16 Nov Insurance For Property Developers
The risk and return paradigm is well understood by many investors – if you want a higher level of return you need to accept a higher level of risk, and vice versa.
So with the high potential returns on offer from property development, it should come as no surprise the risks can also be significant.
However, unlike certain other investment strategies, there are a number of steps that can (and should) be taken to mitigate risks in property development. In this article we will discuss just one of those steps – insurance.
Insurance requirements will vary depending on the type of project, scale of project, and the extent to which the developer is involved in construction, but for the sake of the exercise let’s assume a developer is performing a small residential project where a builder is engaged on contract to construct the project.
In this situation, a developer will typically acquire a site with an existing dwelling on it that may be tenanted whilst the development permit and building permits are secured. During this phase of the project a comprehensive landlord insurance policy will generally be sufficient, assuming it incorporates public liability insurance which most do.
Once the tenant vacates, the landlord insurance policy will typically be cancelled, at which point it’s generally advisable to establish a public liability policy. Whilst the builder will generally hold their own public liability policy, holding a separate policy will provide coverage for periods where the builder’s policy doesn’t apply (e.g. pre-construction and post-construction).
Assuming the developer engages a builder on contract, the builder will be required to hold their own insurances which typically include contract works insurance, home warranty insurance, public liability insurance (as discussed), product liability insurance, and workers compensation insurance.
Once construction is completed, and handover has been achieved, it’s critical the developer insures the works from the date of handover as the builder’s insurances will typically be cancelled at that point.
Where projects with community title schemes are concerned, the body corporate or owner’s corporation manager should assist in arranging the insurances from handover.
Finally, an area of insurance that isn’t often discussed amidst the property development insurance conversation is the area of personal insurance.
The management and financing of a property development project is often predicated on the continued good health and income earning capacity of the developer. But what if the developer suffers an illness or injury mid-project that leaves them unable to earn an income or manage the project? What implications would that have for the project, the developer, and the developer’s family?
A strong case can be made for anybody with financial commitments to hold personal insurances, and that’s particularly the case for property developers.
The key personal insurances to consider include income protection insurance (ideally agreed value with a short waiting period and long benefit period), life insurance, total & permanent disablement insurance, and trauma insurance.
Holding adequate insurance can go a long way to de-risking a property development project, and when combined with a number of other risk mitigation strategies the risk / reward paradigm can begin leaning ever so slightly in the developer’s favor.