On 4 July 2012 the State Duma passed the first reading of the draft federal law "On Mutual Insurance of Civil Liability of Entities which Raise Funds for Participatory Construction of Apartment Blocks (Developers) for Non- Fulfillment (Improper Fulfillment) of Obligations under Contracts for Participatory Construction" ("the Draft Law").

Over the course of recent years the legislation on housing construction has been actively developed in order to ensure the protection of rights of participants (i.e. investors) in participatory construction (in simple terms, the forward sale of property under construction).

In 2010 amendments to legislation on state registration of immovable property and transactions with such property were passed. These amendments impelled developers to enter only into contracts for participatory construction with individuals and specified punitive sanctions for "workaround" transactions with individuals.

In 2011 amendments and additions to legislation on insolvency (bankruptcy) were passed, which stipulated specific provisions of bankruptcy of developers who raise funds from participants in participatory construction.

Also in 2011 amendments to the Housing Code of the Russian Federation were passed. As a result of these amendments developing companies circumvented the large-scale raising of funds from individuals by the creation of affiliated housing cooperatives.

Nevertheless, currently the existence of a signed contract for participatory construction and favorable conditions of participation in bankruptcy proceedings of a developer does not provide participants in participatory construction with sufficient guarantee of repayment of funds in cases where a developer's assets are divested before the start of bankruptcy proceedings.

For the purpose of further protecting the rights and interests of participants in participatory construction it was proposed to use the mechanism of insurance of developers' civil liability by the creation of a mutual insurance company ("MIC") on the conditions and procedures stipulated by the Draft Law.

According to the Draft Law, a MIC is a unified non-commercial organization on the territory of the Russian Federation, operating on the basis of membership of developers.

The MIC will provide mutual insurance of property interests exclusively to MIC members on the basis of the MIC charter and rules of mutual insurance for developers, (being an integral part of the charter). Members of the MIC would receive a policy of mutual insurance of developers in accordance with the procedure stipulated by the Draft Law. The number of members of a MIC cannot be less than 50, with maximum number of members unlimited.

The Draft Law stipulates that the mutual insurance of civil liability of developers shall be provided solely in favor of a beneficiary, even if the mutual insurance policy is issued to another person or it is not indicated in the policy in whose favor it is issued.

A beneficiary can be an individual and / or a legal entity (except for credit institutions) which has a right to demand from a member of the MIC the transfer of ownership of a housing unit (apartment or room) in an apartment block, or a monetary claim in accordance with the law on insolvency and bankruptcy, and which has a right to receive insurance indemnity in accordance with the Draft Law.

The object of mutual insurance of developers is the property interests of a member of a MIC associated with the risk of its civil liability to the beneficiary, which may occur due to the non-fulfillment (improper fulfillment) of an obligation to transfer the ownership of a housing unit to the beneficiary or to fulfill a monetary claim by a MIC as a result of an insured event.

An insured event, in terms of mutual insurance of developers, is the fact of the closing of the register of creditors' monetary claims in accordance with paragraph 1 of article 142 of the Federal law "On Insolvency (Bankruptcy)", if the obligations of a member of the MIC have not been fulfilled in accordance with articles 113 and 125 of the insolvency law or if the demands of participants in participatory construction have not been satisfied in accordance with the procedure stipulated by articles 201.10 and 201.11 of the Federal law "On Insolvency (Bankruptcy)".

A payment of an insurance indemnity under mutual insurance of developers is carried out within the limit of a monetary claim of the beneficiary against the developer in accordance with the Federal law "On Insolvency (Bankruptcy)". A MIC which pays an insurance indemnity obtains the right to claim, within the limit of amount paid, which the beneficiary had against the developer in relation to the insured event.

Membership in a MIC of developers starts from the moment when a policy of mutual insurance is issued to the developer. In order to become a member of a MIC the entity which intends to raise funds on the basis of a contract for participatory construction should:

  • Provide an application for membership
  • Pay membership fee
  • Provide other documents stipulated by the Draft Law

A member of a MIC of developers is obliged to insure its property interests with the MIC, comply with the MIC's charter, implement the decisions of general meeting of the MIC, and timely pay the insurance premium (insurance contributions) and other contributions. In general, the rights and obligations of a MIC's members are determined by the Draft Law, MIC's charter and Russian legislation.

In accordance with the Draft Law, the source of the MIC assets are:

  • Membership fees paid by members
  • Insurance premium (insurance contributions) paid by members
  • Additional insurance contributions and other contributions for covering expenses connected with company's charter activity
  • Revenue from investment and use of available funds of insurance reserves and other company's funds
  • Revenue received from permitted types of entrepreneurial activity
  • Other income that is not forbidden by law

According to the experts, the Draft Law is intended to provide a basis of insurance by establishing a relatively cheap (in comparison to commercial insurance) unified mutual monetary fund, which will exclude the distribution of profit and other revenue, and achieve the main purpose of insurance, thereby creating a more reliable and acceptable financial system managed by mutual insurance participants with safeguards to protect their property interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.