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 Rich_Clark@ajg.com.