Multifamily Insurance Trips and Traps

Surely every property owner’s nightmares must include finding out in the aftermath of a hurricane, fire or a lawsuit that insurance does not cover the costs. What a disaster! Apartment owners must be very careful to risk-manage properly and make sure their assets have the correct insurance policies.

Experts’ advice for ensuring proper insurance protection for apartment properties typically fall into three categories: Making sure that the right type of insurance is purchased, ensuring that enough coverage is purchased and selecting the right insurance broker.

Simply opting for the policy with the lowest premium “just because they are trying to save money” is one of the most common pitfalls of apartment owners, says Carlton Einsel, executive vice president of The Donaldson Group, a third-party apartment manager. “But people do that,” he adds.

According to attorney Barry Fleishman, partner at Kilpatrick Townsend & Stockton LLP, the most typical missteps apartment companies can make include not adequately understanding the coverage, not reviewing the actual policy terms with their brokers and legal counsel, and failing to compare losses in the past to their current coverage. Insurance is a very difficult and complex field, says Fleishman, and the risk manager or CFO should work closely with the broker and/or an insurance attorney to make sure there are no unintended gaps in the protection.

What type of insurance to purchase

First, apartment owners need to ensure the correct type of insurance is acquired. Experts advise that owners purchase all-risk—rather than named-peril—insurance, whether the insurance is third-party property insurance or general liability insurance. This is because named-peril insurance covers only risks that are specifically named, whereas all-risk insurance covers all risks except those explicitly excluded. Property owners should also be careful to have policies that reimburse at replacement cost—and that cover business interruption.

“Buy broad, all-risk, policies, rather than named-peril policies,” says Steve Cataldo, director of risk management at Greystar, which oversees insurance for a management portfolio of more than 48,000 apartment units.

Property insurance coverage generally applies to “all risks,” such as  fire, explosions, earthquakes, tornados and hurricanes, with the exception of specific exclusions. Fleishman, a legal specialist in policyholder insurance coverage, says it’s important that the apartment company review the risk history of the property and the areas in which losses were suffered in the past, and then ensure that none of these exposures are excluded from coverage.

The terms of the insurance, naturally, will be influenced by the location of the property. If the apartment asset is close to a disaster prone area, such as a flood or an earthquake zone, the insurance policy will likely contain sublimits that may be much lower than the coverage for the basic perils.

Certain perils such as windstorms and earthquakes may also carry higher deductibles, depending on the location of the asset, adds Derek Ramsey, Greystar CFO. The apartment owner needs to determine its ability to fund the deductible if a loss occurs. If available cash will be insufficient to meet that deductible, then the owner may want to consider paying a higher premium in order to obtain a lower deductible, he points out.

If coverage for particular risks-—such as flood, pollution or earthquakes in certain regions—is not found in traditional types of policies, the property owner may be able to look to alternative instruments for managing risks. These alternative instruments, which can be very sophisticated, include specialty risk policies (such as pollution liability policies), catastrophe bonds, self-insurance supported by re-insurance, or industry risk retention pools, says Fleishman.

As regards both liability and property insurance, Fleishman advises that apartment owners ensure that all layers of insurance—primary, umbrella and excess—be consistent with each other. For example, property owners should make sure that certain excluded losses in primary layers are not also excluded in umbrella or excess layers. In such cases, there would be a gap in coverage.

“Sit with your broker (or attorney) and go through the policy page by page(it takes one day or so), and understand what is in the policy: what is covered and what is excluded,” he says. “The broker should make sure the policy is consistent in each layer of insurance or tell the client where it is not.”


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