In 2014, the Federal Law No. 294 was amended several times in relation to shared construction. In particular, now in the implementation of shared construction, the builder must draw up an insurance contract that will provide liability insurance to the builder until he concludes his first transaction with the buyer. Otherwise, he will not be able to register this transaction with Rosreestr.
The essence of this obligation
Since 2014, each construction company must without fail confirm its obligations by issuing a guarantee or by concluding a liability insurance contract as a developer engaged in shared construction. These amendments, adopted in the legislation, allow buyers to return their money invested in the construction in the event that the developer has unforeseen situations.
Why else do you need developer liability insurance?
This amendment to the law also makes it possible to establish liability that may arise if it:
- Will shy away from its obligations.
- He will hand over an object that is not completely ready.
- It will go bankrupt before the property is surrendered.
However, economists believe that these measures may entail an increase in the value of real estate. However, the government insists that these factors cannot be interconnected, because even the largest construction company spends on insurance no more than 1% of the sum of all its transactions. Therefore, money should be allocated from its own budget for civil liability insurance of the developer.
Insurance object
In the implementation of shared construction, it is the liability of the developer that is insured. This action implies that the property interests of the developers directly will be protected. That is, the conclusion of such an insurance contract is beneficial primarily to buyers. At the same time, the developer is given the right to choose: he can insure both the house as a whole and each apartment separately.
Customers
The builder's liability insurance contract is concluded in favor of the participants in shared construction. In the event that certain circumstances occur, they will be able to receive the appropriate payment. In accordance with the terms of the insurance contract, the developer is obliged to hand over the object, which will meet the standards of quality and reliability. The insurer, in turn, undertakes to notify the buyer if changes occur in the transaction, and then pay him compensation. If participants in shared construction will change already during the construction process, then this is worth mentioning in the contract, since each additional shareholder will conclude a separate additional contract for insurance of liability of the developer.
Insurers
Not every insurance company wants to conclude such insurance contracts. There is an opinion among insurers that such a transaction often causes losses. In addition, the insurance company itself must comply with the following requirements:
- Must be in the insurance market for at least 5 years.
- For the future period should have a good forecast for development.
- Must be in accordance with financial sustainability requirements.
- The authorized capital of this company cannot be less than 120 million rubles, and its turnover should be at least 400 million rubles. Only under these conditions can civil liability insurance be provided.
Tariffs
The conclusion of an insurance contract that insures the developer engaged in shared construction is excessively expensive. For example, in 2015, the average rates for concluding such an agreement fluctuated at the level of 0.5-0.8%. If the contract is concluded for a long period, then the insurance company, at its discretion, may lower the tariff rate from 10 to 30%. It is more profitable to create mutually beneficial liability insurance companies.
The determination of the interest rate, as well as the full calculation of the annual interest ratios, is left to the discretion of the insurance company itself, since the likelihood that a developer engaged in shared construction may begin to evade its obligations is quite high.
Developer liability insurance for shared construction carries a certain risk.
Factors Affecting Interest Rate
The interest rate on the insurance tariff depends on the following factors:
- Does the developer belong to the holding.
- Does the developer have successful and positive deals in the past? In this case, the insurer can take into account all the criteria of past transactions: the deadlines for their completion, the total number of objects, the presence of representative offices in various regions of the country, the complete absence of complaints and complaints.
- Financial sustainability.
- Legal support, that is, the availability of a full package of documentation and permission.
- Stages into which the construction progress is divided.
- Deadline for the current project.
- The total number of clients involved in shared construction.
Registration of an insurance contract
To register an agreement with the Rosreestr, the developer is required to provide all the necessary documents. Their list includes:
- Project declaration.
- Permission to carry out construction work.
- Certificate of state registration.
- Contract for the implementation of shared construction.
- Copies of all statutory documents.
- Justification of a technical and economic nature.
- Copies of the financial statements of the developer.
- Information about existing lenders.
- Certificate from banks, indicating the absence of delays in loan payments.
After consideration of the securities, the liability insurance of the builder for shared construction is made.
What should be protected?
If the developer does not fulfill his obligations, and this is confirmed by a court decision or the fact of bankruptcy, then the insurance contract concluded during the implementation of shared construction implies that compensation will be paid to equity holders. However, it is worth noting that the insurance company does not compensate for the investment if the developer froze the construction period or extended the period during which the object is to be commissioned. The amount paid depends entirely on the price specified in the contract, but cannot be less than the cost of the object itself and less than the average market rate set per square meter of living space in the same region in which the developer worked.
The maximum bonus volume is also limited by law.
Insured events
The following cases can be attributed to insurance:
- Construction is interrupted.
- The developer is declared bankrupt.
- Interest holders can not get housing.
- The developer refuses to return material resources.
Legislative changes
Changes in the Federal Law No. 294, which we spoke about in our article earlier, consolidated the compulsory liability insurance of the company’s builder.At the same time, the developer himself, who wants to carry out shared construction, is obliged to search for the insurer and directly execute the contracts. The developer can independently, at his discretion, choose with whom he will conclude an insurance contract - with a bank, a specialized insurance company or with the company.
Participants who are members of an insurance company (compulsory insurance) bear equal responsibility. In the event that the insurance contract is concluded with the bank, the developer will have to spend a lot of time collecting papers. Banks also require the developer to pay an obligatory amount of 30% of the total cost of the facility under construction. This amount will serve as a guarantee for the financial institution. Among other things, the central bank provides for its own requirements that apply to banks that conclude insurance contracts. These banks should:
- Work at least 5 years in the relevant field.
- Have a registered capital of at least 200 million rubles.
- The total value of the property should be at least 1 billion rubles.
In this regard, it is more profitable and easier for a developer to obtain a loan than to issue a guarantee. Banks also consider the insurance procedure for the implementation of shared construction is not entirely profitable.
The most profitable is the conclusion of a contract for mutual insurance of civil liability of developers with a specialized company. Due to the presence of considerable competition, insurers in order to attract customers lower tariff rates and prices for their products. And they can also fix the tariff rate for the entire period of the insurance contract. Another advantage of concluding a contract with a specialized company is that documents are processed as quickly as possible. Under such an agreement, the developer will act as the insurer, and the participant in shared construction as the beneficiary. Collateral for each specific dwelling is selected individually. The consumer companies of mutual insurance of liability of developers have become relevant.
Liability insurance procedure for a shared construction company
Policyholders are required to provide collateral. Often, such a guarantee is a piece of land on which the construction of an object is supposed. Among other things, the document should describe the way in which the stated obligations are secured. All securities must be signed before the first contract for shared construction is concluded, and will be valid until the actual delivery of the object. In the event that the transaction was terminated, exemption from liability payments does not occur. But this rule applies only when the insured event occurred during the contract period.
The policyholder can insure both the entire house and the apartments separately. By the way, the first option is not entirely profitable, because then the insured must make a deposit commensurate with the cost of the entire facility, and also be sure that all premises in this facility will be sold. Another problem when concluding an insurance contract for the entire facility is the difficulty in determining the beneficiary.
The contract starts from the moment the first installment has been credited. Such an agreement does not provide for such a thing as a franchise. Otherwise, the terms of the contract can be called standard:
- The insurer undertakes obligations to inform interest holders about the amount of indemnities that have been paid. This is the basis for developer liability insurance.
- The insurance company has the right to contact the developer with a regression type requirement.
- The insurance company undertakes to notify interest holders if the insurance contract has been terminated ahead of schedule.
- The agreement is valid for the entire construction period and depends on it. That is, when extending the construction period, the contract is automatically extended.
The amount that will be reimbursed upon the occurrence of an insured event fully depends on the established rates and prices. Its size should be greater than the value of the total living space of a particular room. Moreover, the decision on how compensation will be paid - by installments or at a time - remains entirely with the insurance company.
Insurance Issues
What are the pitfalls of a builder’s civil liability insurance contract?
Such insurance is quite specific, because financial risks are actually insured.
Such an agreement has a cumulative effect in the event of loss. In the event of a crisis situation, losses will be incurred by absolutely all developers, and not by any particular one. Crisis situations here are understood as an increase in mortgage rates or a drop in demand for residential premises. After all, this is a mutual liability insurance of developers.
Another problem is that there is no way to reinsure risks.
Due to the fact that the Central Bank has increased the requirements for insurance companies, their circle has narrowed significantly. The decisive role was played by the increase in the size of the authorized capital, and in the modern insurance market only 19 organizations are suitable for the requirements. In accordance with the amendments, about 80% of organizations that previously could enter into a developer liability insurance contract lost their ability to carry out insurance activities for developers.