Developer civil liability insurance: the basics and nuances, for whom it works, equity holders protection, alternative options.
In connection with the frequent cases of fraud by interest holders buying housing in new houses, a law was passed in 2014 that made the builder civil liability insurance mandatory for all construction companies.
The law applies to those projects for which equity agreements are concluded. Now apartments from new buildings can only be sold subject to the availability of an insurance policy.
Last year, a new mechanism was introduced to protect the interests of equity holders – the GKF, which will be discussed later. In the meantime, we will return to the developer liability insurance and take a closer look at what it is and how it works.
Developer insurance: types and nuances
The developer can choose from two types of compulsory civil liability insurance:
- Bank guarantee;
- Developer civil liability insurance contract.
The conclusion of an insurance contract is possible both with a separate company, and with OVS (Mutual Insurance Company). The policyholder makes the payment himself and is obliged to do this at the very beginning of sales – before the registration of the first equity participation agreement (DDU). It is also his duty to notify all equity holders about the conditions of insurance, the insurer itself.
Rosreestr ensures that all conditions of the civil liability insurance of the builder are met, in case of violation or the absence of an appropriate policy, it refuses to register DDU.
According to the builder’s civil liability insurance contract, only equity holders are considered the beneficiary. The construction company does not claim to receive a monetary refund.
Compensation is paid only to investors in cases where the developer violates his obligations to transfer the paid apartment to the buyer (after a court decision) or when he is officially declared bankrupt.
The minimum amount of compensation depends on the amount invested by the shareholder, but cannot be less than the product of the housing area and the average market price for 1 square meter. meter in the area.
The insurance period is determined by the construction period of the facility, which is attributed to the project and specified in the contract DU.
The main purpose of the builder’s civil liability insurance is to protect interest holders and their financial interests, ensuring the reliability of their investments in the construction of their future apartments.
If the company engaged in the construction of this house does not fulfill its obligations and cannot provide equity holders with the housing they paid for, they will be paid insurance compensation.
- the insurer that issued the developer civil liability insurance policy,
- reinsurance pool (OVS),
- a bank whose guarantee was chosen at the very beginning by the developer.
The latter option is a rather expensive service, and not all banks offer it. Therefore, insurance for the builder with the conclusion of an agreement with a specific company of their choice or cooperation on the basis of mutual insurance in the joint venture becomes the most popular solution for many.
Compensation fund: features and purpose
As the practice of the past years has shown, the civil liability insurance mechanism of the developer was poorly tuned. Many equity holders could not get their money even with real insurance.
In this regard, some articles of federal law have lost their force, and today the developer liability insurance is valid in the old way only for those who issued the policy earlier – even before the adoption of the new version.
Since 2017, the builder liability insurance mechanism has been operating as follows:
Each developer is required to make contributions to a special fund created by the state. It is necessary to pay for each agreement signed with a new shareholder.
In the event of bankruptcy, the need to complete the construction of a problematic object, or other insurance cases, the necessary amounts are taken from the compensation fund and paid in the form of compensations to the affected equity holders.
Thus, the state took upon itself the issue of protecting equity holders and compensation for their losses due to non-compliance by construction companies with deadlines and obligations for the construction of residential facilities.
The law also provides for another alternative option for protecting equity holders. This is the use of escrow accounts.
Investor’s money deposited to such an account is frozen until the developer fully fulfills its obligations. That is, the construction company will be able to receive money only after the transfer of his new apartment to the shareholder.
The bank in which such an account is opened acts as an intermediary. In the event of the bankruptcy of the company involved in the construction of the house, he will return to the shareholder all his money.
This option guarantees the safety of private funds, minimizes the risks associated with their participation in shared construction.