The current insurance market has made it difficult for real estate owners and operators to find the right coverages at an affordable rate. As a result, many businesses now have gaps in their insurance programs when using multiple insurers with multiple policy forms that don’t always line up.
Worse, insureds may not even be aware that they have gaps that could result in serious consequences. While some challenges driving coverage changes may ease, others may be permanent due to more frequent and severe catastrophes.
Making sense of trends to identify gaps
Here are five insurance trends that can lead to coverage gaps for real estate owners and operators:
- Multiple insurers. In the past, an insured could count on a single insurer to obtain desired policy limits. But today, real estate operations usually must turn to layered policies, using multiple carriers to secure adequate coverage and limits. Because every policy is different and contains different exclusions, having multiple insurers can create coverage gaps. Close scrutiny of layered policies with a broker can help minimize the problem.
- Vacant versus occupied. Insurers may reduce or eliminate coverage for properties that are left vacant for certain time periods, typically 30 or 60 days — with no warning that the policy terms have changed. Policies may also include a “protective safeguard endorsement” that requires building owners of unoccupied buildings to maintain certain aspects of the property, such as sprinklers or security lighting. Owners must do what it takes to ensure properties remain occupied or designated as “unoccupied” instead of vacant. Maintaining an “unoccupied” status means having security staff or Realtors® visit the building regularly.
- Actual cash value roof endorsement. In catastrophe-prone states like Florida and Texas, roofs that are less than 15 years old can receive the full replacement cost but older roofs will receive a depreciated value based on its current state. The most obvious solution is replacing a roof that’s more than 15 years old. Real estate owners should check if their policy covers replacement costs for the entire building.
- Percentage deductibles. Many policies for real estate entities, particularly catastrophic property coverage, base deductibles on a percentage of the property’s total value at the time of loss. So if a building is worth $20 million and the policy’s percentage deductible for a catastrophic peril is 10%, the insured’s deductible would be $2 million, which is far greater than they would have paid previously for a fire loss with a fixed dollar deductible.
- Disclosure of executive liability exposures. Limited liability corporations (LLCs) are often preferred real estate ownership vehicles, as they can include multiple owners such as family members or business partners. However, LLCs can face additional exposures that call for coverage like Directors and Officers (D&O) insurance or employment practices liability insurance. Typically, coverage on these policies does not apply to claims that arise before the policy was issued — unless the carrier agrees to provide coverage retroactively. It’s important that insureds provide new carriers with a list of potential claims to avoid coverage denials and secure retroactive coverage.
Contact HUB’s real estate insurance team for more information on navigating current real estate insurance challenges.