Most industries are feeling the pinch of the hard insurance market, but the multifamily property space is feeling a bit more than a pinch. Insurance premiums are increasing, and multifamily real estate owners are being forced to take on more self-funded risk. We’ll discuss the property market in a future blog post. For now, let’s talk about the new dark horse in the room, the umbrella.
In the past, umbrella insurance policies renewed without much fanfare. Most umbrellas renewed at flat or decreased rates year after year. That is far from the case today. Over the last 12 months, umbrella premiums have increased between 30%-50% for average risks, and in excess of 100% for portfolios with losses and/or portfolios with exposures in high crime areas.
The statement we often hear after dropping this bomb is, “Ok, but we’ve never had a claim hit our umbrella limits, so we shouldn’t expect a big premium increase, right?”. Unfortunately, wrong. Multifamily properties have a lot of tenants and public traffic. When insurance underwriters think of multifamily, their brains are trained to immediately envision the following: elderly tenants without their glasses on walking their dogs on uneven pavement, the Amazon guy delivering 15 times per day carrying who knows how many boxes at a time, property manager Ted slipping on ice busting his hip and Jill the landscape vendor crushing her hand in a garage. Underwriters see chaos and lots of opportunity for claims.
Multifamily exposures (see above) haven’t changed. So why the increase now? Blame it on social inflation. Social inflation is a new buzzword in insurance and is used to describe the rising costs of insurance claims resulting from things like increasing litigation, broad definitions of liability, plaintiff-friendly legal decisions and large compensatory jury awards. Do a quick Google search for “slip and fall jury awards”, and you will see numbers like $2.1M, $3M, $7.5M and even $16M in California! The monetary effects of these huge verdicts and settlements are now hitting the insurance carriers, forcing loss ratios to surge.
So, what can you do? First, start talking with your insurance broker early and often. A broker who specializes in the real estate space should be acutely aware of the current market dynamic and should be providing you with various options around pricing and program structure to help mitigate the cost increase. Second, tighten the hatches to help prevent and mitigate future losses. Review your vendor contracts and tenant lease agreements. And even better, have your insurance broker review your vendor and tenant lease agreements to ensure you’ve got proper risk transfer in place (PSA – MMA has a whole team of experts who will review these contracts for you). Meet with your safety and property management teams to ensure everyone is up to date on best practices for property maintenance, property checks and vendor requirements on site.
Take heart, the insurance market is just like any other and this too shall pass. But for now, buckle up.