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FEATURE ARTICLE, NOVEMBER 2007
COVERAGE VS. COST
Insurance rates are going down. Is your coverage going up?
Interview by Stephanie Mayhew
Everyone knows that there are certain risks inherent in every acquisition or new development in the commercial real estate market. Therefore, protecting your project and your company is imperative. However, as the commercial real estate market continues to expand and become more and more complex, making sure that you have the best insurance and risk management program can be daunting. This month, Northeast Real Estate Business sat down with two experts in the risk management and insurance industry, Robert D. Odell, CIC, the president and chief operating officer of LyonsOdell, one of the Lyons Companies; and Margaret H. Collins, CPCU, ARM, the commercial lines manager and a practice leader within the LyonsOdell Real Estate Group, to discuss different insurance issues in today’s commercial real estate market.
NREB: Many people are talking about the rising cost of insurance, but I understand the big story is really the soft market for insurance. Can you elaborate on that?
Odell: The Northeast region, shoreline properties excluded, is currently in a buyer friendly market. In other words, a commercial real estate owner can buy more insurance for his money or purchase the same insurance for less money. Right now, it is a question of simple economics — it is all about supply and demand and currently there is an abundance of supply in the insurance marketplace.
NREB: What type and how much insurance do owners need to get when they are ready to do a new project?
Odell: It depends on exactly what type of project the real estate owner will be pursuing, but it will start with purchasing builder’s risk coverage to protect the property and purchasing liability coverage to protect the developer during construction.
NREB: Are there different insurance issues affecting the different commercial real estate sectors?
Odell: Yes, the insurance program differs depending on the class of real estate. The most desirable classes for insurance carriers in order of preference are: office, shopping centers, flex/industrial and multifamily. Office buildings and shopping centers are more desirable to insure because of higher quality construction and strong compliance with current building codes. When comparing these two industry classes, office buildings tend to have superior general liability claim experience, while shopping center owners have numerous slip and fall claims within the common area. Flex/industrial can be a very desirable class of business, but it depends on the hazard grade of their tenants. Multifamily is the least desirable class of business due to a 24/7 operation with lower quality construction and less controls over their tenants.
NREB: Are you seeing any particular trends in the insurance marketplace?
Odell: Insurance carriers, because there is an abundance of capital, want to write apartment complexes; whereas, in the past the carriers would be more hesitant to take on that sector. Because of this change, carriers have developed several new apartment programs. Currently, the multifamily sector has become even more desirable to underwrite than the flex/industrial market.
Collins: Insurance premiums increased dramatically in late 2001 and throughout 2002. Buyers were forced to reduce coverage and increase deductibles to minimize the effect of the hard market. Now we are able to negotiate broader coverage and better terms while reducing the client’s total cost.
NREB: As a company that acts as an advocate and liaison between the client and the insurance carrier, what can owners do to make the process smoother and easier?
Odell: Clients need to communicate their goals and objectives for the next 1 to 5 years. We need to design the insurance products and programs to benefit the client and not the insurance carrier. We need to know if the acquisition will be redeveloped and sold, or maintained as it exists.
NREB: What particular cities or markets are seeing higher insurance rates because they are considered as more of a risk?
Collins: Any property with exposure to catastrophic losses is considered to be in a CAT zone and will be subject to higher insurance rates than similar properties outside a CAT zone. CAT zones include high-hazard flood zones; coastal areas that are prone to windstorms; areas where earthquakes are likely; and areas considered to be targets for terrorism such as major airports, skyscrapers and cities such as New York and Washington, D.C.
NREB: How are the current issues in the lending community affecting the insurance industry?
Collins: The current lending environment has affected some internal mechanics because lenders are initiating more stringent insurance requirements, which causes more tedious back-office type of work. The lenders want to get the deal done, so sometimes they really aren’t asking the questions that benefit the real estate owner. In addition, some lenders might require the highest Standard & Poor’s financial responsibility rating (aaa) for an insurance carrier; whereas, other lenders will accept policies from a carrier with a lower Standard & Poor’s rating.
NREB: Any other issues that you would want to address?
Odell: In the current climate of declining rates, many insurance buyers think that they don’t need to spend time on their insurance program. However, I recommend the opposite approach. Now is the time to focus on broadening coverage while reducing the total cost of risk. A comprehensive business plan should have a risk management component. Owners should give serious consideration to how much risk they can transfer to other parties, how much they should retain and how much they should insure. Given current soft market conditions, they should be able to accomplish all of their goals while saving premium dollars.
©2007 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints
of this article contact Barbara
Sherer at (630) 554-6054.
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