Construction/Development coverage extends the E&O policy to provide coverage for the sale of residential property that has been built or developed by an insured agent or broker. The practice of building spec homes has become common in the real estate industry and purchasing Construction/Development coverage will address the specific risk involved in the sale of this type of property. Defending an E&O claim where the agent is also the builder is challenging at best.
The basic E&O policy excludes the sale of property in which an insured agent or broker has an ownership interest, and includes several exceptions to the exclusion, with specific caveats that must be satisfied for coverage to apply. With Construction/Development coverage to apply, the policy usually requires that there must be a specific separate business that does the construction, so an individual cannot be the builder. The policy will also require specific written disclosure of the relationship of the agent, insured and builder/developer. Keep in mind that every insurer words the coverage a little differently, so read the policy thoroughly.
Keep in mind that while many agents will say that they are not builders, but they sell the houses that their husband or wife builds, they own the construction company as community property. So when you are completing the E&O application and you see the question regarding the sale of property built or developed by an insured, be sure to consider the agents that are selling spec homes and whether or not that agent has ownership in that construction company.
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