Feature
by David Grabstald
Do you worry about higher insurance premiums? Does terrorism scare you? If you said “yes” to either of these questions, you’re not alone. In the months following the tragic events of September 11, property owners face uncertainty about what may be prohibitively expensive insurance coverage for their commercial and residential properties.
“The events of September 11 capped off a year of losses that included earthquakes in Washington State and Tropical Storm Allison in Houston (Texas),” says Jay Harris, Vice President of Property Management at the National Multi-Housing Council. “Broad generalizations on insurance increases are difficult to make because rates depend on a wide variety of firm specific factors, including prior-loss history, scope of coverage, and risk of exposure to catastrophic events,” he says. Both the National Multi- Housing Council (NMHC) and it’s partner, the National Apartment Association (NAA) are urging Congress to pass legislation that will contain a workable, inclusive definition of acts of terrorism to ensure adequate coverage for property owners. The assistance, according to the NMHC, must “be of sufficient duration to allow insurers to grow their resources and accurately price terrorism insurance.”
“Apartment firms that renewed coverage and general liability reported they their costs increased dramatically, rising from $150 to $250 per unit to $250 to $400 per unit,” says Harris. “Assuming the average unit generates $10,000 per year, insurance costs now consume 2.5 percent to 4 percent of that revenue. With future increases likely, many firms could pay as much as 8 percent of their revenues for insurance by 2002. Some properties report that they already pay up to 12 percent of their revenue for property and liability umbrella coverage.” Harris adds that fewer underwriters and heightened losses will cause remaining underwriters to increase their rates and deductibles and reduce coverage for incidents like terrorist attacks on apartment buildings.
Risk management consultant Mary Jane O’Keefe agrees. “The insurance industry is experiencing one of its ‘hard cycles,’ which is beginning to have a significant impact on our real estate business,” she says. “Prior to the September 11 attacks on the World Trade Center and the Pentagon, the industry was already in the process of a market correction.”
Harris and O’Keefe both mention that many insurance carriers have used all of the “reinsurance” insurance they purchased to cover their losses. “The insurance carriers’ rates rose significantly at the beginning of the year, when the majority of reinsurance contracts are renegotiated,” says O’Keefe. “Those costs are then passed down from the primary insurance companies to policy holders. The property owners who will be hit hardest are those with poor loss experience, a large catastrophic exposure, or the need to have very high limits. These individuals are already seeing increases in their premiums that often exceed 100 percent, with restrictions on the terms and conditions of their policy.”
Many insurance carriers are no longer writing new business policies until they assess the effects of their reinsurance programs. O’Keefe says that prior to the September 11 attacks there was an increase in property insurance rates of roughly 25 percent to 30 percent. “For the first time in the history of the United States, there is major uncertainty among insurers,” she says. “They are being more cautious…when the economy is strong, rates are low, but there now more limits and exclusions (including terrorism coverage) on insurance policies for commercial and residential property owners.”
What can property owners do to help keep the insurance they have and also to keep costs down? “You can control costs by developing and implementing loss control programs for both property and liability insurance exposures,” says O’Keefe. “A company that shows a concern for risk and a proactive approach to managing risk will be a more appealing risk to underwriters. Additionally, you will see a drop in incidents in your property, which will contribute to a reduction in your premiums over the next five years, as underwriters always ask to see five years of loss history as part of the underwriting process.” Harris adds that property owners should contact their insurance agent at least six to eight months prior to their renewal date. “You must give yourself enough time to discuss any changes or increases to your policy, and also to discuss any additional coverage you need,” he says. “If you’re unable to renew or afford a new policy, give yourself enough time to work with your broker to look for another insurer.”
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. The information contained in this article is general in nature. Consult the advice of an attorney for any specfic problem. David Grabstald is a free-lance writer living in San Francisco. He writes a column in the SF Examiner on landlord/tenant matters.© Copyright 2002.