Real estate companies and property owners have a vested interest in insuring
against a long list of risks. In the current market, some owners can even face the
prospect of not being able to get the insurance they need.
“You may have to use various strategies on
the broker side in order to get the right coverage,” says Kevin Connelly, vice president of
The Graham Company. “Someone that does-n’t handle this sort of risk frequently won’t
have the experience or resources to get the
right coverage when things get tough.”
Smart Business spoke to Connelly about
some real estate insurance best practices for
maintaining the proper coverage.
What are some common concerns for real
estate owners?
A very common shortfall that we see in
real estate programs is that a typical real
estate owner’s policy — similar to most commercial general liability policies — is going
to exclude things like, let’s say, mold. Some
people might not really be worried about
that exposure, but a real estate owner, particularly one that rents apartments, could
have a serious exposure there. And if you
have a standard general liability policy written the way that most real estate companies’
are, you have no coverage for that. In the
insurance world, mold is usually considered
a pollutant, so putting a pollution policy in
place is a good way to fill that gap.
Other policies that might be overlooked
are tenant discrimination type coverages or
employment practices liability policies.
What about the structure of policies?
Typically, what you see with real estate
companies is that they don’t have just one
property. In these cases, there are a number
of different ways property insurance can be
written. One of the ways is with blanket limits, which essentially means that all of your
properties are covered under one limit. You
generally have this huge limit that will most
likely satisfy any needs you may have in a
loss. But a lot of times what we see with multiple properties is they’ll have one individual
limit that applies to that location. And if that
limit isn’t set properly and isn’t assessed closely, if something burned to the ground,
you could end up with a limit that’s totally
inadequate. Or you might have a policy that
contains a coinsurance clause that becomes
very punitive in the event of a partial loss.
Similarly, with business income coverage,
if you have blanket limits over all your properties, you’re probably going to be more
insulated against any miscalculation you
might make in setting your limits. But if you
have it on a per-location basis, there’s a
greater possibility that you could have a
shortfall in the amount of business income
coverage needed.
How can real estate companies best manage
losses?
Any insureds have to remember, whether
they’re a real estate company or not, the
thing that’s really going to be the biggest driver of their cost of insurance is how their historical losses look. What we see sometimes
is that a real estate company will own many
different properties, sometimes in different
states. The problem with that is you may not
have a risk management program where
somebody pulls together what’s happening
at all those locations and lets somebody at
the headquarters in a corporate office know, for example, that the location out in
Nebraska is really getting killed with losses
and pulling the rest of the locations down.
There’s not a lot of centralization of looking
at losses, making sure contracts are standardized among the locations in the right
way and making sure that the loss control
that’s delivered to all the locations is delivered in some kind of orderly and organized
manner. Because the ultimate goal is to
reduce losses and manage risk in order to
drive down the cost of risk.
What about companies that can’t get the
insurance coverage they need?
Before Hurricane Katrina, things like wind
coverage were fairly easy to get at whatever
limits you wanted and the cost associated
with it was somewhat nominal. After Katrina
and the other hurricanes in Florida several
years ago, the ability to get wind insurance in
certain areas like Florida was really limited
and very expensive. So instead of having an
easy decision to make, you had to start
thinking about different strategies to address
what your real exposure was.
Let’s say you have a $100 million location in
terms of your property values. When wind
coverage gets really expensive or impossible
to procure, you have to start looking at what
your real exposure is. If your deductible is $1
million to begin with, and you estimate that
your probable worst-case exposure is $5 million in damage above that, does it make
sense to make a huge premium outlay for
coverage above $5 million? Or perhaps the
real concern is the amount above $5 million
so you retain the risk below that level and
buy insurance for a real catastrophic event.
So what you need to assess is what coverage
you really need on the high end, and then on
the lower end, you need to assess what your
real deductible levels should be. So you look
at those things and you make sure you have
the right amount of insurance, so that you
don’t buy more than you need, and that you
set your deductibles at a level that you can
comfortably maintain and still be able to pay
in the event of a loss.
KEVIN CONNELLY is vice president with The Graham Company. Reach him at (215) 701-5376 or [email protected].
