HOW MULTI FAMILY INSURANCE WORKS

I finally understand how insurance works in the multifamily world. I learned this from an insurance broker I talked to yesterday. There are three kinds of apartment insurance coverage: Tier 1, Tier 2, and Tier 3.

Tier 1 company has the best insurance coverage at the best price. The catch is tier 1 companies are very picky. They will only provide coverage to properties preferably built in the 1980s or newer in a B or C+ neighborhood. The biggest factor that will disqualify your property from a tier 1 coverage is aluminum wiring. Tier 1 companies do not care if the aluminum wiring is pigtailed (the end of the wiring has copper) or remediated. Also, tier 1 companies will examine the roof of the building. If it is a flat roof, it is important to see are there watermarks? On pitch roofs, how old are the shingles? The insurance company will look at the roof because the roofs have been the number 1 source of insurance claims in the last few years. Tier 1 insurance companies prefer properties that don’t allow BBQ grills to limit risk. Tier 1 coverage would cost $500 per unit in my market.

If a property does not qualify for tier 1 coverage, it will have to qualify for tier 2 coverage. Tier 2 coverage is less restrictive on the properties they cover, but coverage will be less and the policy will cost more. For example, if you have aluminum wiring, you’ll probably have tier 2 coverage. Tier 2 coverage costs $600-700 annually per unit in my market. If you are buying a property that is not stable (as in low occupancy or needs a big value add), tier 3 coverage will probably be your only option. Think of a bridge loan property when considering tier 3 insurance. Tier 3 is the laxest on who they cover, but it is the most expensive policy and will offer less coverage.

Last, I learned that if you buy a C vintage property (for example, built in 1960), but if you remodel the property to the studs in 2022 and update everything, including the wiring and plumbing, the right insurance company will use 2022 as the new year built which will give you better and less costly insurance coverage.