CREJ - Multifamily Properties Quarterly - February 2017
As an insurance broker who specializes in apartment building, complex and community association insurance, often I am asked to provide new owners and buyers, as well as established building owners, with a basic understanding of the key coverages associated with an apartment building/complex insurance policy. It’s scary to review insurance policies at times to discover that these property owners might not be covered for what they thought they were. Some of these insurance policies can be hundreds of pages long and, believe me, we can spend hours within just a couple of pages on these policies. The apartment insurance policy is made up of two key components: the real property portion and the premises general liability portion. The portion that dictates the majority of the premium is the real property portion of the policy. Within this section you will find your building coverage, which includes protection and coverage against perils such as fire, water, wind, hail, theft, vandalism, etc. The most expensive portion of the policy is coming from your building coverage limit. Building-coverage limits can come in many valuation types, and the two most popular types are replacement cost or actual cash value. Replacement cost is what it would cost to replace and rebuild the structure to like kind and quality in today’s market compared to actual cash value, which would be what the building and materials are worth today after depreciation. While there are some situations that make sense to insure a building at actual cash value, it’s usually recommended to go with replacement cost, if you can. Replacement cost should not be confused with market value, which takes into consideration land value and other variables. Especially in today’s hot market, it is not unusual for apartment building replacement cost to be less, or maybe even a lot less, than market value. Your insurance agent or broker can work with you to come up with the correct replacement cost number. Digging deeper into the property portion of the policy, you will find some key coverages to consider and review – items like wind and hail deductibles, ordinance or law endorsements, loss of rent, equipment breakdown/boiler and machinery, and water and sewer backup coverage. All of these are key to reducing your exposures as a property owner. A new norm on apartment building insurance policies is increased wind/hail deductibles. Within your property insurance policy will be the property deductible and, often, you will have a separate and increased wind/hail deductible. These increased deductibles are a result of the wind and hail claims insurance carriers have suffered over the last five to 10 years. According to 9News, a report by the National Insurance Crime Bureau places Denver as second in the nation for hail-related insurance claims. In 2015, Coloradans filed over 180,000 hail loss claims. Only Texas had more. Often the wind/hail deductibles are percentage-type deductibles. This is not a percentage of the claim, but rather a percentage of the building-replacement cost limit that is listed on your insurance policy. For example, say you have $1 million in building-coverage limits assuming a 2 percent wind/ hail deductible. If the roof is damaged by wind or hail, the deductible would be $20,000 or 2 percent of the building-coverage limit. There are separate insurance policies that can buy down a percentage wind/hail deductible to a lower deductible. Loss of rent, boiler and machinery, and water/sewer backup coverages are fairly self-explanatory but important. Another important item to examine is ordinance or law coverage. This provides coverage for the increased cost of construction to rebuild to current code. This is especially important for older properties. There are three parts to this particular coverage. Coverage A provides coverage for loss to the undamaged portion of a building. If the building was damaged by fire, local jurisdiction can require that the remaining portion of the building be torn down. This coverage pays to rebuild the undamaged portion of the building when it must be demolished to comply with code requirements. Coverage B provides coverage for the cost of demolition. This will pay for the cost to demolish and clear the site of the undamaged portions of the covered building, where the law requires its demolition. And Coverage C provide coverage for the actual increased cost of construction to rebuild to current code. While the increased costs associated with rebuilding to current codes might bring a rude awakening, they need not result in an unpleasant surprise. Properly planned and placed ordinance or law coverage will help make sure that full financial recovery takes place. The other component of the insurance policy is your premises and general liability portion. This is the least expensive portion of the policy and protects and defends you, the building owner, against suits for bodily injury and property damage claims as a result of the building owner’s negligence. Common general liability claims would be trip-and-fall or slip-and-fall type claims. The insurance company agrees to pay those sums that you, as the building owner, become legally obligated to pay, and the insurance carrier has a duty to defend against these suits. Defense costs with most insurance carriers do not reduce your limit of general liability insurance. This type of insurance is very comprehensive in scope but does come with limitations and exclusions, such as workers’ compensation, business auto liability, employment practices liability, errors and omissions, privacy liability, technology liability, directors and officers liability, employee benefits liability and pollution liability – all of which can be bought back if needed or wanted. One last item to consider would be the addition of an umbrella or excess liability insurance policy, which goes above and beyond your general liability insurance policy. This umbrella does not increase any limits of the property portion of the policy – just the general liability portion of the policy. How much umbrella coverage is needed varies based on the assets and net worth of all individuals but, in order to protect your current assets and future earnings as a result of a costly lawsuit, I always recommend additional liability regardless of how many assets are involved. The details of an insurance contract can be confusing and complicated, but your policy is much more manageable if you look at its various parts and address those sections applicable to your current needs. If you can understand the basics of policy composition and the information each section provides, you will have a fuller, more usable and comprehensive insurance policy. Here is to a happy and healthy 2017.