Commercial real estate liabilities insurance: what are my options?

Aug 4, 2022
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Liability for commercial real estate developers can be a tricky minefield to navigate. Developers aren’t just responsible for making sure their own risks are taken care of, but they also need to stay on top of whether their general contractors (GCs), contractors and subcontractors have the right coverage for that project too.

For the scale of projects our clients work on, basic liability policies can leave them open to expensive gaps in coverage. Going into a project, their GCs will carry a general liability insurance policy, and their subcontractors will do the same. But while that covers them for construction related events, they might not be covered under those policies for anything non-construction, like slip and fall.

Even if the developer has a premises liability policy in place for these incidents, it’s very ‘bare bones’, leaving them open to a litany of other possible liability issues.

For the smaller projects, developers can get most of the protection arranged through a contractual risk transfer – this is where we’ll assess everyone’s policies, make sure everyone’s suitably covered, and help place each liability with the party most suited to cover that risk.

 

Have you considered ‘project specific’ liability products?

But there are other sophisticated insurance products on the market that work on a ‘project specific’ basis that we can pull in to complement a contractual risk transfer. Or in some cases, completely replace it.

The type of product they choose depends on two things. How broad the client wants the coverage to be (who is insured under the policy, which coverages are included etc.) and what’s available to the project depending on where it’s located.

Here are the products out there we’re advising our clients on. We’ve listed them in order of how much coverage they offer (from the least to the most).

 

Owner’s Interest Policy (OIP)

  • Covers the developer’s liabilities
  • Steps in when GCs/subcontractors exhaust the limit on their policies
  • Includes a ‘products and completed operations tail’

This product goes above and beyond what the GCs liability insurance covers – not only does it cover premises liability, but it will also cover the developer if the limits on the contractors or sub-contractors’ policies are exhausted. Or even pick up something their policy hasn’t covered them for.

An OIP can also include what’s called a ‘products and completed operations’ tail.  which covers the subcontractor for any construction issue that occurs after construction has finished. By endorsing an extended reporting period for products and completed operations, the developer protects themselves against potential construction defect claims post completion.  By marrying the reporting period with the statute of limitations where the project is domiciled, we remove any chance of a gap in the event the GC/subcontractor has changed their program or even dissolved.

For example, a sprinkler subcontractor does their installation during the course of normal construction, completes their work, and leaves the site.  The sprinkler contractor had their own insurance, and the GC correctly collected a certificate of insurance.  Two years post construction a sauna on site is in use and it turns out the sprinkler subcontractor has used the wrong equipment causing the system to react, flooding and ruining the sauna.  Because there was an extended reporting period on the Owners Interest policy a claim is filed, and the damage/repair caused by the construction defect is a covered claim.  The Owners Interest carrier may well subrogate down to the GC or Subcontractor but, regardless if those groups have changed their insurance program, sold, or dissolved, coverage is in place.

OIPs (and the following products) are able to pick up an extended reporting period for these types of claims. As mentioned above it’s imperative to match whatever the statute of repose is for construction defect claims in the state you’re building. Some states are six years, others can be as much as ten.

 

Dual Interest Policy

  • Covers general liability for Developer and GCs
  • Includes a ‘products and completed operations tail’
  • Removes ambiguity
  • Eliminates ‘pass through’

The next step up is a Dual Interest policy. The major clue to this policy is in the name – a Dual Interest has two insured interests on the policy, where both the developer and GC are included as first-named insureds.

These are great in a number of ways. First, it takes away any of the ambiguity in the event of a claim, as the same insurer is representing both parties. And it also removes any pass-through costs from the GC to the developer.

When not using a Dual Interest, every GC doing the construction for a developer needs to carry their own liability, but they’re not going to do it for free – they’re going to pass through those costs to the developer. So if their insurance premium is $1m for the year and this project represents 30% of their billables for that period, they’re going to pass through $300k to the developer for the cost of carrying that insurance, many times with a markup.

With a Dual Interest policy, the GC won’t need to pass through any of those general liability costs. They no longer report their receipts against their own traditional policy, but onto the policy for the project. The Dual Interest.

And the insurances cost to the developer are relatively the same. So they’re able to broaden the amount of coverage they can get at very little extra cost to the project.

 

General Liability-Only Wrap (GL-Only Wrap)

  • Covers general liability for developers, GCs, and subcontractors
  • Includes ‘products and completed operations tail’
  • Eliminates pass through
  • Removes ambiguity

The GL-Wrap takes on the general liabilities for the developer, the GC, and the subcontractors. So, the same pass through you eliminate from the GC is now eliminated from the subcontractors too.

It’s specific to GL because it’s designed to wrap all of the general liability of the project into one policy and, again, takes away any ambiguity around which policy should pick up a claim.

It makes sure 100% of the subcontractors are carrying that ‘products and completed operations tail’. This removes some of the legwork when reviewing subcontractor certificates and renewals.  The only coverage that needs to be verified is the workers compensation, coverage for off-site activities, and any other ancillary coverage required by contract as a result of their work.  The GL coverage for the project is identical for all enrolled parties as soon as they step on site.

So while the actual premium gets bigger, the overall insurance costs to the project generally stay relatively flat, and the coverage you get is that much broader.

 

Owner Controlled Insurance Program (OCIP)

  • Covers everyone’s liabilities, including workers’ compensation
  • Includes ‘products and completed operations tail’
  • Removes ambiguity
  • Eliminates pass through
  • Adds administrative fees

As far as project-specific policies go, OCIP is the most comprehensive in terms of coverage. Whereas GL-only takes on just the general liability for the developer, GC, and subcontractors, OCIP takes on everything, including workers’ compensation.

Again, it does everything all the other products do. It eliminates pass through, takes away ambiguity in the event of a claim – as everything’s reported to the same place – and you get that extra layer of liability protection on top.

A downside is that there’s a lot of data to collect. Every subcontractor that comes on site has to calculate their general liability rate, their umbrella rate, their workers’ compensation rates, and also follow certain protocols that the project has in place. Paying a third-party administrator to keep track of everything comes at a cost.

To put those costs into perspective, in New York City an OCIP generally only starts to make sense when a project is $400m and above. So even though it’s the broadest coverage available for developers, it doesn’t always make the most financial sense when the barrier to entry is set so high.

Outside of the city, however, it becomes easier to place an OCIP on a project around the $150m-$200m range – this is where our regional expertise helps make sure the client gets just the right amount of coverage, and at a price that matches their budget.

 

OCIP isn’t the be-all and end-all

Even though OCIP is the most comprehensive in terms of coverage, that’s not to say you can’t be protected by combining an Owner’s Interest Policy with a really good risk transfer. It just means the importance of the contractual review and insurance requirements is much higher.

For instance, say you’re relying on a general contractor’s practice policy to provide the general liability, as well as the products and completed operations coverage for your project, it’s important to know you’re not sharing that liability with another project.

You can’t always see what other work your general contractor is doing at any given time. They might be only carrying a $250m limit on their policy, but actually doing upwards of $400m of construction, and you need to know your agent is doing enough work to make sure these details never go unnoticed.

You don’t want to find yourself in a position where you can’t make a claim on a project because your GC’s coverage limits have been exhausted elsewhere.

 

Talk to your agent early to find the best match

We always see ourselves as an extension of our client’s risk management team, so we like to start having conversations around the insurance route they want to take months before construction gets started.

It helps us get a clear view of your priorities, budget, how familiar you are with your GCs/subcontractors etc. This is also a point where you can tell us what methods, if any, you’ve used before and would prefer to stick with.

Our team has decades of experience working in commercial real estate, both from the insurance side and the developer’s perspective so we’ve got a 360-degree view of what each person needs at each stage. We’ve placed insurance all over the country, so we know how to help you navigate different legal frameworks, depending on your project’s location.

We’re comfortable working several ways and can adapt to how you and your partners prefer to work. And if you’re a new player to this type of market, we can help you breakdown your different options and help you find your most ideal fit.

 

Speak to Varney about your next project

In a market like this, it’s not enough to just have an agent with a strong technical hold on what’s available on the insurance market. You need a team you can rely on to go that bit further – who knows the level of due diligence these projects demand, and can make sure you’ve got all your bases covered and go into every project with just the right level of insurance.

If you’ve got a project coming up, feel free to get in touch with me directly. I’d be more than happy to set up a time for us both to talk.

 

Jack Cowie, Senior Vice President

jcowie@varneyagency.com

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