The sources of financial loss to real estate company owners and managers are as varied as they are significant. From natural catastrophes to vandalism to hidden policy exclusions that limit recovery when losses occur, a comprehensive risk assessment must leave no stone unturned.
Here are four solutions addressing real estate risks and how proper execution could save companies millions of dollars.
1. Removing coinsurance clauses
Coinsurance clauses, often found in property policies, restrict loss recovery if the limit of insurance purchased by an insured is not at least equal to a specified percentage of the value of the insured property. For example, under an 80% coinsurance clause, the owner of a building valued at $1 million would be expected to insure 80% of these values, or $800,000. If the insured purchased less than $800,000, he or she would be responsible for a proportionate share of the loss.
Although some states have passed laws voiding coinsurance clauses, they remain a source of distress to real estate companies who frequently encounter the restriction following a loss. Real estate company owners and managers should leverage a process that includes negotiating the removal of this restrictive language from the property policy to provide full replacement cost following a covered property loss.
This approach can save significant amounts of money. For example, a real estate team negotiated the removal of a 100% coinsurance clause from a property program before a major hurricane. Following the hurricane, the business found that increased demand for building supplies and contractors had resulted in an underinsured amount of $250,000. As a result of this analysis and removal of the coinsurance clause, this amount was fully covered.
(Photo: Thinkstock/Fuse)
2. Quantification of risk through modeling for catastrophes
Subsequent to the model of a company's property schedule for earthquake, it was determined that five locations were driving 80% of the loss estimate. Additional information was requested that specifically pertained to the earthquake design of those five buildings and the model was run again. These additional building characteristics reduced the loss estimate and corresponding premium by 40%.
As a result of a careful analysis and negotiation with carriers, the company's earthquake premium was reduced by $80,000.
(Photo: Thinkstock/Phototreat)
3. Enhanced vacancy coverage
Many standard property policies contain certain limitations of coverage if a building is vacant for more than 60 days. Often specific perils such as vandalism, theft, sprinkler leaks and water damage from pipes are eliminated.
Real estate company owners and managers should partner with their brokerage firm to identify loss prevention measures for low-level occupancy locations and have them negotiate with carriers to remove any vacancy coverage restrictions. Reduced coverage normally applies when vacancy levels reach 31% for more than 60 days.
(Photo: Shutterstock/SpeedKingz)
4. Eliminating subcontractor warranties and limitations
There are many exclusions and restrictions that real estate managers and owners must look out for when obtaining general liability coverage. This important exercise is often neglected. Conducting a thorough review of the general liability policies could identify any exclusions or warranties relating to construction, repair or renovation work for the owner by contractors. Following that, a request should be made with the carrier to remove any exclusionary or warranty wording as it relates to the work. The financial consequences of removing such warranties can be substantial.
Take this recent example: A real estate owner asked an employee on staff who had experience doing carpentry to do some work on the building. While performing the work the employee caused an unstable ladder to fall and seriously injure a prospective tenant. When a claim against the landlord for $1 million was filed, the general liability carrier denied the claim on the basis that an exclusion in the policy did not permit coverage arising out of any construction work. As a result of an analysis and expansion of coverage, this gap is now fully covered.
In today's highly competitive business environment, it's critical for companies to understand that every policy is different, and not exploring such strategies as the ones outlined here could leave a business at greater risk. By addressing valuation coverage, quantification of risk through modeling for catastrophes, enhanced vacancy coverage, and the removal of subcontractor warranties and limitations from a general liability policy, financial losses can be mitigated, leaving real estate managers and owners to focus on what they do best: growing their business.
Brian Dove is USI's national real estate practice leader and is based in USI's Houston office. The real estate group leverages the USI ONE Advantage™ with prospects and clients across the country. USI ONE is a fundamentally different approach to risk management, integrating proprietary business analytics with a networked team of local and national experts in a team based consultative planning process to evaluate the client's risk profile and identify targeted solutions to address those risks. To learn more about USI ONE, contact Brian at [email protected] or 713-490-4597. Visit www.usi.biz for more information.
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