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The property insurance market was
pretty easy to navigate in the
Houston area until 2006. It didn’t require any special treatment from the
insurance industry. Hurricanes Rita and
Katrina have changed that. Now the area
is considered on par with the coastal
areas and has most of the concerns that
go along with that distinction.

“The two main changes have been that
premiums have increased by two or three
times and deductibles now generally
range from 2 percent to 5 percent of
value,” says Rich Clark, managing director of Gallagher Hospitality Niche, Arthur
J. Gallagher & Co. “Our crisis mode does
not rival Florida’s. While premiums and
deductibles have jumped, at least we
haven’t seen the instances of coverage not
being available.”

Smart Business talked with Clark for
more information on the property insurance outlook in the Houston area.

What do you see on the property insurance
horizon in the Houston area?

In general, property owners should budget for about the same property insurance
costs as they paid in 2006 because the market is leveling off.

The exception to that would be for those
whose premiums come due in the first quarter of the year. If they paid their premium in
the first quarter of 2006, they probably got
by without much of an increase. They will
have to deal with a hefty increase this year.

Besides the premiums, property owners
need to be aware of the potential exposure
due to higher deductibles.

What can property owners do to alleviate
some of the costs?

First of all, it is important to have a market-knowledgeable agent or broker. He or
she needs to have experience in placing
coverage on the type of asset you own to
provide the best advice.

Secondly, ask your agent or broker to
have a Probable Maximum Loss (PML)
study done. Most lenders require that full
replacement coverage be maintained.

Insurance companies want their premium
based on full replacement cost. The PML
study will show what the potential loss
would be under various scenarios. It gives
you a tool to negotiate with. Let’s say you
have $100 million worth of property and
the study shows that your maximum total
loss would be $20 million from wind or
flood damage. Then, if your lender agrees,
you might only have to purchase insurance at the higher rate for wind or flood
damage on $20 million and lower rates for
$80 million coverage for fire, theft or
other damages.

Is an appraisal necessary to determine coverage requirements?

As long as you can show the carriers
that replacement costs are in line with
industry standards, an appraisal should
not be necessary.

With newer buildings, it is fairly easy to
review various standards to come up with
fair replacement values. With older buildings — especially those with historical
significance or those built before many of
the current laws and codes were in effect
— higher replacement costs need to be
considered.

You may have much higher costs to
replace a building using today’s building codes. In these cases, be sure to talk
to your agent about law and ordinance
coverage.

What about flood insurance?

Houston has been remapped, so flood
zones have changed. Flood insurance can
be purchased through the National Flood
Insurance Pool (NFIP). You can purchase
this insurance whether you are in a flood
plain or not. It is quite inexpensive, so it is
usually recommended that property owners buy what NFIP insurance they can and
then purchase supplemental commercial
insurance to cover what isn’t covered by
NFIP.

What is the most important aspect of a property owner’s insurance program?

People tend to look at the price of
their coverage, but it is most important
to review your coverage with your
agent or broker. Make sure you understand what coverage you have and don’t
have. This is another reason to deal
with an agent or broker who specializes
in your industry and understands your
coverage needs. Only such a specialist
is able to point out things that you do or
don’t need to have covered and how
best to obtain the coverage at a fair
price.

Any other advice?

Be prepared. Every property owner
should have a relationship with a first
responder in the event of a major claim or
catastrophe.

Also, identify a forensic accountant. Have
your team in place before a catastrophe is
imminent. When something happens,
everyone should know who is going to do
what, and when.

RICH CLARK is managing director of Gallagher Hospitality
Niche, Arthur J. Gallagher & Co. Reach him at (713) 358-5930 or
[email protected].