How Multifamily Companies Can Avoid the Commercial Insurance Whirlpool

Avoiding the Insurance Whirlpool
For many multifamily companies, many of which are very flat organizations, there is a cyclical effect that often occurs. The company grows, management gets busy, and somewhere along the way things start to slip through the cracks. For a multitude of reasons, multifamily insurance costs can begin to creep upward. These rising costs can obviously have adverse effects. You, as the owner, are forced to take on more of the work; specifically, shopping your insurance more than usual, which takes up your time. (The industry is notorious for bidding out its insurance more than most others.) Business increases, your available time decreases, you manage risk less, costs increase, more shopping occurs, and thus, the cycle continues.

Consider these helpful tips concerning multifamily insurance to break free from this “insurance whirlpool”:

Make Wise Choices. The world of commercial insurance agencies can be confusing. Essentially, you pay as much for a bad broker as you will for a good broker. Regardless of if you are paying a commission or a fee, it can come as a shock to many that a Mercedes costs the same as a Pinto. Choosing a full service agent you trust, and who also comes with industry references, can save you time and money. For example, a reputable broker who has a great claims department will negotiate with insurance company adjusters and assist you in preparing proofs of loss, and handle the public adjusters. Any such assistance in getting you the maximum final loss recovery will serve to reduce your overall cost of risk.

In 2004, after Hurricane Ivan ravaged the Southeast, my firm took on an apartment management client. This company came to us after being forced to learn a difficult and expensive lesson. Without adequate claims advocacy it had accepted loss recovery of only $.60 on the dollar.

Additionally, never forget whom your insurance broker works for: You. This is the age of transparency; so do not be shy about asking questions. It never ceases to amaze me when I find out about companies that are paying both a commission and a fee, even though it is unbeknownst to them. My firm discovered two such unscrupulous brokers in 2007 that were taking an “extra” hidden commission. Both were taking in excess of $175,000.

Everything Can Be Negotiated. My firm manages risk for numerous large real estate portfolios. We have seen many companies find themselves in trouble with respect to lender insurance requirements.

In fact, two years ago, we found out about a large multifamily organization that bought $90 million worth of commercial insurance on its properties in Florida. Many deals, such as this one, can be rushed and secretive. In this case, the organization probably overlooked the requisite contract review and due diligence that should accompany any deal. Attempting to collateralize the loan, the foreign lender required the multifamily insurance be written for the full loan amount. Basically, this insured the land as well in the process. The deal ended up being a blockbuster that ultimately became something less sweet than originally anticipated.

Manage Your Time. Many multifamily companies manage between 500-10,000 apartment units and have one- or two-person commercial insurance agencies managing their insurance. Thus, these companies have management executives who spend time each day performing duties that a full-service commercial insurance agency would do much more efficiently and for the same amount they pay their current broker. If this sounds like your situation, have a little fun. Call your current agent and say, “Please begin the cleaning the pool at Holiday Isles and collecting rent checks for me.” Your agent will probably reply, “Excuse me? We’re an insurance agency.” Then you can come back with, “Exactly! So remind me again why I am attempting to get a claim paid and allocating premiums?”

What should your broker be doing for you? Negotiating the best commercial insurance coverage for the best price, handling loss prevention/control, and ensuring effective and efficient claims handling, among other things. It’s OK to outgrow an agency. If yours is not doing the work it should be on your behalf, upgrade.

Consolidate, Consolidate, Consolidate. One action that consistently produces decreased insurance costs and better productivity is the consolidation of multifamily insurance policies. There are a myriad ways it helps to lump together all of the policies you are renewing throughout the year. First, and foremost, you will find that you have more free time to spend performing actions that actually make you money.

Second, by consolidating, you will decrease your total premium with increased leverage with the commercial insurance companies. This will cut your premium rate and allow you to avoid some of the frictional cost you would experience with multiple policies. This is imperative when you are in charge of multiple ownership entities. If you believed, based on misinformation from the past, that consolidation is not possible, think again. Consolidation is a terrific option.

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