We all know the 2004 hurricane season resulted in an unprecedented four hurricanes striking the State of Florida, and then again in 2005, another year of huge losses. Many of Florida’s prominent commercial insurance underwriters have completely pulled out of the Florida market and many who continue to write now exclude the State of Florida. We have seen enormous premium increases in recent policies, which for most commercial tenants equate to a higher pass through or higher shortfalls at year end when common area maintenance (known as CAM) / insurance and real estate taxes are reconciled.
Insurance is used to manage risks to an investment and create a financial cushion against losses caused by foreseeable or unforeseeable events. Further, adequate insurance is necessary for owners to acquire financing for their investment properties. The kinds of insurance typically fall into two general categories. Property-loss insurance protects against losses from the destruction of the property or damages to the property and protects the owner against loss of rent due to property damage. Liability loss protects against claims for any damage or injury caused to another person or the person’s property. This minimizes the financial effect of liability for personal injuries that happen on the property, for instance, if someone falls in the lobby or in the parking lot areas, commonly known as a ‘slip and fall’ incident.
The goal for purchasing insurance is that the owners not lose money, so coverage may be higher than the loan. Most owners typically insure for the ‘replacement’ cost of the asset. Some owners will assume more risk than others. It is important that this is determined at the time the insurance is purchased, as it is too late after an insurance event actually occurs. With the ever increasing premium rates we are now seeing, some owners are choosing to ‘self insure’ against loss and obtain only liability insurance. This is only possible on a property that is owned free and clear, as federal lending regulations require the borrowers to maintain sufficient property and liability loss insurance.
Extended coverage endorsements provide additional protection against damage from windstorm, hail, explosions, riots, civil disturbances, smoke and are typically added to the main fire policy, which is generally considered the principal risk in real estate. Fire insurance policies can also include different kinds of property or extended coverages, for example vandalism and malicious mischief, building and contents coverage, specific hazards coverage, etc. Owners also need to determine whether local conditions and the needs of the property call for insurance against floods, glass breakage and replacement, or boiler and machinery malfunctions.
The typical general liability insurance policy offers one or more coverages for bodily injury, property damage liability, or medical payment insurance. A comprehensive general liability policy provides for the broadest protection. The owner is covered against all risks except any specifically excluded in the policy provisions. Other additional coverages for liability could include Owners/Landlords/Tenants liability, wherein the policy would cover liability arising from maintenance, ownership or use of the premises, and would extend to activities off the premises involved in the running of the business; Medical payments insurance provides for reimbursing members of the public injured on the premises, regardless of liability, for medical expenses; contractual liability allows a party to assume liability contractually, for example, a tenant may agree contractually to take on the landlord’s liability under certain conditions.
Insurance is an absolutely unavoidable cost for the owners and the tenants who pay for this proportionate share of coverage through their CAM. We can only hope that we have a less eventful hurricane season in Florida and that next year we can find more competitive rates and more companies once again entering the market.