PROPERTY INSURANCE

Property insurance for building owners, commercial and residential, can be quite expensive; or not so expensive depending on geography, topography, operational and physical characteristics of a building.  Areas deemed "high catastrophe (cat) risk" will find their costs higher than the norm. 

How can you successfully negotiate the best insurance terms?  We have prepared a list of what you need to consider.  Adhering to these guidelines will absolutely positively impact your insurance costs. 

Many owners and investors have an early exit strategy and are willing to take on  risk based on the history in their particular area that a CAT event will not occur while they own the facility or business.  Whether you are in it for the short or long haul, consideration must be given with respect to the integrity of the structure from different perspectives.

Design and Construction

Should your business model allow you to construct new facilities from scratch, it is paramount to consider the real return on investment (ROI) on whether to "build to code"; or "build to withstand a maximum probable loss ("MPL")", i.e. "build to code plus" in your most critical areas.

On the front end your costs are higher; however, in the event of a catastrophic ("CAT") loss you will have the added assurance in knowing that your facility will likely withstand physical damage and shutdown than otherwise; and with less worry about losing market share to a competitor. The true costs of a loss go far beyond the physical damage to buildings, contents and extra expenses. Management and operational personnel time and attention to your core business will have been impacted tremendously, perhaps changing your business forever. While you may find a temporary or permanent location, all covered by insurance; you can be sure that a competitor is waiting in the wings for the opportunity to take advantage of your misfortune. Insurance will never make your business whole again; and cannot protect you against your competitor.

Many businesses retain an architect and set about designing a facility that will accomplish all their immediate needs and future growth. More often than not owners have the impression that the local building code was intended to withstand a severe CAT event.  It is almost never the case. Your county and state building engineers cannot possibly know how the shape, design and construction of your facility in various combinations will weather a CAT event such as a hurricane, flood or earthquake. These building code experts assemble readily available information and apply their collective expertise to arrive at a "minimum" standard to protect the majority in the event of an severe unforeseeable event, but not necessarily a severe CAT event.

The acquisition of land; and the design, shape and construction of your facility needs to take into consideration the surrounding third party exposures and topography, as well; and the probable resulting contingent events that will occur in the wake of a CAT event. If you are in wind CAT prone area such as in Florida,  you need to consider building beyond the Florida Building Code (FBC). While the FBC has one of the best wind code criteria in the country; history has proven building codes, even those updated, inadequate for many CAT events.

Design and engineering for a flood MPL is often overlooked. Again, building to code does not suffice in the wind prone areas of the coastal regions. The flood elevation maps and historical statistics are inadequate; and relying on code is a disaster waiting to happen.  Facilities need to be built in excess of code and available flood maps whenever possible. It is only a matter of time before a CAT event such as a Category 5 hurricane in tandem with a violent rain storm produces CAT flooding. The overwhelming majority of newer buildings will be severely impacted.

During the course of construction, every aspect of the construction phase should be photographed, in exacting detail.  The architect, contractor and owner should all photograph; with the owner retaining permanent copies for their own records.  These images will help you better negotiate your claims to adjusters. Plans should be duplicated and stored offsite in a data warehouse or at the very least on some form of digital storage in a secure and battle tested vault. By battled tested we mean, the storage facility can withstand a violent CAT event, substantially above the flood tables, fire resistant, quake resistant, in the center of the storage facility. You need to be as comfortable with the offsite storage construction as you are of your own facility. Consider fire perils just as you would wind, flood or earthquake risk.

Strongly consider the construction, design and positioning of exterior or free standing structures such as expensive signs. In the event of a severe event, the overwhelming majority of incidental free standing structures will be totaled.  Many signs cost upwards of seven figures, due to their complexity.  If these are custom designed and due to their unique design critical to the business, you need plans or a mold made of them well in advance.  You should have an agreement in place to reproduce these and ideally from a source that would not have likely been impacted by the event.  Strongly consider designing your signs so that they can be lowered, shuttered or even removed in advance.  Make sure you have an agreement in advance with a licensed and insured third party maintenance firm that can assist in rapid installation. Insuring signs increases the deductible threshold on the entire insurable risk in the event of a loss.

Prevention and Pre-event planning for a Cat Event

Debris from third parties is one of the leading contributors to massive property damage. This includes neighboring facilities or development in your area that present an immediate risk.  Speak with the owners of these facilities to make sure the have a plan in place to remove or control any exposures from entering your area.  Having good relations with your neighbors will go a long way towards mitigating your loss. 

Impact windows need to be shuttered up in advance of hurricanes. Impact windows alone will not weather many severe hurricanes.  Your investment in shutters which exceed the wind loads of impact windows will go a long way in protecting your structure.  You should have an agreement in place with a third party firm to assist you. Your employees may have their hands full. Nothing is more assuring than knowing you have additional assistance in waiting.

You should designate employee teams working in shifts well in advance of CAT events. Your employees will likely have to tend to securing their own properties, families and relatives. Many leave town. It is just as important that you offer personal CAT planning for your employee teams that are working the CAT preparation shifts. To pull this off successfully, you need to put their mind at ease.

Generators should power your most critical needs and beyond. You should have a third party firm under contract to supply parts, service and expertise; throughout any down time from a CAT event. Carefully consideration should be made in this selection. Does this firm have their own business continuity plan in place so that they can manage their risks and respond to your needs?

Preparing for the insurance underwriting process.

First, we'll make this comment.  Underwriters do not want to hear you say your facility is built to code.  That would not be speaking with you or your agent if it was not.  If you want to make the "A" list, which underwriters put top priority on, you need to be at Code+.

Insurance underwriters need to have detailed information on the construction, design and neighboring areas. Property insurance carriers use a process called C.O.P.E. to assess much the risk they are considering to insure. Underwriters base their rates, deductible, coverage terms and willingness to accept the risk based upon COPE.

Construction (C): 

Frame - combustible construction-any building where more than 33% combustible wall construction is frame

Joisted Masonry - masonry supported walls with combustible floors and roof

Noncombustible - steel frame building with non-combustible construction (usually metal panel) walls and roof deck

Masonry Noncombustible - supporting masonry walls with steel roof or concrete floors supported by unprotected steel bar joist

Fire Resistive - Concrete or masonry supporting structure with protected steel and concrete floors and roof

Occupancy (O): 

Underwriters classify the occupancy by the Insurance Services Office ("ISO") Commercial Lines Manual classification table which ultimately determines rates. Beyond effect on pricing, the UW will examine occupancy hazards such as common hazards of heating and electrical to special hazards such as flammable liquids, cooking, weldings, etc.

Protection (P):

Split Protection classes give two grades per municipality, one for buildings less than 1,000 ft to a hydrant and one for all others. Beyond the ISO protection grades, the underwriter will examine sprinkler systems, smoke alarms, extinguishers, fire walls and doors, plus more.

Exposure (E):

Underwriters consider the condition of exposing property as fire can spread from building to building. Construction, distance and protection are key considerations. Underwriters will consider frame and joisted masonry buildings closer than 50 ft as on a risk to set line limits and reinsurance.

 

Underwriters will require detailed historical loss information about the property.  Producing what is know as "hard copy" loss runs from the past insurers is required.   There was a day when underwriters took you at your word, however, those days are in the past. 

Underwriters need to know the operational experience of the management team.  They need to see your business continuity plan. 

Underwriters will need to discuss the financial condition of your company. Do you have the financial capacity to invest in the proper maintenance of the facility?  Do you have reserves on hand to protect your property in the wake of a CAT event, or are you holding on by a thread? Credit ratings are equally important.  Consider updating your Dun & Bradstreet or similar rating.  Some insurers will not consider you if you do not meet a certain credit rating.  Many businesses do not want to divulge their financial information to D&B or the insurer.   If you feel uncomfortable releasing financial information to an intermediary, then it can be submitted directly to the underwriter.   

Underwriters do not want to see their prospective insured involved in continuous litigation.  If this is the nature of your business, it needs to be communicated to the underwriter.

Documentation

You have heard the expression "a picture paints a thousand words", well this sums it up for underwriters. Nothing is more assuring to an underwriting than being able to see what they are insuring or reinsuring. Being able to produce detailed images throughout the construction process; in tandem with current photos and surrounding areas, is even more reassuring.  In this day of digital information, underwriters can use satellite images of your facilities; however, these are typically old images which cannot be relied upon.

At the very least, design and construction plans should be readily available, contact information for the professionals who designed and built the facility from the architect, civil, mechanical and structural engineers; GC, roofing contractor; including all critical trades plus all means and methods. You should be able to produce written documentation on which specific building code and version the facility was built to.  Having a copy of the CO or building permit provides little comfort. 

There are many additional factors that go into the process.  These are just some. 

Setting Property Limits:

Market appraisals of your property are a good start when followed up with a full professional replacement valuation by a knowledgeable firm.

Business Interruption coverage

Business Interruption is an often misunderstood coverage.  Too often organizations do not devote enough thought on the front end when arriving at an adequate valuation for their business income exposure. This can often lead to claim payments which do not meet the financial objectives of the business following a loss.

Setting limits do not begin with increasing last years limits by your overall budget growth. This leads to inadequate and/or inaccurate figures and insufficient coverage or just as bad, overpaid premiums. Taking numbers straight off the balance sheet are also of little value when a CAT loss occurs. If errors are identified by your carriers, you'll find adjusters considering denying coverage or restricting the amount of recovery for extra expense, rental values, ordinary payroll, etc... Knowing what your real exposure is on the front end not only helps you following a loss, but often reduces your premiums.

Standard Business Income coverage is designed to cover the actual loss of income incurred if normal business operations are disrupted by damage to your property. Contingent business income coverage, indirect or consequential, should always be considered. This type of coverage is not standard to business income policies and must be specifically endorsed onto the policy. These losses include interruption of utility services, inability of customers/vendors to reach your facility, or even critical supplier having suffered significant damage. Interruption by Civil or Military Authority coverage is for losses suffered when a covered loss restricts access to your property by order or action of civil or military authority. Ingress/Egress coverage is for losses suffered when, a covered loss restricts entry to or exit from your property.

Examine your policy for any "waiting period" which can be be 24 hours to 7 days with larger risks; and perhaps more before a loss will be paid. For many businesses, this is the timeframe where you suffer your greatest loss. Some waiting periods can be negotiated on a fixed dollar amount. An Extended Period of Indemnity should be considered for those structures or businesses that will not be back up and running full steam when your doors open, without it your loss may not be paid. After a CAT event, expect your business to take much longer to get back up and running.

Extra Expense Insurance is an important element of business income coverage. These are the additional expenses that your business incurs from having to move your business as a result of damage to your facility. This must be endorsed onto the policy.

Many policies include co-insurance clauses that are a penalty for carrying a specific limit that is less than the minimum percentage of value required by the policy. We recommend seeking a waiver here when possible, which is often the case on larger property values.

Loss management plan: After a loss and before substantive meetings with the insurer, we help clients develop detailed loss management plans. The objective is to identify the scope of the damages under the relevant parts of the insurance policy.

Insurexchange professional will provide clients with significant support pre-event, during and post-event. We will provide claim preparation assistance in conjunction with your agent and adjuster, so that claims are expedited and maximum recovery is reached.

We have the expertise to design and negotiate the most competitive property insurance program.  Property insurance in the coastal regions have been hit hardest with substantial premium increases and ever increasing deductibles. It is critically important to be able to determine a fair estimate of your probable maximum loss in the event of a cat event such as a hurricane.  We will be help you arrive at comfortable retentions both financially and operationally.