Insurance for multifamily, changing after initial quote?

Question

I'm new to REI, with just two smaller multi-family deals, a 12-unit and a 24-unit. In both cases, I went thru an insurance broker and the process went like this:

Quotes came back, we accepted one. After closing and after the policy is bound, within the first month or two, the insurance company did a loss control inspection and came back with items they wanted addressed or changes to the policy based on what they found. The specifics were different each time. In the first case, they wanted repairs we planned to do in the Summer/Fall of this year. On the most recent one (the 24-plex), I got "required recommendations" that I don't think are reasonable for the area and type of building, AND the premium went up a bit based on them changing the construction type on one of the buildings. This happened with two different carriers.

What I'm wondering is how others deal with this. Right now, it feels like my expense for insurance isn't very predictable. There's a risk they're going to come in after closing and insist on repairs or upgrades, or leave me scrambling for another carrier (who may wonder why my last carrier dropped me?) or raising the premium by $100-$200 a year after the deal has closed.

To be clear, $100-$200/year on a 24-unit place isn't making the difference between positive cash flow or not, but I'd like my numbers to be predictable before I enter into a deal and present it to my partners. Should I just be saying: "here's the insurance quote. I've added on $300/yr and $1000 in one-time capex as because that's may be what happens?"

Part of me wonders if I'm the sucker that the table and I just don't know it. Is this just common in commercial multi-family?

Derek Lacy · Answer

Kelly Byrd If all things were known and disclosed to the underwriter, there should be no change in rate. What I find is less experienced brokers don’t understand everything in a commercial policy. So they could not know if the quote is exact or not. We don’t see those price changes after binding, but we ask and understand all the questions upfront. And don’t accept, not sure as an answer.

Kelly Byrd · Answer

Thanks for the reply. My main concern right now isn't being able to predict the rates from deal to deal or over several years, when I could shop around. Pre-offer, I use a guesstimate for yearly insurance. During due diligence, I get quotes and in could back out of the deal if I somehow discovered all the insurance quotes came in high enough to make the deal not worth it. My concern is that it based on my limited experience, the insurers are regularly going to "change the numbers" on me right after I have closed on the property and written the insurer my first check. To be a bit of a Star Wars nerd for a second, it feels very much like "I am altering the deal. Pray I do not alter it further." Is this just how the commercial residential insurance works? If so, how do folks account for it? Or, am I the sucker at the table and I just need to work harder to find a better insurer or broker?

Frank Chin · Answer

Hate to say it, but insurance rates are far from predictable.I've been doing real estate nearly 40 years, and used the same insurance broker for 35 of them, whom I trust. Then, they got a little lazy, when my daughter got her drivers licenses, they raised my auto insurance rates by $350/month. I had all my insurance with this broker, and the insurer, Travelers, covering my home, rentals, umbrella etc. They say you get better rates when you insure every thing through one company.My wife happened to be booking a trip through AAA, the Auto Club people, they also sell insurance, and they quoted us the same policies, through other insurers, including our daughter at the same total amount as what we're paying, so we'll be paying $350 less a month. What our relief.When I called our old broker, I mentioned Travelers want too much, cancel it, as I got coverage thru AAA, but through other insurers. She ask, "which insurers"? I mentioned the names and she said "we can get coverage through them too". Now, years ago, the brokers uncle owned the place, he would have said "$350/month more is too much, I'll shop around". So I wonder, why didn't she call these other insurers?Now these new insurers did an inspection, and they did require us to install a banister to the basement that the other insurers for over 20 years never required. The job other cost $300 dollars, and the total insurance bill came down $350/month, so in my mind, there's no contest.The other thing about insurance is years ago, my dad owned a commercial property. And depending on the insurance company, underwriting standards at the company that can change year to year, whether they like the type of commercial tenants you have, if you shop around time to time, you can get quotes vastly higher or vastly lower.Based on my experience, and my dads, I can't count on insurance rates being stable. But if you talk capex, my water rates went from $280/quarter to $580/quarter for a duplex, over the last several years, and insurance rate increases is not bad by comparison.