Property insurance can make or break real estate management companies, depending on their coverage in the event of a disaster—whether it’s a hurricane blowing in from the coast town, a flood unleashing its wrath or an earthquake rattling windows and walls.
Yet, the complicated nature of property insurance, along with the multitude of other responsibilities real estate managers face, hinders many from investing the time and resources needed to ensure their properties are adequately protected.
“The problem with insurance is it keeps you up at night and you don’t know why,” said Lou Nimkoff, CPM®, president of Brio Properties in Winter Park, Fla. He said many real estate managers, particularly those at small management companies, are “defacto” risk managers, thrown into the responsibility of determining a property’s level of risk and finding adequate insurance to mitigate that risk.
“Insurance is very legal and very detailed,” Nimkoff said. “Most of us are asked to take on the duty when we’re ill-prepared to do so.”
Being prepared means understanding the types of coverage available, the coverage a property already has in place or needs, exclusions in policies that can be damaging, and how to handle insurance claims in the event of a disaster.
Should disaster strike, the major form of insurance on most real estate managers’ minds is property insurance. Standard property insurance protects against risks to a property, such as fires, some weather damage and theft. Coverage for floods, earthquakes and windstorms is often available via an endorsement to a property policy or as an entirely separate policy.
Property insurance can come in the form of an all-risk policy, also called an open peril policy, whereby all the causes of loss are covered unless they are specifically excluded; or a named peril policy, which covers only specifically listed risks. All-risk policies are the most broad and comprehensive, said David Mistick, CPM, president of Circumspex LLC, a company that provides a web-based disaster planning and recovery application for property managers. He said the only reason companies would select a named peril policy is if a risk is expressly excluded in their all-risk policy.
“If the all-risk policy excluded flood or earthquake, the property owner would want to buy a named peril policy to cover these if he was exposed to those risks and the likelihood of occurrence was significant, said Mistick.”
Named perils like flood or earthquake are limited in sales and coverage. For example, flood is all underwritten by FEMA but distributed by private insurance companies. Earthquake is often underwritten by risk pools of companies to spread the exposure.
As far as limits go, wind, earthquake and flood limits are based on models that analyze a location’s susceptibility to particular disasters and estimate a probable timeframe for the next occurrence. Clients usually buy to the 250-year event level for earthquake and wind, based on the probability, according to Al Tobin, managing director and national property practice leader for Aon Risk Services in New York. He shared that fire limits are set against values in the simplest way: For example, if your largest building has replacement cost and rents of $100 million, $100 million may be your limit. Lenders might also require a certain limit based on any building debt. “A property manager, with a broker’s assistance, should be able to acquire the right combination of coverage,” Mistick said. “The key will be getting them at a price that fits the budget.”
Deductibles are of course a big part in deciding what fits the budget. Different deductibles apply to different disaster perils, said Ann Butterworth, director of property underwriting in Weston, Mass., for Liberty Mutual Property. Some are percentage based, where one pays a percent of the loss, and others are a flat amount that must be paid upon a loss.
Regardless, Butterworth said owners and managers need to take into account the deductible when budgeting and determine if they could afford to be financially responsible at that level if a loss was to occur.
Acquiring adequate property insurance at the right price hinges on a thorough assessment of portfolios, the appropriate valuation of properties, and owners’ and managers’ appetite for risk.
“There is no right or wrong,” Nimkoff said. “It’s a property by property and owner by owner strategy.”
Owners and managers should assess a multitude of variables when determining risks to a property, such as the proximity of a building to a chemical plant that could have a spill, the possibility of a property being targeted by terrorism, the use of their buildings and the associated risks with those uses, and the geography of their properties and whether they are in areas prone to natural disasters.
“The insured should know where their exposures are and what perils they are subject to,” Butterworth said. Aside from an owner’s or manager’s analysis of a property and its risk, insurance companies have modeling tools that will help determine a property’s risk profile.
Kristin Gunderson is a contributing writer for JPM. If you have questions regarding this article or you are an IREM Member interested in writing for JPM, please e-mail Markisan Naso at firstname.lastname@example.org.