Insurance coverage-small commercial multifamily property

[Jeromy Jordan]

Hey BP Community,

Question for the commercial multifamily investors out there. What type of insurance coverage are you using to protect your asset? What should I be looking for in a good insurance policy for a small commercial multifamily property? What are the "must haves" that should be included in a policy and the extra protection coverage that would be a nicety but not necessity?

Thanks in advance!

[Bo Bond]

Jeromy,

Noah Bank provided some great details above.  Hopefully the items below are even more specific to your question.

* Building Ordinance & Law - This is a vital coverage when you invest in older buildings (say 15+ years old).  Building laws and ordinances change all the time, and now more than ever before given how we're trying as a country to be lest wasteful and more conscious of our environment.  As these things change, so do the requirements when you rebuild a building that's been significantly damaged due to a covered cause of loss.  Visit with your agent about what level of coverage / protection is available, and what they might suggest as being adequate for the size of building you're referring to above.  Understanding what might need to be brought up to code within your specific dwelling after a significant loss, and what the cost might be to fully upgrade or replace will be very helpful in searching out the correct limit.  I'd start with HVAC, electrical, plumbing, and any fire prevention requirements.  While this isn't really necessary in most states when it comes to single-family homes or duplexes, once you start to add more units (multi-family), this would certainly need to be strongly considered.

* Roof Language - It's always best to find out how a specific carrier responds in the event there's wind/hail damage to your roof.  You would need to know what the language of the policy states, and consider any endorsements / exclusions that add to or remove coverage.  Many companies pay ACV (actual cash value) if a roof is more than 10 years old, with others it may be roofs more than 15 years old.  This is especially important if your dwellings are in more wind prone areas.  You'd also want to look into any language about cosmetic damage.  

* Water & Sewer backup - This is a very important coverage item for any investor.  Depending on the type of rental and/or number of units in a single building, you may need to review this language/limit within your policy or with your agent.  Some carriers completely exclude damage to the dwelling that originates from the backup of water or sewer, while others may provide lower than normal limits.  Please understand that water and sewer backup is "not" the same thing as water damage after a pipe bursts within the walls / confines of your home.  These are completely different losses.

 * Theft, Vandalism, Malicious Mischief - This is one of the most common claims to many homes in the U.S., but especially rental homes / dwellings.  Make sure you visit with your agent or review your policy for the extent of coverage on this topic.  Also, some carriers will provide coverage for this "only" if and when the unit is occupied, and then may eliminate coverage at some point if the dwelling is vacant at all, or for a certain amount of time.  Again, some carriers may exclude this coverage altogether, or limit the amount of coverage they provide for such a loss.

* Vacancy Language - It's always important to visit with the agent or review your policy when it comes to vacancy language.  You need to know what coverage will remain in place just in case your unit or dwelling is vacant for 30, 60, 90 days.  While you may rent in an area that has a great footprint for rentals, you do need to consider what can and will happen if things tighten up significantly and you loose a renter during that time and struggle to find another one.

* Sump Pump Coverage - If you're in an area of the country where sump pumps are common, then you do need to know what coverage is in place

* Outdoor / Other Property - If you have a detached garage, shed, retaining wall, costly wall or fence, etc., then you should certainly bring these items to your agents attention.  They may or may not be covered under the policy.  Most special form policies allot for this type of exposure, but if you're not on a special form type policy, you could be without coverage completely.  Take note of what you have and what you want/need protection for, review your policy, and visit with your agent. 

* General Liability - It's my personal take, but I think anyone and everyone with rental properties should look for $1M/$2M in liability protection "per dwelling".  If you're in a more litigious area of the country, then you may elect $2M/$4M liability limits, or an umbrella policy if those limits aren't available with your current carrier.  In most cases, the liability policy has a $0 deductible, and pays the first dollar of defense.

Standard Policy Exclusions

While policies can have many exclusions, knowing the most common exclusions under just about any property policy is helpful.  While some of these can be added to your policy for coverage, some can't be, and some must be obtained through another carrier (stand-alone policy).  Just remember that there may be more exclusions under your policy depending on the carrier and their policy form.

* Mold, Fungus, & Rot Exclusion - After the mold scare of the late 90's, many carriers across the U.S. responded (and still do) with a complete exclusion for mold and fungus related issues/losses.  "Some" carriers may give you a few thousand dollars of coverage as long as the mold / fungus is produced due to a recent water damage claim, but for the most part, its commonly completely excluded.

* Subsidence Exclusion - Simply put, this is an exclusion that applies to any damage (big or small) caused by the shifting of soils and clays under your dwelling, along with earthquakes, landslides, sinkholes, etc.  Unfortunately, just about every house in America moves and shifts to some degree, and thus shows signs of this movement through cracks in the slab or walls.  If insurance companies covered this everyday movement, tens-of-millions across the country would have claims to file.   While the everyday shifting of your foundation will likely never be added back to your policy for coverage, you can find carriers that will insure earthquake and sinkhole exposures.  Sometimes the property carrier you're currently with will add it to your existing policy, while some won't.  If they won't, then you can approach other carriers who specialize in writing this coverage specifically.   

* Flood - This is also a very common exclusion and is typically well defined within your policy.  In most cases it's defined as rising water originating outside your dwelling due to heavy rains or the overflow of natural and manmade boundaries that rises on the outside of your dwelling and seep inside.  Some carriers may be able to add this protection to your policy for additional premium, but most will require you to go secure a stand-alone policy for earthquake with another carrier that more commonly writes this type of peril.

* Normal wear & tear / Neglect - As an owner you have the responsibility to maintain your dwelling.  Most carriers exclude coverage when losses occur due to typical aging or normal wear and tear or complete neglect by the owner.  This is a common exclusion that likely won't be removed by most carriers.

* Construction Defect / Faulty Workmanship - This exclusion especially holds true for your newer dwellings, and certainly those that still have a 2/10 builder's warranty tied to them.  This would primarily exclude anything that could be damaged due to construction errors or poor workmanship.  This is a common exclusion that likely won't be removed by most carriers.

* Bacteria and Virus - This exclusion especially came to lite as we hit the COVID pandemic.  This is a common exclusion that likely won't be removed by most carriers.

* Damaged caused by insects and animals - A common exclusion that likely won't be removed by most carriers.