Investing in real estate projects that are not adequately insured to protect the equity partners.
As direct investors in real estate, it is in a family office’s best interest to understand how the project will be insured to protect its equity. This includes insuring the project while under construction and after project completion. Depending on the sophistication and expertise of the project sponsor, the insurance program may have major holes that expose the family office to unnecessary loss.
The loss of rents coverage within a builder’s risk policy is a good example. Loss of rents coverage pays for a loss of rental income caused by a covered loss. If you were building a student housing project, for example, this coverage is really important. If your project is delayed because of a fire and as a result the building is not ready in time for students to move in, you would miss an entire school year of rental income. This coverage can only be purchased by an owner. Contractors are not eligible to purchase it because they do not have an ownership interest in the property. A family office that relied on a contractor to buy builders’ risk coverage would be unintentionally putting itself at risk.
Not having its own Directors & Officers (D&O) liability program.
Another detail that often gets overlooked as family offices transition from fund investment to direct investment is D&O liability insurance. Family offices need to be sure that every company in which they invest has D&O insurance, and that the family office itself has D&O insurance. The family office D&O policy should contain a provision that will protect the family office in the event that a portfolio company D&O policy does not cover a particular claim or its policy limits are exceeded.
We are in the midst of a big shift in how capital gets deployed into our markets. Now more than ever, family offices are taking steps to control their own destiny, make their own decisions and deploy their assets in a way that is the most rewarding and meaningful to them. A solid insurance and risk management strategy is a crucial part of the infrastructure that will enable this shift to happen.
Scott Kegler is Family Office Practice Leader for Aon, based in Philadelphia. He works with family offices that are making direct investments in operating companies (majority or minority) and real estate.