Property Insurance 101

Insurance doesn't exactly have a good reputation. Most people see it as an extra tax and a chekbox to be filled, that is until they need it for a claim. Then they find that while they may have checked the box, they might of missed a few other boxes.

So what is insurance and what can it do? Insurance pays a person for a loss she suffered. The insurance company gets the money to pay her from the money she and others paid in. Anything can be insured for the right price and today we’ll focus on commercial real estate.

Most property owners get insurance because their bank requires them to. They don’t really think of it as a card in their deck of business strategies, but if it’s correctly managed, insurance can save the successful investor a lot of heartache.

Building insurance is written to the entity that owns the property. It covers destruction by fire, some types of water damage, vandalism, theft and more. It can cover vehicles owned by the property and slip and falls and other types of negligence claims. It can cover individual members of the owning entity too. In order to get coverage, the owner may have to do things required by the insurance company such as fix property condition items requested after the inspection, comply with building codes and answer application questions honestly.

Some of the questions they ask pertain to maintenance practices, subcontractor management practices and property use. Is maintenance done by an in house crew? Does the super live on site? Are sub-contractors insured? Does the owner get Certificates of Insurance? That’s a super important one.

Important: The insurance company wants to know if any of the tenants are in rent programs, Section 8 or are students. Some won’t insure those types of buildings, and you don’t want a cancellation on your record. In my experience it’s just better to be upfront about these things. You can still get great insurance at a decent price, but you’ll save yourself aggravation later. I’m big on saving aggravation later.

Let’s look at a couple of case studies, shall we?

Case #1: The property owner has a fine little building, 12 apartments, well maintained and 95% occupied, but in a lousy neighborhood. The owner’s agent secured a policy from what we call, a non-admitted carrier, for $12,000 a year!! That’s a crazy price. That means the owner had to pay collections for a whole month just for insurance!! A non-admitted carrier is usually used just for hard, uninsurable cases.

I don’t think the agent did his homework when writing the policy. Actually the neighborhood isn’t lousy, it’s just urban and working class. The crime rate there is not high and the building itself is in great condition. The agent just made some assumptions that were based on his preconceived notions…or, he doesn’t have carriers interested in those types of properties, or he doesn’t have a good rapport with his underwriters.

An agent’s relationship with his underwriters is an important component of the customer’s experience. When a problem comes up, if the agent doesn’t have a good relationship with the underwriter, a policy is more likely to be cancelled or non-renewed, premiums are more likely to jump and inspection conditions can be more strictly interpreted.

In this case, we treated this property as if it was any other risk. We presented nice quality photos of the property to the underwriter, educated her about the neighborhood and the building owner’s business practices. We secured for the customer, a policy from an admitted carrier for only $5,000 per year!!! A $7,000 savings!! – Amazing J

Case #2: The property owner had 2 claims in 1 ½ years of ownership on a 4 apartment building with a vacant restaurant. Her insurance was cancelled because she couldn’t meet the occupancy requirement of the policy. I personally think it was 2 claims in such a short time, and we will talk about that. In this case, WE secured a policy from a non-admitted carrier, but…we negotiateda premium that was LOWER than her previous one, even though she had the claims. Because we were honest with ourselves, we asked, “How could the owner afford the premium if she hadn’t yet rented the vacant units?” In this case going with the non-admitted carrier took the pressure off her to rent her units quickly and she can finish her rehab of the building without the pressure of deadlines.

That building owner had a different problem though. She hired an uninsured roofer to do work on her building. He convinced her he had insurance, and had the kind of personality it was hard to say “No” to, but really he was “working under his friend’s policy” which basically means he didn’t have insurance. She was afraid of him and wasn’t happy with his work. She took him to arbitration and he lost. To his credit, he agreed to come out the next day to finish the work in compliance with the arbitration agreement. But he was still uninsured.

The roofer’s brother in law was on the work crew. While the building owner was there inspecting the work, the brother-in-law, who may have been under the influence of alcohol, and who certainly wasn’t wearing any safety harness, fell off the roof, 3 stories to the sidewalk! While he lay there dying, the roofer started telling the insured that the fall was her fault and that she would need to pay for the funeral! The guy wasn’t even dead yet!! He told her she would have to come with him to the hospital and later called her to come meet the family of the deceased!

Let me ask you, was the lady responsible for the guy’s fall? If not, why would the roofer pressure her so much? The answer is: No, she’s not responsible for the guy’s fall. Not legally and not morally. The roofer was trying to make her feel bad to get money out of her because she has some and he wants it, or he tried to blame her because he knew he’d have to face his wife and family for not making sure his brother-in-law was working safely.

Will she be sued? Maybe. I advised her not to be upset if they serve her with papers. And, she can give them to the insurance company to represent her. Her insurance company is at best, going to demand that she always secure Certificates of Insurance from her vendors. At worst, they’ll non-renew her policy. That’ll give us a new challenge to work out. It’s VERY important to ALWAYS get a Certificate of Insurance from a vendor.

As I mentioned earlier, this client had made 2 claims on her building within the first 1 ½ years of owning it. That’s too many claims. Recently I had to make a jewelry claim on my homeowner’s policy. I was concerned that my premiums might go up as a result. They may, but the only 2 claims I’ve made in the past were due to hurricanes and those are treated differently because they’re “CAT” or catastrophe claims. People. Whether you have a low deductible or a high one. Your insurance company cannot keep rates down if too many claims are made or if they are for little amounts or if you can fix it yourself for a low cost. I’m sure I’m saying something unpopular, but if you want to stay insured, you’ll think twice before making a claim. If you have lost a big amount, by all means, make your claim. But if it’s small, or something you really can fix yourself, please just fix it yourself.

When processing a claim, not only does the company have to give you money, it also has to pay several employees who will administer it, and have to set aside a new amount of cash reserves.

What happens at renewal time? Your policy is up for renewal annually. About 60 days before the end of the policy year, you’ll receive a notice. 90% of the time, they’ll want more premium, and “premium creep” is a common aggravation for insurance customers of all kinds. Don’t worry, just call me and I’ll shop the policy for you!

In my experience, it’s super important to be loyal to your agent. When there’s a tough claim or a cancellation notice, a customer needs an ally, and that’s her agent. But, there’s no reason to be loyal to an insurance carrier. Ask your agent to shop if you’re not happy. If she won’t, then you might consider switching agents.