How Real Estate Project Delays Affect Insurance

Things don’t always go as planned. Despite best efforts to complete a real estate project on time, delays are sometimes unavoidable. In recent years, supply chain and skilled labor issues, along with high interest rates and related financing issues, have resulted in more delays. In addition to leading to extra costs, real estate project delays can also impact insurance.

Building Project Delays Have Increased

ConstructConnect’s Project Stress Index shows that there’s been a 14% increase in public projects that are on hold as of March 2, 2024, when compared to the same week in 2023. There’s also been a 70% increase in abandoned public projects. However, year-over-year changes in the private sector have been less pronounced, with only a 9% increase in abandoned projects.

The problem is not a lack of demand. USA Today reported on a plan to build a 352-unit apartment building in West Philadelphia to meet the city’s need for affordable housing. When the project started, construction costs and interest rates were low, but after the COVID-19 pandemic, material and labor shortages caused construction costs to rise, and then interest rate hikes caused borrowing costs to climb to a 23-year high. The project became economically unfeasible.

Project delays can stem from other issues, as well, including wildfires and extreme weather. Equipment malfunctions and problems with planning can also lead to delays. Regardless of the cause, when delays happen, the insurance implication can quickly become complicated.

Project Delays and Project-Specific Policies

When purchasing a project-specific insurance policy, the length of the project has a significant impact on the expected costs and risks, and this plays a key role in underwriting.

IRMI provides a good example of a two-year project in an area with hurricane exposures. In the first year, the risks are minimal because not much construction has been done. In the second year, the risks are substantial. Logically, it’s clear that the risks will continue to be high if the project is delayed and stretches into a third hurricane season. Similar issues can surround wildfire seasons and other exposures.

Although it’s often possible to secure an extension for a project-specific insurance policy, this may not always be straightforward. If risk exposures and market conditions have changed, the extension may be expensive, and this could lead to additional problems for a project that’s already stressed. The situation can be even more complicated if the insurance carrier has since pulled out of the market.

Delay in Completion Coverage

Builders risk policies often include the option for delay in completion coverage. If a project is delayed, delay in completion coverage provides insurance for lost income and/or certain resulting expenses. However, this coverage is typically restricted to delays that stem from physical property damage.

If a fire or storm damages the building site and makes it impossible to complete the project on time, delay in completion coverage could provide coverage. However, if other causes – such as inadequate planning or financial difficulties – cause delays, coverage is unlikely to be available under these terms.

How to Navigate Insurance

As real estate project delays become more common, it pays to be proactive about the potential insurance complications.

• Set realistic deadlines. Although some delays arise due to unforeseeable events, other project delays stem from overly optimistic estimates. Consider how long a project is likely to last, taking known supply chain, labor, seasonal issues and financial factors into account.
• Consider purchasing delay in completion coverage. Although this coverage does not insure against all delay-related risks, it does provide some protection, and adding it to your builder’s risk insurance policy may make sense.
• When purchasing insurance, consider how delays could impact coverage and costs. Does the policy allow for extensions, or is this something that would need to be negotiated if delays arise?
• If delays seem likely, contact your insurer as early as possible. It may take time to negotiate an extension, especially for large projects that require layers of insurance or reinsurance. Monitor the project’s progress, and if it looks like the project is running behind, address the issue head on instead of hoping that you can get the timeline back on track. If you wait until the last minute to try to get an extension, you are more likely to run into serious problems.

Do you need help securing coverage for your real estate projects? Heffernan Insurance Brokers offers customized real estate coverage to meet your needs.