Do you find insurance and risk management hard to navigate? In this episode, Danielle Lombardo, Senior Vice President at Lockton, offers her expertise on selecting good insurance brokers and what common mistakes she sees investors make when choosing insurance plans.
Danielle Lombardo | Real Estate Background
- Chair of Global Real Estate Practice within Lockton Companies, a global insurance broker and risk management consultant.
- She’s an insurance broker and consultant for a variety of types of CRE firms. Within her specific team, they are focused on providing these services to real estate firms (owners, operators, developers, REITs, etc.) operating in all asset classes.
- Based in: NYC, NY
- Say hi to her at: email@example.com | LinkedIn
- Best Ever Book: Twelve Hours’ Sleep by Twelve Weeks Old by Suzy Giodarno
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Ash Patel: Hello, Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Danielle Lombardo. Danielle is joining us from New York City. She is the chair of a global real estate practice within Lockton Companies, which is a global insurance broker and risk management company. Danielle is also a broker and consultant for all asset classes. Danielle, thank you for joining us, and how are you today?
Danielle Lombardo: I’m doing great. How are you?
Ash Patel: I’m doing very well. Before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?
Danielle Lombardo: Yes. I’ve been in the insurance brokerage business for the past 15 years. I started actually in Los Angeles, I did the opposite of what most people do, going from LA to New York. Clearly didn’t come here for the weather… But always been focused on real estate insurance and started in the multifamily space. One of my first clients grew from 100 units to 10,000 units in two years. During that process, I found out pretty quickly how hard it is to not only place insurance on behalf of real estate owners, but actually service it on a day-to-day basis. I spent an almost 15-year career building our expertise, not only on getting the best rates and coverage, which should be an afterthought with your broker, but really the day-to-day servicing and the psychology of risk management within an organization.
Ash Patel: Can we deep-dive into that? Because to me, it’s almost like title insurance; we don’t really know what we’re getting or why are we getting it. What are we supposed to look for? It’s one of those things that until there’s a disaster, it really is just not in the forefront of what you’re doing. So what are mistakes that a lot of multifamily or any commercial asset real estate operator makes? What mistakes do we make?
Danielle Lombardo: What mistakes? Wow, that’s a great question. First of all, I was talking with a client of mine earlier today. He’s one of the largest multifamily developers in the country. We were just chatting about how inefficient and opaque the insurance market is; no one really understands it. You have to go through a broker to get to the insurance carrier, insurance pricing has become very volatile the past couple of years; it’s causing deals to die, unfortunately. I’ve had multiple situations where people have come to me at the 11th hour trying to get cheaper insurance to make sure that they could actually close on a deal. So it’s become one of these service offerings that is becoming much less like a title, where it’s commoditized because it is what it is on the title insurance… And on the property and casualty insurance front, you can become a lot more strategic around how you’re placing the insurance, the deductibles that you take on, etc.
So if we want to talk about your last question of what do real estate owner-operators, where do they make mistakes – where I see the biggest disconnect is amongst acquisitions teams and the C-level of an insurance company, particularly in risk management, the CFOs etc. who are looking at the long-term coverage implications of insurance. When you’re on the acquisition side and you’re just trying to do deals, you’re trying to get the lowest possible coverage that will meet lender requirements, in general. I don’t want to paint such a broad brush, but I would say amongst all of my clients, that’s generally the perspective. Then, when you’re dealing with asset management, risk management, CFOs etc. they generally have the experience of dealing with the actual claims. So where you may be saving money upfront to get a deal done, from a long-term perspective when you’re looking at the financials of the deal, if you have to fund millions of dollars for a deductible that you didn’t anticipate or there’s a huge gap in coverage, that will absolutely affect investor returns as well. So you really have to take a look at insurance through both lenses – the upfront NOI perspective and focus, as well as more long-term IRR, how is this deal going to pan out if we don’t have the right insurance.
Ash Patel: I’m shocked. Do people really just find the absolute minimum coverage?
Danielle Lombardo: Oh, absolutely. Are you being sarcastic or you just — [laughs]
Ash Patel: No, I’m being serious. So I’m not in the multifamily space, I’m in the commercial space. But we usually get pretty decent insurance; we don’t want the minimum. I mean, we want to know that we’re covered. What horror stories have you encountered and what lessons learned can you help us with?
Danielle Lombardo: There are a lot, and that’s why I’m pausing right now, to see what would be most effective in terms of answering. I would say, at the end of the day a lot of your peers do focus on cost first, and coverage, as long as it meets lender requirements, can be an afterthought. I do see that perspective differing amongst different types of real estate firms. For example, real estate, private equity, and REITs might have more of a conservative standpoint, family offices, because it’s their own money. When I talk to more of my syndicator clients that are just trying to churn and burn deals, three to five-year holds, they’re just trying to make most of their money on the upfront acquisition fees; I think it’s a different perspective as well.
I’ve certainly seen situations where clients have had to do capital calls for insurance-related claims where the deductibles were a lot higher than they had expected. For example, when you’re dealing with catastrophe coverages, like windstorms or earthquakes, you’re going to see three, five, and sometimes higher percent deductibles of your total insurable value, which can be millions of dollars out of pocket after a significant windstorm, or earthquake etc. A lot of times you’re not putting aside that money for a rainy day, and you’re not really thinking through the deductibles on an upfront basis.
I would say the other mistake that I see across more middle-market to small operators is not purchasing general partnership liability insurance, which is essentially a blend of directors and officers and errors and omissions. When you’re dealing with claims of misrepresentation and other claims from investors when deals go South, for example, regardless of what your contracts look like or how good your relationships are, or you think they are, with your investors, they’re generally going to come to you to try to find some reason to recoup their money.
The other side of that too is if you’re the property manager, there are certainly errors and omissions-related claims as well. If you, for example, placed the wrong insurance or you don’t pick the right deductibles, then you have to come out of pocket and you didn’t appropriately advise your investors how you chose those limits or those professional services. There’s a lot there from a professional liability and a directors and officers liability standpoint. Everything else just really skirts the coverage gap conversation around why you’re choosing to purchase particular limits upfront, and what happens when there’s an actual claim.
Ash Patel: Can you dive into the general partner’s liability insurance? What exactly does that cover? Have you encountered a situation where an operator had a loss and they were sued, and this insurance provided some safety?
Danielle Lombardo: Yes, I have. These are typically what we would call catastrophic claims, meaning you’re not going to see claims for $50,000 or $100,000, and that’s why a lot of times the deductibles are much higher. These are claims from investors who say, “You misrepresented on this deal, and I invested as a result. Now I’ve lost money and I’m suing you for $5 million.” Those are the types of claims that we’ve seen. Depending on how the lawsuit is worded and a number of different factors, we certainly have seen significant claim payments on that type of coverage. From a professional liability perspective, if you’re doing property management, we do see, unfortunately, a lot of employee theft-related claims and things like that… Now it all falls within the realm of management liability, outside of what you’re buying on a property level.
Ash Patel: Danielle, we’ve all heard the horror stories where somebody has a roof that blew off of, a fire, and the insurance company doesn’t want to pay. What tips can you give our audience on how to deal with situations like that?
Danielle Lombardo: I have this conversation all the time. The insurance companies want your money ASAP, but they generally will wait to pay claims or will take a while to pay claims. Especially if you’re dealing with catastrophic claims, because you have adjusters that are just overwhelmed. So I would say a couple of things… The way that your coverage policy forms are written upfront is very important. Most of my clients have what are called master insurance programs, that have a number of different insurance companies sharing in the risk. We have a locked-in-based form that we write on behalf of our clients, that tries to make it bulletproof at the point of the claim, so there are no questions and there’s not as much back and forth.
As strong as the coverage might be, you’re still going to have issues getting the right attention from a claims adjuster. So you need to have a broker that has an internal claims advocacy group, that’s sole purpose is to interact with and project manage with the adjusters, and have relationships with those adjusters. It’s actually a fairly small underwriting and claims community, if you can believe it, so having someone internally advocating for you on the front end and then project managing it forward is very, very important to get the claim towards resolution.
I do think that dealing with your larger insurance brokers, they’re going to have the leverage with the insurance carriers to get claims paid not only faster, but to maximize the claims payment. So I do think having a larger insurance broker is certainly key.
Ash Patel: At what point do individuals qualify to get insured by these larger insurance brokers?
Danielle Lombardo: It depends on a couple of different factors. You need to have a minimum premium amount. I would say that minimum premium amount, at least for me personally and within our group where we can add the most value, is usually around $500,000 in premium. That can be a couple of thousand units, that can be even a thousand units if we’re dealing with Florida, because the premiums in Florida are that much higher, it can be 500 units in New York, because general liability insurance in New York is that much higher… So it depends on the geography and the asset class. But if I were to look at premium amount, it’s usually about that $500,000 mark.
The reason why, for us, there has to be sort of a minimum there is not only the service that we offer. We really act as an outsourced risk management department for our clients, so we’re heavily staffed more than a lot of brokers in that sense. But also, when you’re dealing with smaller portfolios, there tend to be one-off regional carriers that are more competitive than our carriers will be. Think farmers, and state farms… They’re obviously not regional carriers, but I’m talking carriers that are focused on smaller portfolios.
Ash Patel: Danielle, Neal Bawa, if you know of him, a multifamily legend, a Silicon Valley guy who just applies a lot of data to real estate investments – he did a webcast recently where he talked about how insurance companies are applying a different level of risk based on climate change data and past weather patterns. Are you seeing that as well?
Danielle Lombardo: We are. It’s a great question and it comes up at least once a week from clients and prospective clients. How are we addressing ESG, and specifically, from a climate change perspective, what is the insurance industry doing. At the end of the day, the reason why there’s so much volatility, at least on the property insurance side, is as you have seen over the past couple of years, there’s been an increase in frequency and severity in weather events. It’s very difficult to anticipate outside of any model out there of how things are going to pan out for insurers. So it’s very hard to underwrite when there’s so much unknown.
With that being said, there are catastrophe models that now have modules to address climate change. Think sea level rise, flood, wind, and other variables that they’re overlaying across their portfolio. We’re certainly seeing insurers focus on it more and we’re seeing clients focus on it more. I will say any catastrophe model that I’ve seen, whether it’s climate change-focused or not, it gives you thousands of years of data. But when you look at how it actually pans out in reality after a storm, it usually is a little bit far off. I think insurance carriers and clients are just reaching for any sort of data to help them make decisions, but at the end of the day, the reason why there’s so much volatility within the insurance market is that there’s so much unknown.
Ash Patel: They’re going to reach and try to stay ahead of the curve.
Danielle Lombardo: They’re going to try to, so what they do as they try to paint the accounts with a broad brush, and really, an insurance broker’s responsibility is to try to beat them at the pass, meaning underwrite internally, have the same types of systems and analytics that underwriters use, so that they can anticipate and be proactive about having conversations around their concerns… Whether it be weather related issues, catastrophe related issues, liability related issues… From a liability perspective, most underwriters are using what is called crime scores in order to evaluate their exposure in different neighborhoods from a multifamily perspective… And to be able to get ahead of that and have conversations with deal teams around what’s really going on within the neighborhood, and what cap-ex is being discussed on the front end, and really what the value-add strategy is at that location, and how they’re going to integrate security as well… So it’s really a lot about having the internal tools, whether it’s climate change or anything else, to be able to have those conversations with underwriters.
Ash Patel: Danielle, what is your best real estate investing advice ever?
Danielle Lombardo: My best real estate investing advice ever, from an insurance perspective, I will say you have to be able to marry both perspectives of upfront pricing and long-term coverage. I would say my advice, again, through the insurance lens, is around making sure that you’re looking long-term at really hedging against the volatility of the insurance market, taking on higher deductibles, putting in place and thinking through potential captive and risk finance opportunities so that you’re getting out of the dollar trading in the insurance market, and being more strategic around how you’re buying insurance.
You don’t want to be where I’ve seen most real estate companies have been over the past year or two, where you are beholden to the insurance market and you’re losing deals because of it. Everyone’s complaining about insurance, and it’s become a real issue when people just want to get deals done.
Ash Patel: Danielle, are you ready for the Best Ever lightning round?
Danielle Lombardo: I’m ready.
Ash Patel: Let’s do it. What’s the Best Ever book you’ve recently read?
Danielle Lombardo: Twelve Hours’ Sleep by Twelve Weeks Old.
Ash Patel: What was your big takeaway?
Danielle Lombardo: Getting my two-and-a-half-year-old and my one-year-old to sleep through the night.
Ash Patel: Got it. Danielle, what’s the Best Ever way you like to give back?
Danielle Lombardo: I love to learn about organizations that are close to the people around me, and continually evolve how I’m giving back. My passion is for at-risk youth, so any organization that focuses on at-risk youth, specifically teenagers, is where my passion lies. But I really do love to spark conversation with people around me, especially my clients and colleagues, what means the most to them and support them as well.
Ash Patel: Danielle, how can the Best Ever listeners reach out to you?
Danielle Lombardo: I think email is probably best, firstname.lastname@example.org.
Ash Patel: Danielle, thank you for your time today and sharing some insights on the world of insurance that’s often mysterious to a lot of us. Thanks for your time today.
Danielle Lombardo: Thank you.
Ash Patel: Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five-star review and share the podcast with someone you think can benefit from it. Please also follow, subscribe, and have a Best Ever day.
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