During the phases of a real estate transaction—acquisition, development, ownership, sale or lease—a variety of insurance products and considerations come into play.

Perkins Coie has experience evaluating the full kaleidoscope of insurance issues that may arise. The following are some of the insurance considerations that a property owner may face during the life cycle of any particular project.

Acquisition of Real Property

Careful review of the insurance elements of purchase and sale agreements, service agreements, leases and loan documents can help avoid, or at least minimize, potential disputes. For example, it can be very important to review the insurance requirements provisions of contracts for consistency with the parties’ expectations of anticipated risks and responsibilities. It is also important to try to obtain copies of all insurance policies to ensure that the coverage conforms to the contract documents. It is also crucial to retain policies in the eventuality of losses or future claims.

Description of The Property

Many insurance policies limit coverage to the property or worksite described in the insurance policy or in the real estate contracts. In order to maximize potential coverage, individuals in a real estate transaction should verify that all real estate contracts include the same, accurate description of the property.

Purchase and Sale Agreements

Purchase and sale agreements should identify who is responsible for securing insurance and which party will be entitled to insurance proceeds in the event of a loss. Typically, the owner’s First Party Property (Property) policy covers the property until closing, but this should be documented in a purchase agreement. Parties should also make sure the agreement specifies which party should pay for and secure insurance for any incidents that may arise during due diligence—such as bodily injury or property damage that takes place when surveying the land or completing environmental tests.

Title Insurance

Securing the requisite title insurance is paramount, as it essentially represents an insurer’s guarantee that its research of the property’s history did not fail to uncover any non-disclosed problems with the title. An owner or purchaser of real property should consider purchasing extended coverage, which often requires that the property be surveyed, but then includes assurances against encroachments or other property interferences that would not be “of record” but identifiable from such a survey. Title insurance typically is issued only for the value of the property (the sales price if issued at acquisition), but inflation riders may be available. Even with an inflation rider, however, it is important to update title insurance if the property has significantly appreciated in value, especially if an improvement has been built on the property.

Environmental Policies

When purchasing a contaminated property, a Pollution Legal Liability (PLL) policy may help minimize the risk of runaway remediation costs. PLL policies often cover remediation costs in excess of a certain threshold. Insurance Coverage for Real Estate Transactions During the phases of a real estate transaction— acquisition, development, ownership, sale or lease— a variety of insurance products and considerations come into play. Perkins Coie has experience evaluating the full kaleidoscope of insurance issues that may arise. Some jurisdictions in which Perkins Coie LLP practices law may require that this PerkinsCoie.com/Insurance_Recovery communication be designated as Advertising Materials. Perkins Coie LLP | January 2015 For prospective, unknown environmental liability, an owner or purchaser of real property should consider buying an Environmental Impairment Liability (EIL) policy. EIL policies may help neutralize, or at least lessen, the impact of unexpected costs arising from the discovery of environmental contamination. These policies provide coverage for bodily injury and property damage as well as for governmentally mandated investigations and cleanup costs arising from pollution claims.

Development of Real Property

Commercial General Liability (CGL) Policies

CGL policies often provide coverage for bodily injury and property damage arising out of an “insured contract.” This coverage may prove invaluable because it covers a policyholder’s obligations to indemnify, defend and hold harmless another party. A policyholder should review its CGL policies to ensure that contractual indemnity provisions—particularly those in contracts with contractors and subcontractors—qualify as insured contracts.

Subcontractor Exception

A property owner should ensure that all liability policies issued to it or its contractors include a subcontractor exception so that damage to the property is covered. This issue often arises in construction defect litigation.

Builders Risk (BR) Policies

BR policies generally cover specifically defined property during the course of construction. Disputes with insurance companies can result from incorrect or underestimated dates of completion of the project and inaccurate descriptions of the property or project site. If project delays arise, policyholders should review BR policies to assess whether coverage needs to be extended.

Owner Controlled Insurance Programs (OCIPS) & Contractor Controlled Insurance Programs (CCIPS)

These programs, also known as “wrap up” policies, are commonly used for large projects because they often provide higher limits, lessen litigation risk and minimize premium costs for owners and general contractors. They may include coverage for commercial liability, workers’ compensation, builders risk, construction management, professional liability and environmental liability related to a specific construction project. OCIPs and CCIPs generally provide coverage to owners, contractors and subcontractors, which means that multiple parties may access the policy limits. As with BR policies, accurate descriptions of the project site or property will greatly decrease potential disputes about what claims are covered. Parties should also be aware that many CGL and Property polices exclude coverage for construction projects that are covered by OCIPs or CCIPs. To avoid gaps in coverage, a policyholder should ensure that its CGL and Property policies provide coverage on a difference in conditions basis.

The Completed Project

CGL policies provide insurance against third-party liability that arises from property ownership while Property policies cover the policyholder’s property. As insurance needs vary over time, property owners should review the limits of liability, deductible provisions and descriptions of the covered property before every insurance policy renewal.

First Party Property (Property) Policies

Property policies are typically written to provide coverage for physical damage or loss to the policyholder’s improved property. They will cover at least the “actual value” of the lost or damaged property, but owners typically will purchase “replacement” cost coverage as well to protect against the likelihood that a property will cost more to reconstruct than it is actually worth. Insurance companies will typically include a co-insurance requirement and a corresponding “penalty” for situations in which the insurance purchased does not equate to a set percentage of the property’s value. Because these penalties can be substantial and result in under-insurance, it is important to check this aspect of coverage periodically. Some jurisdictions in which Perkins Coie LLP practices law may require that this PerkinsCoie.com/Insurance_Recovery communication be designated as Advertising Materials. Perkins Coie LLP | January 2015

Business Interruption Insurance

Property and BR policies can be purchased to provide business interruption coverage for economic losses (i.e. lost profits) that a policyholder suffers on account of an interruption of its business due to damage to finished property or property being acquired or built. One can also acquire “contingent” business interruption coverage, which provides insurance protection for lost profits resulting from damage to another’s (“dependent”) property, such as property owned by an entity in the supply chain.

Leases

Evaluation of insurable risks should be made during all contractual relationships for real property. Leasing is the most obvious. The lease should specify the insurable interests of each party and allocate the risk of loss for each such interest. The landlord and tenant will want to protect against all risks but also avoid incurring the expense of them both acquiring insurance against the same risks. Often the landlord’s acquisition of insurance for the building will protect the tenant as well, directly or by implication. If the landlord wants a tenant to be obligated to rebuild or repair a building where the tenant caused the damage, this should be specified in the lease documents and the tenant should make sure to acquire insurance to protect itself in that event.

Attorneys in Perkins Coie’s Insurance Recovery practice are well recognized for their work on behalf of their policyholder clients and for their counsel on the types of coverage available. Together with the firm’s attorneys in our real estate and land use practices, Perkins Coie presents companies with a well-rounded approach to assess risk from all fronts. Not only do we understand the real estate issues and potential problems, we know how to prepare for them.