The Importance of an Insurance Coverage Audit
ADAM M. LEVINE, CPA, CFP
Insurance is a fact of life for real estate investors. From start to finish, each project needs to have the proper insurance. The time to wonder whether you are properly insured is before there is an issue. To be safe, hiring a qualified professional to help you conduct an insurance coverage audit may be necessary. Coverage audits can reduce the odds of an uncovered incident undermining a project’s profitability.
Types of policies
Risk management is as integral to a successful project as the construction materials and crew. Insurance coverage is the building block of risk management. How do you know if you have the right type for your project? And how much is enough?
Before launching a project, you will need to assess what types of insurance policies are needed. Some common insurance policies include:
- Builder’s Risk Insurance
This is designed to temporarily insure buildings and structures while they are under construction. It also may cover materials, supplies, fixtures and equipment that are on-site, in transit or temporarily located at other locations. Some policies may cover loss of income from the property’s rent or sale when the construction project is delayed.
- General Contractor Insurance
If you decide to act as the general contractor for a project in addition to investing in the property, you will need insurance before you begin the project.
- Liability Insurance
This includes general liability, workers’ compensation/employer’s liability and commercial vehicle coverage, as well as covering payment and performance bonds.
- Wrap-Up Insurance
With this insurance, a developer provides a single source for project-specific liability insurance. The policy covers the developer, general contractor, subcontractors, construction managers and possibly design professionals. The developer is designated as the named insured and the other parties become additional insureds.
Related Read: What Kind of Insurance Does the Project Need?
Understand your coverage
For all insurance policies, obtain proof of coverage with certificates of insurance for your own policies, as well as any policies under which you might pursue coverage as an additional insured or intended beneficiary. Keep in mind that your policies are secondary to the policies that list you as an additional insured. Thus, if you have a claim, you will make it under the policies that list you as an additional insured before turning to your own insurer.
In addition, change-in-coverage notices should be sent to both the named insured and to you on policies that list you as an additional insured. Where necessary, ask that coverage terms be amended so that innocent intended beneficiaries (such as you) are not adversely affected by the conduct of others whom they do not control (such as a named insured contractor who fails to comply with a requirement of the insurer).
Occurrence-based policies are generally preferable to claims-made policies. With the former, coverage extends to claims deemed to have occurred during the insured period, no matter when a claim is made. A claims-made policy protects only against claims made during the insured period. For claims-made policies, coverage needs to be extended beyond the project completion date, customarily 12 to 36 months longer. Otherwise, you are exposed to problems discovered postconstruction.
Consider supplementing your policies with excess or umbrella coverage, as appropriate.
The big picture
There is more to your insurance coverage than just insuring a specific project. Be sure to consider your business as a whole, including your financial standing. Work with ORBA’s insurance, financial and tax professionals to evaluate your coverage and achieve holistic coverage for your business.
Three Provisions for the Real Estate World
ANITA S. WESCOTT, CPA
Late 2020 saw the enactment of a massive new federal spending law. Much of the media attention focused on the relief related to COVID-19, but the Consolidated Appropriations Act (CAA) also includes some tax-related provisions of particular interest to real estate owners and developers. Here are some tax law changes you should know about.
Related Read: President Signs a New Stimulus Package
- The Low-Income Housing Tax Credit
The CAA may make some low-income housing projects more viable. It establishes a minimum 4% rate for computing credits related to projects acquired for rehabilitation or funded using tax-exempt bonds. The rate is effective for eligible property placed in service after December 31, 2020.
The law also expands the credit for states with qualified disaster zones. It increases the allocations in disaster-struck states to $3.50 multiplied by the number of residents in the disaster zones, capped at 65% of the state’s 2020 allocation.
- Depreciation of Residential Rental Property
The Tax Cuts and Jobs Act (TCJA) allows real property businesses to elect out of the business interest deduction limit — but such businesses must apply the alternative depreciation system (ADS) to residential property. The TCJA also reduced the ADS recovery period from 40 years to 30 years for residential rental property placed in service by the taxpayer after December 31, 2017.
The CAA assigns a 30-year depreciation period to all residential rental property held by electing real property businesses if it was not subject to the ADS prior to January 1, 2018. This opens up the business interest election to businesses that may have opted out to avoid the 40-year recovery period.
- Empowerment Zones
An Empowerment Zone (EZ) is a designated area of high poverty and unemployment that benefits from tax incentives provided to businesses within its boundaries. Businesses located within such zones are eligible to receive certain tax incentives, including a 20% wage credit on up to the first $15,000 of wages paid to specific employees. The CAA extends EZ designations through 2025.
But it is not all good news for EZs. The CAA also terminates the enhanced expensing rules and deferral of capital gains tax on the sale and timely replacement of EZ investments for property placed in service in tax years beginning after December 31, 2020.
That Is Not all
The CAA contains many other provisions that could affect businesses, whether in real estate or not. ORBA can help you make the most of the changes to minimize your tax liability and maximize your bottom line.