During the past year or so, the multifamily insurance market has changed. Throughout most of the post-2008 economic expansion, we were in a “soft” insurance market. That is, insurance companies were competing for business. As a result, multifamily operators had access to relatively low insurance premiums. However, according to multifamily insurance specialist Bryan Shimeall, we’ve officially transitioned into a “hard” insurance market.
In a “hard” insurance market, insurers are very picky about the types of properties they will insure and policies they will provide. As an example, Bryan said many insurers no long offer renewable policies. Once the current contract expires, they may elect to not renew the insurance, depending on their updated underwriting standards.
As a result, assuming the property still qualifies for insurance, the premiums will tick higher and higher.
Because of these changes in multifamily insurance, here are the eight things to think about when obtaining an insurance quote.
- Setting the insurance assumption when underwriting: The days of assuming the stabilized insurance premium will be equal to the T-12 insurance premium or OM insurance premium are over.The increases in insurance rates depend on the geography, but a double-digit percent increase in the insurance rate is not uncommon in certain markets. When underwriting a multifamily deal, speaking with your insurance provider to get an estimated insurance premium is now more important than ever.
- History of losses: To provide you with an accurate quote, your insurance provider will require the history of losses from the current owner’s insurance provider. When they do not have the history of losses, they will create a quote with the assumption that the property has a clean history.However, if they discover a history of losses during the due diligence period, the insurance premium will go up. Depending on the severity of the loss history, the insurer may opt to not provide insurance on the asset at all. Therefore, request the loss history as early as possible.
- Deductible vs. Premium: Generally, the deductible and premium have an inverse relationship. The higher the deductible, the lower the premium and vice versa. You want a higher deductible that you are comfortable paying and a lower premium. This will result in a reduced insurance expense and higher cash flow. Ask the insurance provider for multiple quotes with varying deductibles and premiums and select the coverage with the highest deductible you are comfortable paying.
- Understanding the deductible: There are two types of deductibles: a deductible per occurrence and a deductible per building. If damage occurs to multiple buildings and the deductible is per building, you will have to pay the deductible multiple times until the insurance coverage kicks in. If damage occurs to multiple buildings and the deductible is per occurrence, you will have to pay one deductible and then the insurance kicks in.
- Loss of income coverage: Apartment insurance not only covers the physical building but can cover loss of income as well. You will want to determine if you receive reimbursements for a loss of rent if the property is damaged by a covered loss, like a storm or a fire. If you do, how does the coverage work? Will it cover a certain time frame? Up to a certain amount?
- Commercial general liability insurance: Apartment insurance can also protect you against lawsuits from a tenant or visitor being injured. A good rule of thumb is $1 million per occurrence and $2 million overall in general liability coverage.
- Replacement insurance: Make sure the replacement cost is what it would cost to replace the property. The replacement cost should be based on the price per foot to rebuild as opposed to some other method of valuation.
- Real Estate America Property Association (REAPA): REAPA partners with the best-in-breed industry leaders to provide its members with significant savings on products and services related to real estate. Join REAPA for $250 per year to access their less expensive insurance product.
8 Things to Consider When Obtaining Insurance
To avoiding underestimating your insurance costs and to ensure you have adequate coverage when needed, make sure you:
- Don’t trust the proforma insurance but rather obtain a new estimate
- Request history of losses from seller ASAP
- Go with the lower premium and higher deductible policy
- Understand the difference between deductible per occurrence and per building
- Obtain loss of income coverage
- Get general liability coverage
- Confirm replacement cost is based on price/sqft approach
- Join REAPA for discounted insurance premiums
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.