenants are certainly entitled to peace of mind. However, it is important for the tenants to ensure that the developer takes care in the interim period to maintain the safety of the site, remove obstacles and keep the site organized, tidy, clean and safe.
One of our main emphases at the Itzick Simon Insurance Agency, which has specialized in TAMA 38 insurance for about 15 years (and in construction insurance in general for over 30 years), is that the policy be purchased by the developer and not by the contractor . This way, when contractors change, the insurance policy is still valid and all the developer has to do is find a suitable contractor, without any harm to the continuation and continuity of the insurance coverage.
If the abandoned contractor is the primary insured policyholder on the contractor's policy, we are in a completely different situation. In this case, the project may be left without valid insurance .
Often the first step of the departing contractor will be to contact the insurance company and notify them of the termination of their activity on the project (in order to receive a proportional refund of the insurance premiums). Now, the developer is in a challenging situation, as they must both find a new contractor and purchase a contractor insurance policy.
This is no small matter. Not every contractor will willingly enter into a project that was abandoned in the middle of work (since he does not really know what the factors were that led to the departure of his predecessor), especially good quality contractors. In addition, the insurance company may make it difficult to draw up a contractor work insurance policy for a project on which work has been stopped. Often it will refuse to issue the policy at all, and sometimes it will demand high premiums and strict accompanying conditions for it.
The contractor abandoned, what is the insurance implication?
Similar to the abandonment of contractors, the abandonment of developers is also not uncommon in TAMA 38 projects. Developers seek to leave projects at various stages in the process. For example, difficulty obtaining bank financing after receiving a building permit, discovery of unexpected engineering difficulties, disputes with tenants, unexpected costs without financial backing, difficulty in contracting with an operating contractor, and so on.
There are cases in which a dispute between the tenants and the developer leads the former to try to "fire" the latter. For example, by attempting to open the contract under circumstances of non-compliance with a condition considered a "violation" and to make it an "improvement clause." To this must be added tenants who, in such circumstances, believe that they can lead the project themselves, better than the developer, and try to push him out.
From an insurance perspective, this is a complex issue if the developer is evicted after work has already begun on the site. To the extent that the developer was the one who purchased the contractor's work policy, upon his departure the tenants are left without valid and appropriate insurance. Any accident or incident that occurs on site, without an alternative insurance policy being purchased, could place them as liable for damages.
This is why we recommend that in TAMA 38 projects, it is not enough for a contractor's insurance policy to be purchased by the developer and not by the contractor, but rather that it include a clause that allows the tenants to step into the shoes of the policyholder and the main insured, if the developer leaves . This clause does indeed make the tenants the policyholders and the main insured, but it allows them to benefit from continued insurance coverage for the project, and this is a matter of great importance.
The entrepreneur is quitting, what do we do?
In conclusion, the end of TAMA 38 insurance with forethought
TAMA 38 projects are high-risk projects. Contractors and developers abandoning these projects is not uncommon, and from an insurance perspective, these departures have dramatic implications for the tenants. To prevent situations in which the project will be uninsured, a number of preparatory and protective steps can be taken in advance. As the saying goes, the end of the matter is in the first place:
> The developer as the primary insured – When tenants contract with a developer for a TAMA 38 project, it is very important to ensure that the developer will be the primary insured in the contractor's insurance policy. This is to prevent an impact on the policy in the event of a change of contractors.
> A clause that discusses replacing the policyholder in the event of a developer leaving – In addition to making sure that the developer is the primary insured, a clause should be included in the policy whereby the tenants can step into the shoes of the policyholder and the primary insured (the developer), in the event that he leaves the project for any reason.
> Approval of the contractor by the tenants – In the contract between the tenants and the developer, it is very useful to stipulate that the contractor chosen will be subject to the approval of the tenants. This is to allow the tenants to ensure that the developer is not only contracting with the cheapest contractor but also that he is careful to choose a contractor with experience in TAMA 38 projects. The field of urban renewal is a field in which the well-known saying "There is no wiser than the experienced" is stated even more strongly.
> Guarantees and collateral – As part of the agreement with the developer, tenants must ensure appropriate guarantees and collateral. For example, insofar as projects are concerned according to TAMA 38/1, it is worth verifying the existence of a performance guarantee. The guarantee is given to tenants near the start of work and is held in trust by their lawyer. A performance guarantee allows tenants who live in the building to repay it following a breach of agreement by the developer, a change of contractors, and the like.
TAMA 38 projects are high-risk projects. Contractors and developers abandoning these projects is not uncommon, and from an insurance perspective, these departures have dramatic implications for the tenants. To prevent situations in which the project will be uninsured, a number of preparatory and protective steps can be taken in advance. As the saying goes, the end of the matter is in the first place:
> The developer as the primary insured – When tenants contract with a developer for a TAMA 38 project, it is very important to ensure that the developer will be the primary insured in the contractor's insurance policy. This is to prevent an impact on the policy in the event of a change of contractors.
> A clause that discusses replacing the policyholder in the event of a developer leaving – In addition to making sure that the developer is the primary insured, a clause should be included in the policy whereby the tenants can step into the shoes of the policyholder and the primary insured (the developer), in the event that he leaves the project for any reason.
> Approval of the contractor by the tenants – In the contract between the tenants and the developer, it is very useful to stipulate that the contractor chosen will be subject to the approval of the tenants. This is to allow the tenants to ensure that the developer is not only contracting with the cheapest contractor but also that he is careful to choose a contractor with experience in TAMA 38 projects. The field of urban renewal is a field in which the well-known saying "There is no wiser than the experienced" is stated even more strongly.
> Guarantees and collateral – As part of the agreement with the developer, tenants must ensure appropriate guarantees and collateral. For example, insofar as projects are concerned according to TAMA 38/1, it is worth verifying the existence of a performance guarantee. The guarantee is given to tenants near the start of work and is held in trust by their lawyer. A performance guarantee allows tenants who live in the building to repay it following a breach of agreement by the developer, a change of contractors, and the like.
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