insure this
Covering the Big Gaps in Your Policy
By Various Authors
Q. What type of insurance would cover a bedbug infestation in my apartment building?
A. Two of the common exclusions in virtually all commercial insurance policies are pollution and infestation. There are ways to get some coverage for the former, but infestation, like wear and tear, is not insurable.
Pollution includes exposures such as lead paint, asbestos and, unfortunately, mold. Bodily injury from ingesting lead paint or breathing asbestos are relatively rare and with some precaution, such as removal or encapsulation, the exposure to risk from these things can be reduced to a very manageable level. Mold, on the other hand, is constantly lingering as an exposure. Any time there is water—from a leaky window, gutter, vent or even from putting out a fire—the chance that there will be mold forming is quite high. And with the increasing awareness in both the medical and legal communities that many previously unexplained conditions are now being attributed to mold, the chance of experiencing a claim due to mold during your tenure as a property owner is quite high. Making matters worse, the type of bodily injury caused by mold and other pollutants can be severe and lingering, potentially creating a high-dollar event.
The bad news is that (with very few exceptions) mold and other forms of pollution are completely excluded in most apartment building and commercial building lessors’ risk policies. I differentiate lessors’ risk (where you are merely renting the building to others) from owner-occupied premises; an owner-occupant can often get pollution coverage if there is inherent risk, such as with a dry cleaning plant, auto repair or manufacturing business. The good news is that coverage can be purchased separately for all these types of pollution on either a single location basis or covering a whole schedule of buildings for portfolio owners or property managers. There are two insurance programs I’m aware of that even include some pollution liability in their package at no extra cost. This is especially important for single-location owners because the cost of stand-alone pollution policies generally starts at about $10,000, which is oftentimes more than the package policy. So, if this is a concern for you, look for programs that include pollution; you’ll likely find that the price is competitive with what you already have, and you’ll get the pollution coverage for free. Since the minimum premium of around $10,000 applies whether you have just one or many buildings, the coverage becomes more cost effective if it can be spread among various locations. For this reason, a property manager may choose to purchase a policy on behalf of all clients, allowing them to opt in and pay a much lower rate than they otherwise would if they were to buy a policy for their building alone.
Pollution coverage can be purchased with or without mold coverage. It can be purchased for remediation only (removal of the source of pollution from the building) or for legal liability, such as bodily injury to a third party, such as a tenant. It can also include both parts.
The second major exclusion on virtually all commercial property policies is infestation. This would include bed bugs, termites and other common insects or vermin. The exclusion may be only on property, however, leaving bodily injury liability from such exposures covered. So if your building is falling apart due to termites eating the wood, it is probably excluded. If a tenant develops a rash from bedbugs, however, you may likely have coverage under the liability section of your policy.
I’m not aware of any way to buy back coverage for any parts of this exposure that may be excluded by way of a separate policy or endorsement as there is with pollution. This falls into the category of exposures that must be self insured, as the industry has evidently not found a way to price it.
–David Gordon
Q. We recently made some substantial upgrades to our units after some long-term tenants moved out. Do we need to tell our insurance provider about these upgrades? Is it likely to affect our premiums?
A. Upgrades to an apartment building come in many forms: regular maintenance on an annual basis; preparing an apartment unit for the next tenant; repairing and replacing the building systems; and additions to the building.
The real consideration is whether the upgrades have increased the “replacement cost” of the building. For standard upgrades made to apartment units when preparing for the new tenant—like new carpet, paint, bathrooms and kitchens—you will be using apartment-grade materials. The repairing and replacing of building, electrical, plumbing and heating systems will also be replaced with apartment-grade products. Neither of these increase the replacement cost of the building. Therefore, if your building is “insured to value,” at the time of loss you should have the limits you need to replace and rebuild your property. If your apartment building has a total loss and you are insured to value, you will be able to build and replace what you lost with like kind and quality.
Larger upgrades, like adding another floor, do increase the overall building’s “replacement value.” If you do not notify the carrier and increase your limits, you may not have enough coverage to replace or repair any portion of the building, due to co-insurance clauses requiring you to insure to value.
As a rule, your insurance is only as good as the coverage you have purchased. The most overlooked factor in placing coverage is “insuring to value,” while the most scrutinized issue is price. Too many times, policies are evaluated and adjusted based on price while little concern is given to limits and coverage. As an example, most property policies have a stated limit the carrier will pay in the event of a total loss. This limit is the most that will be paid, regardless of the current cost of construction, any upgrades you have made and even the additional cost to repair or replace the undamaged portion of the building (as could be required by a building ordinance). If your policy limits are not “insuring to value” the “replacement cost” of the property, you may have a huge shortfall for any loss you may incur.
–Paul C. Tradelius, Jr.
The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. David Gordon is an independent insurance broker who has been serving the needs of Bay Area property owners for more than 25 years. He is available at 877-877-7755, x. 6972. Paul C. Tradelius, Jr. is with Commercial Coverage and can be reached at 415-436-9800. Copyright © 2007 by SF Apartment Magazine. All rights reserved.