Abstract
Building Completion Insurance (“BCI”) is a special type of insurance mechanism aimed at protecting consumers, landowners and other beneficiaries against the risk that the contractor or seller may fail to complete construction projects.
Under Turkish law, BCI gives rise to different legal consequences in terms of pre-paid housing sales, urban transformation projects and optional applications based on the parties’ contractual intentions.
There is a widespread misconception in practice that BCI covers all construction-related risks. However, BCI is not a general guarantee system covering defective performance, incomplete works or all types of damages. Rather, it provides protection only against the risks of non-completion specified under the relevant legislation and the insurance policy.
This article examines the legal nature of BCI, its mandatory and optional areas of application, its function in pre-paid housing sales and urban transformation projects, and the limitations of its coverage.
1. Legal Framework of Building Completion Insurance
1.1. Purpose and Rationale Behind Building Completion Insurance
The construction sector involves significant risks due to long project periods, substantial financing requirements and complex legal relationships involving multiple parties.
Consumers and landowners may suffer serious losses where the contractor becomes financially incapable, enters into bankruptcy or fails to complete the project for various reasons.
Particularly in pre-paid housing sales, consumers make payments for an independent unit before the completion of the construction. In urban transformation projects, landowners transfer their existing property rights to the contractor in exchange for acquiring rights over the future completed structure.
BCI has been developed as a mechanism to protect beneficiaries against the risk that the contractor or seller fails to fulfil its completion and delivery obligations in such circumstances.
However, BCI does not constitute a guarantee system eliminating all construction-related risks. The primary subject matter of BCI is not physical damage to the building, but rather the risk that the project cannot be completed under certain circumstances.
1.2. Legal Nature of Building Completion Insurance
BCI is technically a type of surety insurance product. Therefore, unlike traditional indemnity insurance, its primary purpose is to protect the interests of a third party where a specific obligation cannot be fulfilled.
Within the scope of BCI:
- The policyholder is generally the contractor or seller,
- The insurer is the entity providing insurance protection,
- The beneficiary is the consumer or landowner.
Although the insurance agreement is technically executed between the contractor/seller and the insurer, its economic purpose is to protect the beneficiary.
In this context, the separate guarantee certificate plays a significant role. The mere existence of BCI for a project does not automatically mean that the beneficiary will be directly protected in all circumstances. Whether the beneficiary has a right to claim under the insurance coverage must be separately assessed based on the insurance policy and the guarantee certificate.
2. Scope of Building Completion Insurance
2.1. Risks Secured Under BCI
The fundamental purpose of BCI is to protect the beneficiary where the contractor or seller fails to complete the project.
Within this scope, the following circumstances may be assessed as falling under the insurance coverage depending on the specific circumstances:
- Bankruptcy of the contractor,
- Inability to continue the project due to financial reasons,
- Failure to fulfil the delivery obligation.
Where the insured risk occurs, the insurer may either provide monetary compensation or, under certain conditions, ensure completion of the project.
The option of completing the project is particularly important for housing purchasers, as the primary objective of consumers is generally not merely to recover the amounts paid, but to obtain the independent unit they purchased.
2.2. Circumstances Excluded from BCI Coverage
One of the most common misconceptions regarding BCI is the assumption that “if there is insurance, all damages will be covered”.
However, BCI is limited to the risk of non-completion of the project.
For example:
- Use of materials contrary to the contractual specifications,
- Failure of the building to meet quality standards,
- Existence of incomplete works,
- All types of damages arising from delay
are not automatically covered under BCI.
Such disputes are generally evaluated within the scope of construction agreements, consumer protection law and contractual liability provisions.
Therefore, the concepts of non-completion, defective performance and incomplete works must be distinguished from each other.
3. Mandatory Applications of Building Completion Insurance
3.1. BCI in Pre-Paid Housing Sales
Within the scope of the Turkish Consumer Protection Law No. 6502 and the Regulation on Pre-Paid Housing Sales, it is stipulated that payments made by consumers must be secured under certain conditions.
However, the critical point is the following: In pre-paid housing sales, the mandatory requirement is not obtaining BCI itself but securing consumer payments.
The legislator has imposed an obligation to provide security in favor of consumers and has regulated BCI as one of the methods through which such security may be provided.
3.1.1. The Thirty-Housing Criterion and Alternative Security Systems
Pursuant to the Regulation on Pre-Paid Housing Sales, sellers of projects containing thirty or more housing units are required to secure consumer payments.
Accordingly, consumer protection may be provided through methods such as:
- Building Completion Insurance,
- Bank guarantee letters,
- Progress payment systems,
- Linked credit systems.
Therefore, the statement that:
“BCI is mandatory for all projects containing more than 30 housing units”
is not legally accurate.
The mandatory requirement is the provision of security, whereas BCI constitutes only one of the available security mechanisms.
4. Building Completion Insurance in Urban Transformation Projects
4.1. Importance of BCI for Landowners
Within the scope of the Law No. 6306 on Transformation of Areas Under Disaster Risk, landowners transfer their existing properties to contractors in urban transformation projects and expect to acquire new independent units in return.
The most significant risk in this process is the inability of the contractor to complete the project after the existing structure has been demolished.
For example, where an apartment building is determined to be a risky structure and the owners vacate the building following an agreement with the contractor, failure to complete the construction may place landowners in a difficult position both financially and in terms of housing.
For this reason, BCI constitutes an important security mechanism for landowners in urban transformation projects.
4.2. Relationship Between Contractual Arrangements and Security in Urban Transformation
When assessing BCI in urban transformation projects, not only the insurance policy but also the following matters must be examined together:
- Land share construction agreement,
- Delivery period,
- Allocation of independent units,
- Scope of the guarantee certificate.
The existence of insurance alone does not mean that the contractor will fulfil all of its contractual obligations.
5. Optional Applications of Building Completion Insurance
BCI is not only a security mechanism used in projects where providing security is required by legislation. Parties may voluntarily obtain BCI for any construction project within the scope of freedom of contract.
In particular, BCI has become an important tool regulating risk allocation between parties in:
- Large-scale housing projects,
- Mixed-use projects,
- Commercial real estate investments,
- Construction projects involving institutional investors.
The primary purpose of optional BCI is not to fulfil a statutory obligation, but to increase project reliability and manage the risks arising from possible non-completion.
Within this scope, BCI may be preferred for the following purposes:
- Increasing investor confidence,
- Protecting landowners,
- Strengthening the financing capability of the project,
- Supporting the reliability of the contractor.
Especially in projects involving professional investors or institutional landowners, objective assurances regarding the completion of the project are as important as the contractor’s commercial reputation.
However, when establishing optional BCI, the scope of insurance coverage must be compatible with the underlying contractual relationship.
For example, in a land share construction agreement:
- Delivery date,
- Allocation of independent units,
- Default of the contractor,
- Termination conditions
should be clearly regulated, and the insurance coverage should be structured in accordance with this legal relationship.
Otherwise, although the parties may have a general perception that “insurance exists”, the relevant risk may still fall outside the scope of the insurance policy.
6. Comparison of Building Completion Insurance with Other Security Mechanisms
6.1. Difference Between Construction All Risks Insurance and BCI
In practice, BCI and Construction All Risks Insurance (“CAR”) are sometimes confused with each other. However, these two types of insurance provide protection against different risks.
The primary purpose of CAR insurance is to secure physical damages that may occur during construction activities.
Within this scope, risks such as:
- Fire,
- Earthquake,
- Flood,
- Storm,
- Sudden and unexpected damages occurring at the construction site
may fall within the scope of CAR insurance.
On the other hand, the subject matter of BCI is not physical damage to the building, but the risk that the contractor or seller cannot complete the project.
For example, damage caused by an earthquake occurring in a completed building would generally not fall within the scope of BCI, but rather within the scope of relevant property insurance mechanisms.
Therefore, these two insurance products are not alternatives to each other. On the contrary, they may operate as complementary mechanisms managing different risks in large-scale projects.
6.2. Difference Between Surety Insurance and BCI
Although BCI technically constitutes a type of surety insurance, it differs from traditional surety insurance in certain respects.
In traditional surety insurance, the primary purpose is to protect the beneficiary where the policyholder fails to fulfil a specific obligation.
In BCI, however, the protection of consumers and landowners is particularly emphasized.
Furthermore, one of the significant characteristics of BCI is that it enables the insurer not only to provide financial compensation but also, under certain circumstances, to ensure completion of the project.
Therefore, BCI may establish a broader protection mechanism than a conventional security relationship.
6.3. Difference Between Bank Guarantee Letters and Traditional Contractor Guarantees
Bank guarantee letters and other traditional security mechanisms have been used in the construction sector for many years to secure the contractor’s obligations.
Under a bank guarantee letter, the bank undertakes to make a payment upon the occurrence of the conditions specified in the guarantee.
On the other hand, BCI establishes a specific protection mechanism within the insurance system, particularly aimed at protecting consumers and landowners.
Therefore, the selection of the appropriate security mechanism should be determined by considering:
- The scale of the project,
- The financing structure,
- The nature of the parties,
- The specific risk intended to be secured.
7. Disputes Arising from Building Completion Insurance and Available Legal Remedies
7.1. Application to the Insurer
A person claiming rights under BCI must first apply to the insurer.
In such applications, the following documents and information are particularly important:
- Insurance policy,
- Separate guarantee certificate,
- Sale agreement or construction agreement,
- Payment documents,
- Information and documents demonstrating that the project has not been completed.
The insurer will primarily examine whether the insured risk has occurred and whether such occurrence falls within the scope of the insurance coverage.
7.2. Insurance Arbitration Commission and Judicial Remedies
Where the insurance company is a member of the Insurance Arbitration Commission, disputes arising from BCI may be resolved through arbitration.
Insurance arbitration has an important role in practice as it provides a faster and more specialized dispute resolution mechanism for insurance-related disputes.
In addition, depending on the nature of the dispute, claims may be brought before:
- Consumer Courts,
- Civil Courts of First Instance,
- Other competent judicial authorities.
The determination of the competent court depends on factors such as:
- The status of the parties,
- The legal nature of the underlying relationship,
- Whether the dispute constitutes a consumer transaction.
7.3. Judicial Approach
Since specific disputes concerning BCI are relatively new in practice, there is not yet a comprehensive and well-established body of higher court precedents specifically addressing this type of insurance.
Nevertheless, established principles of insurance law remain significant in evaluating BCI-related disputes.
Accordingly:
- The scope of insurance coverage is primarily determined according to the insurance policy and general conditions,
- Insurance agreements cannot be expanded without limitation through broad interpretation in favour of the insured,
- Risks excluded from coverage must be assessed in accordance with explicit contractual provisions,
- The purpose of the agreement and the principle of good faith must be considered together.
Therefore, in BCI disputes, it is not sufficient merely to determine whether an insurance policy exists. The content of the policy, the separate guarantee certificate, the underlying agreement and the specific circumstances of the case must be examined collectively.
8. Conclusion
BCI constitutes an important legal security mechanism for managing the risk of non-completion in the construction sector.
However, in order to properly understand BCI, the mandatory security system and the insurance product itself must first be distinguished from each other.
In pre-paid housing sales, the legislator has required consumer payments to be secured under certain conditions, while BCI has been regulated as one of the methods through which such security may be provided.
In urban transformation projects, BCI is one of the important mechanisms protecting landowners against the risk that the contractor may fail to complete the project.
For contractors, BCI should not be regarded merely as an insurance cost. Rather, it should be evaluated as a risk management tool that enhances project reliability and strengthens relationships with investors and landowners.
For consumers and landowners, understanding the limits of insurance coverage is equally important. The existence of BCI does not mean that all losses will automatically be compensated.
Ultimately, BCI is a specialized security mechanism that provides effective protection when combined with proper contract management, an appropriate financing structure and comprehensive legal assessment.
Since each construction project has its own legal structure, parties and risks, the necessity and scope of BCI must always be evaluated on a case-by-case basis.
For detailed information on this subject and to receive paid oral and/or written legal consultancy services, please contact us through the “Contact Us” section of our website.
Detailed information regarding our law firm’s practices in Real Estate Law, Construction and Infrastructure Law, Property Ownership Law, Contract Law and Consumer Law may be accessed through our website.
Adar UÇAR (Attorney at Law)
Uçar Law & Consultancy Office
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