Real estate insurance 101 Featured

8:00pm EDT September 25, 2008

Real estate companies and property owners have a vested interest in insuring against a long list of risks. In the current market, some owners can even face the prospect of not being able to get the insurance they need.

“You may have to use various strategies on the broker side in order to get the right coverage,” says Kevin Connelly, vice president of The Graham Company. “Someone that does-n’t handle this sort of risk frequently won’t have the experience or resources to get the right coverage when things get tough.”

Smart Business spoke to Connelly about some real estate insurance best practices for maintaining the proper coverage.

What are some common concerns for real estate owners?

A very common shortfall that we see in real estate programs is that a typical real estate owner’s policy — similar to most commercial general liability policies — is going to exclude things like, let’s say, mold. Some people might not really be worried about that exposure, but a real estate owner, particularly one that rents apartments, could have a serious exposure there. And if you have a standard general liability policy written the way that most real estate companies’ are, you have no coverage for that. In the insurance world, mold is usually considered a pollutant, so putting a pollution policy in place is a good way to fill that gap.

Other policies that might be overlooked are tenant discrimination type coverages or employment practices liability policies.

What about the structure of policies?

Typically, what you see with real estate companies is that they don’t have just one property. In these cases, there are a number of different ways property insurance can be written. One of the ways is with blanket limits, which essentially means that all of your properties are covered under one limit. You generally have this huge limit that will most likely satisfy any needs you may have in a loss. But a lot of times what we see with multiple properties is they’ll have one individual limit that applies to that location. And if that limit isn’t set properly and isn’t assessed closely, if something burned to the ground, you could end up with a limit that’s totally inadequate. Or you might have a policy that contains a coinsurance clause that becomes very punitive in the event of a partial loss.

Similarly, with business income coverage, if you have blanket limits over all your properties, you’re probably going to be more insulated against any miscalculation you might make in setting your limits. But if you have it on a per-location basis, there’s a greater possibility that you could have a shortfall in the amount of business income coverage needed.

How can real estate companies best manage losses?

Any insureds have to remember, whether they’re a real estate company or not, the thing that’s really going to be the biggest driver of their cost of insurance is how their historical losses look. What we see sometimes is that a real estate company will own many different properties, sometimes in different states. The problem with that is you may not have a risk management program where somebody pulls together what’s happening at all those locations and lets somebody at the headquarters in a corporate office know, for example, that the location out in Nebraska is really getting killed with losses and pulling the rest of the locations down. There’s not a lot of centralization of looking at losses, making sure contracts are standardized among the locations in the right way and making sure that the loss control that’s delivered to all the locations is delivered in some kind of orderly and organized manner. Because the ultimate goal is to reduce losses and manage risk in order to drive down the cost of risk.

What about companies that can’t get the insurance coverage they need?

Before Hurricane Katrina, things like wind coverage were fairly easy to get at whatever limits you wanted and the cost associated with it was somewhat nominal. After Katrina and the other hurricanes in Florida several years ago, the ability to get wind insurance in certain areas like Florida was really limited and very expensive. So instead of having an easy decision to make, you had to start thinking about different strategies to address what your real exposure was.

Let’s say you have a $100 million location in terms of your property values. When wind coverage gets really expensive or impossible to procure, you have to start looking at what your real exposure is. If your deductible is $1 million to begin with, and you estimate that your probable worst-case exposure is $5 million in damage above that, does it make sense to make a huge premium outlay for coverage above $5 million? Or perhaps the real concern is the amount above $5 million so you retain the risk below that level and buy insurance for a real catastrophic event. So what you need to assess is what coverage you really need on the high end, and then on the lower end, you need to assess what your real deductible levels should be. So you look at those things and you make sure you have the right amount of insurance, so that you don’t buy more than you need, and that you set your deductibles at a level that you can comfortably maintain and still be able to pay in the event of a loss.

KEVIN CONNELLY is vice president with The Graham Company. Reach him at (215) 701-5376 or