Investment approach
Insuring a Property Project: Liability, Construction, the Property
A project carries several layers of insurance: the property, the works, contractor liability and buyer guarantees. The LOE regulates guarantees for the finished building; the contract sets the rest.
A property project is insured in layers: the property itself, the liability of the contractor and designers, the works, and guarantees to the buyer of the finished building. By law only the guarantees for the finished building are regulated, under article 19 of the Ley de Ordenación de la Edificación (LOE, Spain's Building Act), and whether they are compulsory depends on the type of building. The rest is set by the contract, the bank and your own risks, so the policy is checked rather than accepted because "there is insurance".
Four layers and who answers for what
| Layer | What it protects against | Who usually pays | Compulsory by law |
|---|---|---|---|
| The property (assets) | Fire, water, damage to the building | The owner | Depends on the case, see insuring the property |
| The works | Damage to the works and materials on site | Under the contract: contractor or client | The LOE does not require it, the contract sets the terms |
| Liability | Damage to third parties from the works, errors by those doing the work | Contractor, designer | Under the contract, if it requires it |
| Guarantees for the finished building | Hidden defects after handover | Contractor (1 year), promoter (3 and 10 years) | Depends on the type of building: set by disposición adicional segunda of the LOE, to which art. 19 refers |
What the law says: the LOE
Ley 38/1999 (LOE) sets the liability periods of those involved in construction in art. 17.1: ten years for damage to structural elements (foundations, supports, load-bearing structures), three years for defects affecting habitability, and one year for finishing defects. The contractor answers for execution errors directly (art. 17.6), and the promoter answers to buyers jointly with the others involved (art. 17.3).
The guarantees for a finished building are listed in art. 19.1: one year, three years and ten years. Which are compulsory is set by disposición adicional segunda of the LOE, to which art. 19 refers. Under its text, the ten-year guarantee is currently compulsory for buildings whose main use is housing (with an exception for a self-builder of a single home for personal use), while the one- and three-year guarantees the government may make compulsory by a separate Real Decreto. The policyholder for the one-year guarantee is named as the contractor, and for the three- and ten-year ones the promoter (art. 19.2.a): if you are the promoter, the policy is yours. When a seguro decenal (ten-year structural insurance) is needed in a refurbishment is covered in the article on the seguro decenal.
How insurance works: two rules that most often let people down
Ley 50/1980 on the insurance contract contains the rules that most affect a payout:
- Risk declaration (art. 10 and 11). Before the contract is made, the policyholder answers the insurer's questionnaire and discloses all circumstances known to them that bear on the risk assessment. The insurer may terminate the contract within a month of learning of an inaccuracy. If the circumstances in the questionnaire change for the worse while the policy is in force, this must be reported (art. 11). For a project this means a property about to be renovated, an empty property or an old building must be described honestly.
- Underinsurance (art. 30). If the sum insured is lower than the real value, the insurer compensates the loss in the same proportion, unless the parties have excluded this rule.
Worked example: underinsurance
Worked example, not a forecast. The property is insured for €400,000, and the real cost of reinstatement is €500,000. The coverage ratio: 400,000 ÷ 500,000 = 80%. A loss of €100,000 occurs. Under the art. 30 rule the insurer pays 80% of the loss, that is €80,000, and €20,000 stays with the owner.
If the rule is excluded in the contract, the calculation is different. That is why the sum and the terms are checked against the reinstatement value, not against the purchase price: the cost of rebuilding is calculated separately from the price of the deal.
What to check in the policy before work starts
- Who is the policyholder, who is the insured person and who is the beneficiary. If the property belongs to an SL, the policy must be issued in its name.
- Whether the policy covers the renovation period: a standard home policy may not allow for works, so ask the insurer.
- Whether the contractor has a liability policy and for what sum; ask for a copy of the policy, not a verbal assurance.
- What the exclusions in the póliza (policy) are: art. 8 of Ley 50/1980 requires exclusions to be set out prominently.
- Whether the description of the property in the policy matches reality: area, condition, use, whether it stands empty.
Requirements for the contractor and the order of staged payments are covered in the articles on contract milestones and the contingency reserve.
Who a policy will not help
Insurance does not replace vetting the contractor and does not cover budget errors or missed deadlines. Nor does it cover market risk: a sale price below the estimate. It works for specific insured events, and the insurer is entitled to apply exclusions. So the insurance layer is counted in the budget as a cost, not as protection of the project's result.
Next step: put the premiums and the reserve into the calculator and check the full list of costs against the article on the full project budget. What the contract for a specific DNPI project covers is set by that contract itself; clarify it before signing.
Questions and answers
Which insurance is compulsory for renovation or construction in Spain?
The LOE (art. 19) regulates the guarantees for the finished building, and whether each is compulsory depends on the type of building and disposición adicional segunda; see the separate article on the seguro decenal. Insurance of the works themselves and the contractor's liability are compulsory if the contract or the bank requires them.
Who insures liability for defects after handover?
Under art. 19.2.a LOE the contractor takes out the one-year guarantee, and the promoter the three- and ten-year ones. The liability periods of those involved are in art. 17.1.
What is infraseguro?
It is a situation where the sum insured is lower than the real value of the property. Under art. 30 of Ley 50/1980 the payout is then reduced in the same proportion, unless the contract excludes the rule.
Do I need to tell the insurer that the property is empty or will be renovated?
If it appears in the insurer's questionnaire, yes: that is the risk declaration (art. 10 of Ley 50/1980), and a change in such circumstances during the policy is also reported (art. 11). What counts as material for your policy, check with the insurer and an abogado.
