Converting an office building to residential use can be a significant endeavor, and part of that process involves insuring the property adequately during the conversion.
STEPS TO CONSIDER
Assess the conversion: Thoroughly assess the building’s conversion from office to residential use.
Check zoning regulations: Ensure the project complies with local building codes, zoning regulations and safety standards.
Access structural modifications: Evaluate whether any structural changes are needed to convert the space to residential. This might include adding bedrooms, bathrooms and a kitchen if they don’t already exist.
Permits: Make sure to obtain the necessary permits for the conversion. Each area has its own building codes and regulations for residential properties. Make sure to comply with all safety and structural requirements.
Electrical and plumbing: Ensure that the electrical and plumbing systems are up to code for residential use.
HVAC system: Evaluate the heating, ventilation and air conditioning system. It may need to be modified to accommodate residential needs.
Accessibility: Check if the space meets accessibility standards for residential properties. This includes considerations such as wheelchair access, door widths and bathroom facilities.
Soundproofing: Depending on the location and layout of the property, you may need to add soundproofing measures to ensure privacy and minimize noise disturbances.
Safety features: Install appropriate safety features such as smoke detectors, carbon monoxide detectors, fire sprinklers and fire extinguishers.
Aesthetic changes: Consider the layout and design of the space to make it more suitable for residential living. This might involve adding a pool and or a recreation area.
Contact your insurance provider: Reach out to your current insurance provider or a specialized insurer who deals with commercial and residential properties. Inform them of the intended conversion and inquire about the specific insurance requirements for such a project.
Evaluate insurance needs: Your insurance needs will change when converting from commercial to residential use during construction and post completion. Some questions to answer include, “Will the project be operated as a for-rent apartment or for-sale condominium?” “Will any portion of the project be occupied during the conversion?” Significant planning and time will be required in developing the insurance program, preparing insurance requirements for all contracts (GC, subcontractors, lender and equity partner), reviewing all municipality requirements (which may require bonds) and negotiating and securing insurance quotes.
Building inspection: Conduct a thorough inspection of the property to identify any potential hazards, structural issues, safety concerns and adjacent uses.
Secure proper coverage: Large-scale conversion projects are complex and require specialized expertise. Work with an insurance provider that has experience with conversions to secure the appropriate coverage during construction.
COVERAGES TO CONSIDER
Builders risk coverage will need to include the value of the existing structure(s) and contracted work (hard costs), and the developers/owners delay in opening exposure (insurable soft costs, loss of income and/or loss of earnings). Deductibles will vary based on the perils insured. Earthquake and flood exposure should be evaluated. Permission to occupy should be granted if any portion of the project will be occupied prior to completion. Rates will vary based on the type of construction, scope of work and the construction timeline.
Commercial general liability and excess liability limits adequate exposure for the premise operations (during construction) and completed operations (post completion of construction). Review the areas adjacent to the project and assess any exposures to loss. Review the applicable statute of repose for reporting construction defects and determine it the project will be for rent or for sale upon completion. Construction liability costs will be higher if the project’s intended use is a for-sale condominium. Liability coverage can be written using two methods:
- Traditional—contract between developer/owner and general contractor with contractual indemnities flowing upstream from subcontractors to general contractor onto the developer/owner with insurance requirements flowing downstream from the developer/owner to the general contractor and subcontractors; or
- Project-specific—insurance covering the developer/owner, general contractor and all eligible and enrolled subcontractors for the duration of the project and for completed operations upon substantial completion through the applicable statutory timeline often referred to as an OCIP (Owners & Contractors Insurance Program) or wrap coverage. It is important to discuss if a no-conversion-deed restriction will be recorded, imposing restrictions on converting the project from for-rent to for-sale within a certain period, generally the applicable statue of repose.
Workers’ compensation and employers’ liability is coverage for person’s performing work at the site. Coverage should include a waiver of subrogation.
Commercial auto is coverage for all owned, non-owned and hired vehicles used in the contracted work.
Pollution coverage should be obtained for the project and be a requirement for the general contractor and any subcontractor dealing with hazardous materials. Environmental and property inspection reports should be reviewed for any hazardous conditions. Mold coverage should also be included.
Contractors’ professional liability coverage should be required for the general contractor and for any subcontractor performing work under a design/build contract.
Compliance with regulations should be met to ensure that the conversion meets all legal and regulatory requirements for residential properties in your area. Failure to comply with regulations could result in fines, penalties or difficulties with insurance claims.
OTHER THINGS TO CONSIDER
Risk-management strategies should be implemented to mitigate potential hazards and minimize the likelihood of insurance claims. This may include installing safety features, conducting regular inspections, implementing security measures and hot-work protocols.
Review policy terms and conditions of your insurance policy to understand what is covered and what is excluded. Pay attention to any specific requirements or endorsements related to the property’s conversion.
Update coverage as needed as the conversion progresses and after it is completed. Review and update your insurance coverage to ensure it adequately protects the property and its occupants.
Seek professional advice if you’re unsure about any aspect of insuring the converted property. Consider seeking advice from insurance brokers, real estate professionals or legal experts familiar with residential conversions.
By following these steps and working closely with your insurance provider, you can help ensure that your office building conversion to residential use is properly insured and protected against potential risks.
