It’s common for general contractors to have their own insurance policies, but there are plenty of good reasons real estate investors will also want to secure their own insurance for new, ground-up multifamily projects. Here are 10:
- Control Over Coverage: By securing their own insurance policy, the real estate investor has control over the coverage limits, deductibles, and specific provisions that are most appropriate for the project. They can ensure that the policy is tailored to their specific needs and risks.
- Avoiding Coverage Gaps: GC policies may have exclusions or limitations that may not fully protect the interests of real estate investors. Having a separate policy can help fill any potential coverage gaps.
- Claims Impact: If a claim arises and it’s made on a joint policy, it could impact both the GC’s and investor’s future insurance premiums. This could lead to increased costs for the investor on future projects whether the same GC is involved or not. By having a separate policy, the investor can avoid all that.
- Direct Relationship with the Insurer: In the event of a claim, having a direct relationship with the insurer can be advantageous for the investor. It could result in more efficient claims handling and settlements, without having to go through the intermediary of the GC.
- Continuity of Coverage: The investor's insurance can be structured to provide continuous coverage, even after the construction phase is completed. This ensures that there's no gap in coverage between the construction phase and the time when the building is operational and occupied.
- Liability Issues: While a GC's insurance might cover damages related to the construction itself, real estate investors might be exposed to other liabilities (like injuries to third parties on the property). Having their own policy can provide comprehensive protection against a broader range of potential liabilities.
- Financial Security: In some unfortunate scenarios, if a GC goes bankrupt or faces financial difficulties, there might be concerns about the validity or responsiveness of their insurance. Having an independent policy gives the investor an added layer of financial security.
- Contractual Obligations: Some lenders or stakeholders might require the real estate investor to maintain their own insurance policy as a condition for financing or partnership.
- Protection Against Subcontractor Issues: GCs often use subcontractors, and while the GC might be insured, there's always the risk that a subcontractor isn't adequately covered. The investor's policy can serve as a safeguard against such risks.
- Risk of GC Changing Insurers: If a GC frequently changes insurance providers, it could create potential complications or disagreements about which policy should respond to a claim. An investor's own policy would provide more consistency.
The bottom line? While it might seem redundant for a real estate investor to have their own insurance policy when a GC also has one, doing so offers an additional layer of protection, control, and peace of mind. It ensures that the investor's interests are directly and adequately covered against a range of potential risks associated with the construction and operation of multifamily buildings.
The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. For more information, visit our website or call 877-440-3304.