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When do Contractors All Risks policies for residential construction projects need to be extended? Is an extension superfluous if a certificate of occupancy has already been issued?

By Itzick Simon

In this article we will discuss an important aspect of residential construction projects – extending the period of insurance. In another article we will discuss the inherent complexity of the terms “expiry of the period of insurance” and “the completion date of the works” in the construction of office, commercial and industrial buildings.

Does obtaining a certificate of occupancy constitute a sufficient reason to forego extending a Contractors All Risks policy that has expired? We shall discuss this question with reference to an actual case (certain details have been changed to protect confidentiality):

A contractor arranged a Contractors All Risks policy for a residential construction project in the centre of Israel, which was due to expire shortly after a partial certificate of occupancy was obtained. In other words, some of the apartments were occupied, and some were not and remained in the possession of the contractor. The insured was advised by a clerk from the bank that financed the project that there is no need to extend the policy and he acted accordingly.

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“What’s the risk?” the contractor thought to himself. “Not only have around 85% of the apartments been handed-over, but all of the remaining apartments are in the process of being sold and the purchasers are just waiting for the keys”. In this case, as we have seen all too often in the construction industry, Murphy’s Law works overtime.

What happened? Whilst modification works for the purchasers of these apartments were still in progress, a fire broke out and spread around in the building and some of the apartments that had not yet been handed-over were severely damaged. Since they were still in the possession of the contractor and the Contractors All Risks policy had expired, the event fell between the cracks – there was no safety net and no insurance cover.

Now let’s address the term “expiry of the period of insurance” in a typical Contractors All Risks policy in the Israeli market such as BIT or Pisga:

“The insurance cover will expire immediately in respect of those parts of the insured works which are handed-over to the principal or which are put into service, other than during the testing and commissioning period; the earlier of these dates, and the same also applies where the insured works are fully handed-over to the principal, or if they are put into service, or if the project covered under this policy is completed. The insurance cover will expire immediately on the first of the aforementioned dates, even if this date precedes the date shown in the policy schedule as the expiry of the period of insurance. In no case shall the insurance cover continue beyond the expiry date of the period of insurance shown in the policy schedule, other than if the insurer has given prior agreement in writing to the contrary”.

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So what’s the solution?

The bottom line is that merely obtaining a certificate of occupancy does not necessarily justify terminating the Contractors All Risks policy. If the developer or contractor is still in actual possession of property which has not yet been handed-over and is still being adapted to the requirements of the purchasers, it is technically still a construction site to all intents and purposes.

This is especially so when workers are still involved in finishing or modification works, arranging pre-hand over inspections, fitting-out works and the like.

 

The key questions are “Has the property been handed-over?” and/or “Are works still taking place in the apartment?” (including minor finishing works), to differentiate from parts of the project which the purchasers have taken actual possession of after the sale has been completed.

So when does a Contractors All Risks policy need to be extended and when does it not?

  1. If a certificate of occupancy has been issued and the apartment has been handed-over the purchasers – There is no need to include the value of such property in the sum insured for any extension period required.

The extended maintenance period extension in the policy includes third party liability and employers liability in connection with maintenance repairs for 12-24 from completion of the project (as stated in the policy).

  1. Apartments in the process of being sold but which have not yet been handed-over – The cover should be extended and the sum insured should reflect the reconstruction value of this property.

  2. Apartments in the process of being sold in which the works have not yet been completed and/or there are outstanding modification or finishing works – The cover should be extended and the sum insured should reflect the reconstruction value of this property.

  3. Stocks of apartments which have not yet been sold – If a certificate of occupancy has been issued, and if work on these apartments has been completed, the Contractors All Risks policy should not be extended to cover them, and it is important to arrange a regular Extended Fire policy to cover such property.

  4. Common parts which have been formally handed-over and are being used – There is no need to extend the policy to cover such property.

The extended maintenance period extension in the policy includes third party liability and employers liability in connection with maintenance repairs for 12-24 from completion of the project (as stated in the policy).

  1. Common parts which have not yet been formally handed-over – The policy should be extended for the reconstruction cost of these spaces if they are still in the process of final inspections and finishing works.

Please note:

The rule of thumb is that for as long as any works are still underway and workers, contractors, subcontractors, suppliers or other tradesman are still present on the site, even on an occasional basis, and if possession is more tilted in your favour during the interim period, it would be advisable to extend the Contractors All Risks policy until the final hand-over.

Climate change impacts construction methods and construction insurance. For several years, the international broker and risk management firm Marsh McLennan has been publishing a periodic report with global forecasts for construction and details of how climate change impacts various aspects of the industry. Research conducted by Marsh reveals some noteworthy data, such as:

  • Extreme weather events (such as snowstorms or floods) lead to delays of up to 45% in construction sites around the world.

  • In projects conducted by the United States Air Force, it was found that for every 1ºC rise in temperature above 28ºC, construction worker productivity can decrease by as much as 57%!

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The broker makes an important recommendation: “In order maintain a competitive edge and continue to be able to operate in these conditions, contractors would be wise to internalise these risks, classify and manage with to improve resilience.”

They also emphasise that decisions concerning the quality of foundations, building separations, elevations, combustible materials, as well as wind and heat insulation, not only need to adequately withstand the current environment but also “potential future environmental conditions.”

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Is it possible to suffice with the “Extended Maintenance Period” extension in the policy?

Contractors All Risks insurance albeit (usually) includes a 12-24 month maintenance period, although this extension provides limited cover for damage occurring during maintenance work after hand-over. The cover under this extension is “switched-on” when maintenance workers arrive at the site and “switched-off” as soon as they leave. The extension does not cover parts of the property which have not yet been handed-over, regardless of whether the policy covers a residential, commercial or civil engineering project.

When should a regular Extended Fire policy be arranged instead of extending the Contractors All Risks policy?

Extending a Contractors All Risks policy is pointless, and the correct solution is to arrange a regular property damage policy to cover buildings and liability, in the following cases:​

1. The building is “stuck” without a certificate of occupancy 
If the project has been completed, there are no workers or suppliers at the site and all of the works have finished.
Notwithstanding, the question of whether a certificate of occupancy has been issued is an important consideration, since the process of obtaining it involves various physical inspections which are an integral part of the project, and if this process is still underway it will generally be advisable to extend the period of insurance of the Contractors All Risks policy, however each case needs to be considered on its merits.
2. Stocks of apartments which have not been sold
If the project has been completed, there are no workers or suppliers on the site, all of the works have been completed and a certificate of occupancy has been issued, but some of the apartments remain unsold – regular property and liability insurance needs to be arranged until they are sold.
3. Stocks of apartments which have not yet been handed-over
If the project has been completed, there are no workers or suppliers on site and all of the works have been completed and a certificate of occupancy has been issued, but certain apartments are still owned by the developer for technical / bureaucratic reasons connected to the purchasers, outstanding payments and the like – regular property and liability insurance needs to be arranged until the completion has taken place.
4. Apartments which are kept as investment property
If the developer keeps some of the apartments with the intention of renting them after all of the works have been completed and a certificate of occupancy has been issued – regular property and liability insurance should be arranged.
 

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To conclude:

Contractors, developers and anyone insured under a Contractors All Risks policy – The cover needs to remain valid until all or part of the project is handed-over if inspections / finishing works are still underway and formal hand-over has not yet taken place.

Overlooking the need to extend the policy can have catastrophic consequences in the event of a loss and as we know all too well – things can go wrong exactly when we are not expecting them.

Unsure if and how to extend your policy? Contact Itzick Simon Insurance Agency. We have been specialising in construction insurance for the last 35 years and have the knowledge and experience to deal with complex situations and find the optimal and most competitive solution for your needs.

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