The Property Management Shop
by Marc Wilson
Q. Help! I just received a formal notice from my insurance company indicating that my policy would not be renewed when it expires next month. I’ve already called three insurance companies and they all said that they are temporarily out of the market. What is going on with this insurance market? Who can I call to get fire and liability insurance?
A. You are not alone, although I know this is little consolation for you. Lately I’ve heard many similar tales of woe concerning the cancellation of insurance policies and the extreme difficulties in finding replacement coverage. We are in the midst of what insurance people call a “hard cycle.” Many established insurers have left our market because they are having trouble assessing and quantifying their risks. Insurance companies have to make sure that over the long haul their premiums exceed their claims and settlements. I am always amazed that anyone is in the business of insuring your typical San Francisco apartment building owner in the first place. Think about it — fire, flood, mold, lead, trips and falls, crime, terrorist attacks, storms, burst pipes, drugs, prostitution, theft, discrimination against the elderly, rent ordinance violations. The list just goes on and on. Would you want to be in the business of insuring San Francisco apartment building owners in a court of law where more than 70 percent of jurors are tenants?
The bottom line is that insurance companies are fleeing San Francisco because there is more risk now than there was two or three years ago. The pricing structure for fire and liability insurance has simply not adjusted to the new risks. What are the new risks? Mold and wrongful eviction are two of the major ones. We all know that mold is the new culprit for insurers and property owners in addition to asbestos and lead exposure. The very presence of mold, not to mention the physical harm caused by mold, is often the subject of endless debate. The whole issue of mold is a “soft science” at best, and it is proving to be the perfect breeding ground for opportunistic attorneys and litigants. The overwhelming percentage of tenant-related mold claims and wrongful eviction claims simply have no merit. Realizing this fact, many insurance companies started writing specific exclusions for mold and wrongful eviction a couple of years ago. Apparently, some judge in southern California subsequently ruled that insurance companies could not exclude mold from their policies. The insurance companies were placed in a situation where they had to defend mold cases even if there was specific language in the policy that excluded mold. Insurance businesses simply cannot make money if they are in the business of insuring San Francisco property owners against tenant claims for mold and wrongful eviction. Again, the legal environment is one where more than 70 percent of the jurors are rent-paying tenants. As a result, the best insurance companies have simply left the market.
How does the insurance industry fix this problem? They have two options: drastically raise their premiums or minimize their risks. My guess is that we will see a combination of the two. Rates will go way up and, ultimately, the insurance companies will be allowed to have enforceable mold exclusions in their policies. There are simply no business models or any amount of money in the world that will work if tenants are capable of making groundless, mold and wrongful-eviction claims (covered by the insurance industry) in San Francisco’s legal system. What is the first thing an attorney wants to ascertain before proceeding with a wrongful eviction or mold-related claim? He or she wants to know if the property owners’ insurance company will pay for these types of claims.
Believe me, the merits of each and every mold and wrongful eviction claim will miraculously decline when the plaintiff’s attorney realizes that the property owners insurance company simply does not cover these claims. I am reminded of a conversation I had years ago with an owner of one of the largest real estate brokerage firms in San Francisco. He told me he did not have errors and omissions insurance for twenty years and he never got sued. Then he got his first errors and omissions policy and was sued five times in two years. Later he cancelled the policy and has never been sued since. The lawyers are just doing what they are “built” to do—they follow the money.
But I digress. You want to know what you can do? First, you need to survey the entire marketplace and find an excellent insurance broker. You cannot afford to deal with just a sales representative from a single company. Instead, deal with an agent who represents multiple insurance companies and is keenly aware of the new players in the market and knows which players no longer write policies. I know some very capable insurance brokers, so feel free to call if you need a referral. Second, you need to minimize your claims. Do not make unnecessary claims. Any insurance broker will first inquire about your “loss history.” If you have multiple losses in a short period of time, you will find it very expensive and very difficult to get insurance coverage. I’ve seen clients make claims for $5,000 repairs as a result of broken water lines or leaky skylights. In this environment, you are wise to avoid making any claims under $15,000. You do not want to create a “loss history” no matter how small your claim. Whatever money you manage to squeeze out of your insurance company will not be worth the negative impact it might have on your marketability in case you have to go shopping for new insurance. Besides, what is the real after-tax cost if you spend $15,000 to repair your building? The answer is closer to $7,500. What else can you do? Write your congressperson or contribute more money to the SFAA legal fund.
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. Marc Wilson has been managing and selling San Francisco apartment buildings for over 15 years. Please send your questions concerning property management issues to Marc Wilson at 1699 Van Ness Avenue, SF, CA 94109. He can be reached at 415-229-1275. © Copyright 2002.