Building completion insurance Samim UNAN

The legal relationship underlying the insurance Sale of apartments on prepayment A contract (legal nature is doubtful: a work contract or a sale?) Precondition of the contract: The authorization of building must be obtained Pre-contractual information duty of the seller: the buyer (consumer) must be informed on a number of points (deemed relevant for the decision of the buyer). Parties: trader (seller) – consumer (buyer)

The legal relationship underlying the insurance Form requirement: written form Subject matter of the sale: An apartment or a house Consumer effects prepayment(s) (usually by instalments) The seller undertakes to build and deliver (transfer the title on the apartment) latest 36 months after the sale contract The consumer may withdraw from the contract within 14 days following its conclusion.

The issue and envisaged solutions Problem: In some cases the seller is not able to keep its commitments Need to protect the consumers (who already fulfilled at least part of their contractual obligation of payment). For constructions (projects) over a size determined by the Ministry the seller must submit security. The security can be Bank guarantee, or Insurance, or Earnings system, or Tied guarantee, or Any other security approved by the Ministry

Envisaged solutions Earnings system: Tied guarantee: The consumer (buyer) pays into a bank account The seller can draw money from that account only if its commitment under the contract progressed correspondingly (building completion percentage). If the seller is in default it loses its rights over the bank account and the (remaining) money (if any) will be returned to the consumer (buyer). Tied guarantee: A financial institution grants a loan to the consumer for the purchase of a defined apartment or house The financial institution is deemed to have guaranteed up to the loan amount The seller must furnish additional security if the loan amount does not cover the entire sale price.

Envisaged solutions Bank letter of guarantee must be Immediately payable on first demand, upon the default of the seller Unconditional Unlimited in time In practice as sellers are financed by banks, insurers are called to constitute the guarantee (banks put pressure in that direction).

The (prevailing) solution Insurers = charity institutions (they have money to cover losses) Turkish liked the solution: If the consumer suffer losses insurance is the remedy. But how will it work? This brings us to see the system more in details.

Consumer Protection Act (CPA) According to CPA, the Turkish Insurance Regulator shall determine the extent and the general terms of the building completion insurance The benefit of insurance cannot be seized or otherwise be subject of any encumbrances or be included within the bankruptcy or liquidation mass.

General conditions According to general conditions of building completion insurance The risk covered is the non-completion of the house or the building in which the apartment purchased by prepayment. The insurer will grant cover to the benefit of the consumers named in the “security account” in accordance with the “general” and “special conditions”. If the seller goes bankrupt (insolvency) If the seller (being a real person) dies and his heirs waive their right of succession. If the seller is in delay beyond 12 months in completing the building

General conditions The insurer will grant a “maximum limit” for the part of the project subject to sale on prepayment. After individual sales, the insurer issues to each consumer (buyer) a separate bond (up to the sale price). The aggregate of bonds issued to individual buyers shall not be higher than the maximum limit. Only prepayments made through banks will be under cover. If the apartment were purchased by a tied guarantee, the insurance will cover the remaining debt.

General conditions The insurer will remain liable for the bonds it has issued until completion of the building and its delivery to the consumer. The insurer may opt to have the building completed through a new constructor instead of paying the consumer. In such a case the building must be finished within 24 months from the appointment of the new constructor. The seller is under the obligation to refrain from acts that may jeopardize the accomplishment of the project.

General conditions The insurer who pays the consumer shall be subrogated to its rights. The seller will be liable towards the insurer for the sums that the insurer has paid to consumers (+ interests). In case the consumer transfers its rights under the sale contract with the seller, the insurer may choose to cover the new buyer (why not automatic continuation with the new buyer?).

Evaluation The general conditions of insurance don’t seem to encompass all of the eventualities. Many points seem obscure. Turkish insurers have difficulties in convincing the reinsurers.