The apartment business is booming right now. Unfortunately, construction defects persist as well, particularly in garden-style and wood-framed construction. Most developers are savvy enough to maintain a good insurance program, but many do not understand (until too late) that the policies they bought may not cover the risk of construction defects.
As an owner-developer, neither your property insurance policy (including your builder’s risk policy) nor your general liability policy is likely to protect you from the cost of repairing defects to property you own. Most likely, your property policy has an exclusion for any damages caused by defects in construction or design. And your liability policy has exclusions for property damage to any property you currently “own, rent, or occupy.” (See exclusion J(1) below.)
Even more surprising to some is another exclusion that prevents coverage for property damage to property that you “sell, give away or abandon” (known as the “alienated property exclusion”). (See exclusion J(2) below) This means that for projects you develop, occupy (i.e., rent) and sell, you likely have no coverage during your occupancy of that project or after you sell (whether to unit owners through a condo conversion or to another apartment owner).
j. Damage to Property
“Property damage” to:
(1) Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property;
(2) Premises you sell, give away or abandon, if the “property damage” arises out of any part of those premises;
Upon learning of this unfortunate situation, many developers ask: What good is the policy if it doesn’t cover me when I own the project and it doesn’t cover me after I sell it? Good question. The insurer’s response is that the policy only covers damage to other people’s property (like the project next door), not damage to your own property or the property you once occupied and sold. Strangely, if you sell the project before you occupy it, coverage is more likely.
Solutions? There are steps you can take to minimize your risk:
(1) always sell your project under a strongly worded and very broad “as-is” clause;
(2) recognize that even an “as-is” clause won’t protect you from suits for fraud or concealment (and that your insurance usually won’t cover intentional bad acts either);
(3) consider purchasing a special endorsement to your policy that gets around the “alienated property exclusion,” if available;
(4) consider a separate “tail policy” to cover the risks arising out of property you developed, occupied and sold, if available;
(5) ensure that your design and construction team have policies that contain broad coverage and adequate dollar limits;
(6) ensure that your contracts require the design and construction team policies to remain in place for the full statute of repose, even if the claim comes after any sale or disposition of the property;
(7) ensure that your design and construction contracts avoid any limitations on liability or waivers of damages; and
(8) include in your contracts a strong indemnity clause that might (in some jurisdictions) allow you to seek protection under the design and construction policies even after the original statute of repose has run.
Finally, recognize that the statute of limitations or repose applicable to claims against you may be longer than the limitations periods applicable to your claims against the design and construction team. The act of any repair or remodel work by you, or the act of sale or disposition, may start a new limitations period for claims against you arising out of the repair, remodel or sale. This new limitations period would likely not, however, extend the liability of your contractors and designers (or their insurance policies) unless they were directly involved in the repair or remodel work.