Real Estate Developers (RED) E&O Claims

Real Estate Developers (RED) E&O Claims

REAL ESTATE DEVELOPERS E&O

RED policies marry the features of professional liability insurance for design professionals, contractors and real estate development professionals into a broader
solution for the real estate industry than previously available. The following hypothetical scenarios illustrate potential situations in which a RED policy might
provide coverage.

NEGLIGENT PROPERTY MANAGEMENT

A RED policy may provide coverage for property management services provided to both owned and non-owned properties.

  • A developer/owner’s HVAC system goes down and its tenants’ businesses are disrupted. The tenants sue the developer/owner for consequential damages to their businesses, alleging that the developer/property manager was unwilling to permit recommended maintenance after heavy wear was discovered in the cooling system of a building. A RED policy may provide coverage for the tenants’ allegations.
  • At the request of a tenant, a property manager hires a flooring company to replace the carpets and hardwood floors on a stair landing. The tenant’s employee later slips on the landing and falls down the stairs. The employee sues the property manager, alleging negligent hiring and supervision of the
    flooring company. A RED policy may provide professional liability coverage for the performance of professional services as a property manager.

NEGLIGENT MISREPRESENTATION/CIVIL CONSPIRACY

  • A real estate developer and its independent contractor are sued for civil conspiracy, negligent misrepresentation and unjust enrichment related to the
    purchase of a block of HUD properties in a metropolitan area. Although aRED policy would generally exclude indemnification coverage for intentional
    acts (e.g., civil conspiracy), it may provide defense coverage until final adjudication.

OVER-ACTION CLAIM GONE WRONG

  • A general contractor agrees to indemnify a project owner/developer for losses caused by the contractors’ employees’ jobsite injuries. An employee of the general contractor dies while working on the construction site, and his family member sues the project owner/developer in an over-action claim. Before the over-action claim is made, the general contractor goes out of business and is not present to indemnify the owner/developer. A RED policy may provide coverage for the owner/developer’s exposure.

DESIGN PROFESSIONALS SKIPPING TOWN

  • A condominium owner brings a claim against the developer and the architect for a design error. The architect cannot be located and the architect’s  insurance on file has lapsed. The suit continues against the developer and its vicarious liability may be covered under a RED policy.

UNHAPPY NEIGHBORS AND ZONING ISSUES

  • A restaurant sues the owner/developer of an adjacent project for property damage and consequential damages due to negligent construction operations, including alleged “design errors and omissions” of the owner’s design professional. The contracting activities affect the restaurant’s business – customers do not want to dine al fresco because the contractor has done a poor job of keeping down dust and noise. A RED policy may provide coverage for the alleged design errors and construction supervision.
  • The elders of a historic church from the Revolutionary War period sue a developer, alleging that the seismic activities of the developer’s construction activities had caused the foundation and walls of the church to begin to crack. A RED policy may provide defense and indemnification for allegations of negligent construction management and oversight of subcontractors.

SPEARIN DOCTRINE

  • Under the Spearin Doctrine, the owner of a building is responsible to a general contractor for the accuracy of building plans. An owner/developer provides
    engineering reports and designs to a contractor, but the reports and designs incorrectly reflect the true site conditions. The contractor incurs
    damages, and sues the project owner/developer, asserting that the owner/developer had knowledge of the conditions that the owner/developer did not disclose. The contractor also asserts, as an alternative cause of action, that the contract and design documents were “defective” under the
    Spearin Doctrine since the documents did not disclose the conditions. A RED policy may provide coverage for these allegations.

CONSTRUCTION DEFECTS

  • Sometimes, it’s just a matter of a failed build. In this example, a pedestrian is injured when a retaining wall, which had already passed inspection, collapses. The pedestrian files suit against all parties including the owner/developer, contractors and architect alleging design errors and omissions. The lead design team had all plans approved by the owner/developer who had a licensed architect on staff. The design team’s architects & engineers (A&E) policy responds, but fault is proportionately allocated to the owner/developer, who is not an additional insured on the A&E policy. Here, a RED E&O policy may respond to the alleged liability of their in-house architect as well as vicarious liability.

REAL ESTATE FUND E&O

Real Estate Fund E&O is a compelling complement to real estate developers E&O for real estate firms that are heavily engaged with outside investors or large/
complex financing arrangements.

NEGLIGENT OVERSIGHT IMPACTING INVESTORS

  • A New York based private real estate fund manager hires a contractor to build a multifamily property in Montana. Upon completion of construction, the
    investment group goes to visit the property for a final inspection. Upon entering the building, they step onto gravel; the contractor had built only
    a façade and then disappeared. The firm’s investors sue the firm for negligent oversight of the contractors work, causing major investment loss. A Real
    Estate Fund E&O policy may respond to the real estate fund manager’s alleged liability to the investors.

MISREPRESENTATIONS TO INVESTORS AND CREDITORS

  • A real estate investment firm that focuses on hospitality sells a hotel property that they had operated under a national hotel chain flag to a buyer who would not be operating under that chain’s brand. The firm fails to disclose that a substantial portion of the hotel’s annual revenue had come from the redemption of the hotel chain’s rewards points – revenue which would not be available to the new ownership group. The new owners and their creditors sue the investment firm for negligent misrepresentations. A Real Estate Fund E&O policy may provide coverage for defense and indemnification costs.

THE CROSS-SECTION BETWEEN REAL ESTATE DEVELOPERS E&O AND REAL ESTATE FUND E&O

  • A real estate investor/developer accepts money from investors to build student housing in a college town. The region where the building was located
    experiences historic flooding during the construction phase, so the building does not open in time for the new school year as scheduled. Because the building wasn’t ready for the school year, it remained empty for the majority of the year, causing substantial financial loss to investors, prompting a suit brought by investors alleging misrepresentations of the risks of the investment opportunity. A Real Estate Fund E&O policy may cover any liability the real estate investor/developer owes to its investors.

LIABILITIES FROM LOW INCOME HOUSING INVESTMENTS

  • A developer of low income housing fails to lease the applicable percentage of units to low income renters for a specific multi-family property. Consequently,
    the IRS successfully files a judgement to recapture some of the tax credits previously granted to the developer. The developer was intending to pass these
    on as returns promised to investors. While a Real Estate Fund E&O policy generally would not pay for lost taxes, the policy may provide defense and
    indemnification for claims arising from allegations of negligence brought by investors.

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