Along with the lead developer, any entity that acquires an equity interest in a project may also be acquiring a share of those potential liabilities. That makes it crucial to ensure that the professional liability policy provides coverage for the full range of risks that arise from every phase of a project. The coverage should include a very broad professional services description for a developer along with full limits Bodily Injury (BI), Property Damage (PD), Pollution, and Third Party Discrimination for every exposure arising from a developer’s own work or that performed by third parties. The policy should encompass the highly complex ownership structures and business models common to real estate development in a form that’s sophisticated and malleable enough to grow with a business.

A HIGHER STANDARD OF CARE

Broadly speaking, a developer is an entity or individual acquiring property, improving it and obtaining some return on that property, whether it’s through rental income, tax credit considerations, federal subsidies, home or condominium sales, golf course fees or solar energy credits. It’s the equity position in a project that makes the difference between a developer and, say, a contractor or property manager. That equity stake may range from direct ownership to interests held by a related or affiliate entity or a family trust. An insured that’s primarily active in property management, for instance, may also own a construction entity and participate in a family trust with an equity stake in a project. Contractors with a partial interest in a project, for example, may not realize that ownership position carries the responsibilities of a developer.

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The equity position significantly increases the required standard of care. As a developer, the professional liability risks for all services—from design to construction and sales—effectively become the developer’s, even if it’s via a third party. Claims can drag on and become highly expensive. For instance, a foundation at a condominium may sink into the ground several years after completion. The legal action is likely to include not only the architects and engineers that design the foundation and the contractors and subcontractors that built it, but also the developer, even though those service providers have their own professional liability coverage.

COVERING ALL THE BASES

As companies take on more aspects in a development, they may add on professional liability coverage for each of those roles and wind up with multiple policies. For instance, a company may have a contractor’s errors and omissions (E&O) policy along with a separate policy to cover real estate sales but may have gaps in coverage stemming from the exposures it’s taking on as a developer with an equity stake in a project. A real estate developer’s policy will consolidate those multiple coverages.

The policy should provide a very broad professional services description for a developer, covering all aspects of a project. That includes land surveying, engineering, architecture, general contracting, real estate agent broker services, property management and asset management services. Whether the developer is a highly sophisticated, vertically integrated company that can do the entire project in-house, or a company working through third-party services providers, the policy should include every type of peril that a developer can incur from their own services as well as those of third-party providers.

Among the wide range of perils, the policy should provide coverage typical for the design and construction phases, such as bodily injury, property damage and contractor’s pollution coverage, as well as exposures common on the real estate side, such as personal advertising injury, failure to disclose conditions on the site, and third-party discrimination. The policy should provide full limits for all perils, rather than sub-limits.

SOPHISTICATED STRUCTURES

The complex ownership structures common in real estate projects are also a consideration. A typical E&O policy that includes coverage for affiliates, subsidiaries and joint ventures may not be sophisticated enough for the organizational structures common among real estate developers. A developer may range from a family-owned company building single-family homes to a holding company that includes several operational entities, sidecar companies and investment vehicles from special-purpose entities to real estate investment trusts (REITS). A robust developers professional liability policy will identify, and provide coverage for all of those entities, while excluding the potential for legal action among related parties. The policy, however, should be sophisticated enough to not exclude legal action by third-party investors that only hold a cash interest.

BOTTOM LINE

As companies grow, they may take on a developer’s role but not realize that their existing liability coverage doesn’t provide adequate coverage. While the contractors and service providers may all have their own professional liability coverage, that won’t preclude a lawsuit against the developers. To protect themselves, any entity acting wholly or in part as a developer should consider a professional liability policy designed and tailored to provide full-limit coverage for the spectrum of risks stemming from every facet of the development. Working with a specialized wholesale broker, such policies can be crafted to fit a particular insured’s needs on a sophisticated form that can grow with the company.

Contact your CRC Group producer for more information.

Contributors

• Mike Robison is a Senior Broker in CRC’s Dallas office and ExecPro National Practice Leader.
• Jay P. Horoshak is a Director in CRC’s Los Angeles Office and a partner on the LA ExecPro Team.