Managing risk in a development project requires understanding the potential risks inherent in the project, and making key decisions early in the process to ensure your development is covered and importantly, controlled by you the developer.
There are two main coverage components for development, builder’s risk, and liability.
Builder’s Risk Covers the physical damage to the project during the course of construction. (i.e., Fire, Hail, Tornado, etc.) This policy is designed to match the construction cycle of the project and should be designed to allow for rentals as units become available, despite construction continuing at other buildings. Correctly designed, this policy will address the hard costs, as well as soft costs.
Liability – Basically, we’re looking to identify and manage the actual construction operations. Who is responsible for providing the coverage, and are the contracts properly set up so that the risk is transferred as intended? For liability, there are basically 3 schools of thought:
- General Contractor provided and priced into a quote. This used to be the most obvious choice for developers but in recent years, forward-thinking groups are shying from this path as they tend to want control over their projects, and most states have what’s known as a “Statute of Repose” – which equates to many years of tail-risk attached to the project post completion.
- An Owner Controlled Insurance Policy (OCIP) is known as a “Wrap” and covers all subs, contractors, and owners’ liability during the development. This is a master policy taken out by the owner. This policy should be cost-neutral to the GC-provided policy.
- An Owner’s Interest Policy is a sort of hybrid of the above two options and allows owners to ensure coverage for the statute of repose while allowing the GC to manage the rest of the project’s liability coverage. This policy would be an additional cost to the overall project.
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