Insurance Overview

One component of an effective risk management plan is to identify risks that should be transferred to a third party using insurance. Insurance is a short-term contract, generally written for a one-year period, that provides financial coverage for certain types of risks or specified events. It is one way to transfer liability while still protecting properties.

Liability Insurance

Commercial Liability Insurance (sometimes called “Casualty Insurance”) is coverage that offers protection against claims that allege that a property owner's negligence or inappropriate action resulted in bodily injury or property damage to another party.

Comprehensive Commercial Liability Insurance provides coverage in addition to the limits under a General Liability policy.

Bodily injury examples include:

• A maintenance employee left a ladder in the hallway, resulting in a tenant tripping over the ladder, falling, and breaking his arm
• A visitor is assaulted in the parking lot after a meeting in a tenant’s office
• Someone slips and falls on a wet surface and is injured

Property damage examples include:

• The sprinkler system in the hallway turned on suddenly and a tenant’s desk was ruined on move-in day
• A company lawn mower damaged a visitor’s car

Property Insurance

Property (Hazard) Insurance (also known as "All Risk," formerly “Multiperil,” or "Open Cause of Loss," or "Risk of Direct Physical Loss") includes coverage for accidental, direct physical loss to the property of the insured from any event that is not specifically excluded or limited.

The exclusions vary from company to company; many use customized forms. Such forms are subject to a standard set of exclusions including war, nuclear accidents, vermin and rodents, wear and tear, settling, pollution, environmental contamination, hazardous waste, flood and earthquake, landslide, and errors in construction and design. Some exclusions can be removed by endorsement (a rider or other statement or form that is added to an insurance policy to modify the terms or other provisions of the policy) or by any other insurance policy.

Property insurance coverage might include:

• Fire: the most common risk in the property insurance industry that causes substantial loss to the company and tenants
• Rent Loss: covers a percentage of the contracted rents for a property (If space is vacant, check your policy to see if you are eligible for payment)
• Flood Loss: covers losses due to floods, defined as rising water

Additional Types of Insurance Coverage

In addition to Liability and Property Insurance, the following are common types of insurance coverage:

• Umbrella Liability Insurance: a form of liability insurance that protects policyholders for claims in excess of the limits of their primary general liability, automobile, and workers’ compensation policies as well as for some few claims excluded by their primary policies that are subject to a deductible known as a retained limit.
• Windstorm Insurance: protection against damage done to property by unusually high winds, cyclones, tornadoes, or hurricanes. This coverage is important in coastal areas. Coastal and non-coastal property areas can be defined differently by each insurance company.
• Flood Insurance: a comprehensive insurance policy provides protection from fires, storms, vandalism, and burglary. It should also include protection from injuries and losses suffered as a result of poor conditions on the property.
• Boiler and Machinery Insurance: provides important mechanical breakdown coverage generally not available under any other insurance policy. A boiler and machinery policy can protect an insured against the effects of property loss such as steam boiler explosion or an expensive breakdown of machinery and equipment, including most major HVAC equipment.
• Comprehensive Automobile Liability Policy: the broadest form of business coverage for claims that allege bodily injury or property damage resulting from the insured’s ownership, maintenance, or use of an automobile.
• Non-Owned Automobile Liability Insurance: coverage for the policyholder and its employees against liability incurred while driving an automobile not owned or hired by the policyholder or resulting from the use of someone else’s automobile on the insured’s behalf, e.g., an employee using a personal car for the employer’s business purpose.
• Terrorism Insurance: coverage for Terrorist attacks. Some insurers amended their policies after the events of September 11, 2001 to exclude terrorism coverage specifically from their policies. Terrorism policies can be expensive.
• Difference in Conditions Insurance (DIC Coverage): a policy that insures “all risks” of physical loss or damage, excluding fire and extended coverage perils. Such unnamed losses include collapse, water damage, theft, and (optionally) flood and earthquake. In particular, this insurance covers the additional costs, incurred over that which is paid for under the property insurance (which will pay to rebuild the building as it was originally constructed), or rebuilding a property destroyed by an insured casualty for changes in building codes and fire codes and the use of new and improved building materials not available at the time the property was originally constructed.
• Inland Marine Insurance: the insurance of property (generally on an all-risk basis) that is in the course of transportation or of such a nature that it may easily be transported. Also includes some risks at fixed locations considered “instruments of transportation or communication,” such as bridges, tunnels, neon signs, street clocks, etc., which were accepted as inland marine by custom. This coverage protects walkie talkies and some portable computing devices.
• Earthquake Insurance: covers replacement and repair to damaged properties. Check policy for coverage on accessory structures, such as a garage, contents of a building, and exclusions.
• Plate Glass Insurance: coverage for plate glass damage for office and retail buildings.
• Renters’ Insurance: insurance coverage for tenants’ personal possessions, which are not covered by a landlord’s insurance policies.
• Host Liquor Liability Insurance: protection against loss arising out of the insured party’s legal responsibility as a result of an accident attributed to the use of liquor dispensed (but not sold) on the premises at functions incidental to the insured party’s business.

Property Management Company Coverage

Insurance for a property management company includes:

• Workers’ Compensation Insurance: covers claims from employees who are injured on the job. Fault and negligence by the employer need not be established in order to collect benefits. However, the injury or illness has to be incurred in the course of employment in order for the workers' compensation system to provide benefits to the injured worker. The premium, which is adjusted (audited) at the expiration of the policy term, is based on the insured’s actual exposure during the policy term.
• Fidelity and Crime Insurance: all-risk policy covering both employee crime and outsider crime.
• Crime Coverage Insurance: protects against theft and disappearance of company assets.
• Errors and Omissions Insurance: coverage for damages arising out of the insured’s negligence, mistakes, or failure to take appropriate action in the performance of business or professional duties.
• Business Interruption Insurance: commercial coverage that reimburses a business owner for lost profits and continuing fixed expenses during the time a business must stay closed because of a covered peril, such as a fire.
• Employment Practices Liability Insurance (EPLI): coverage against legal actions connected to wrongful employment practices, such as discrimination, sexual harassment, and termination.
• Employee Benefit Coverage: medical and life insurance coverage for employees.
• Disability Insurance: coverage that replaces part of the income if illness or injury leaves an employee unable to work for an extended period.
• Officers and Directors Insurance: protects officers and directors of a corporation from liability in the event of a claim or lawsuit against them asserting wrongdoing in connection with the company’s business.

Additional items to consider insuring include the following:

• Buildings and other structures
• Any outdoor property such as signs or fences
• Mobile property such as construction equipment or automobiles
• Machinery
• Furniture, equipment, and supplies
• Inventory
• Leased equipment
• Computers and other data processing equipment
• Records, valuable papers, books, and documents
• Money and securities
• Intangible property such as trademarks and logos

A real estate manager may want to consider purchasing insurance that protects against libel, slander, discrimination, unlawful and retaliatory eviction, and invasion of privacy suffered by residents and their guests.

Layered or Stacked Insurance

Layered insurance is a method of structuring policies that cover a risk so each policy provides a layer of coverage. This technique is used in liability and property coverage. The advantages of layering are the additional spread of risk among insurers and the premium savings each company grants the insured.

Example of Layered Insurance
Policy A, a primary policy, provides $300,000 in liability coverage.
Policy B provides $1,000,000 of coverage in excess of the Policy A limit.
Policy C provides an additional $3,000,000 in excess of Policy B, for a total of $4,300,000.

Co-Insurance

In property insurance, a co-insurance clause requires the insured to maintain insurance at least equal to a stipulated percentage of the replacement cost of the property in order to collect partial losses in full. If the insurance is less than the minimum required, the amount of the claim that is paid is reduced as follows:

Insurance Carried ÷ Insurance Required x Loss = Payment (subject to policy limit)

When purchasing co-insurance it is very important to

• Accurately value the replacement cost of the property.
• Consider the co-insurance percentage shared between the insured and the insurer. Typically, the lower the co-insurance percentage, the lower the cost of insurance. However, a lower percentage for the insurer translates to higher risk for the insured if the property is under insured.
• Have an “Agreed Value” or “Replacement Cost” loss limit for which the owner sets the value and the insurance company agrees that the value is correct.

Example of Co-Insurance
Properly valuing a property and higher or lower co-insurance percentages can have significant effects. Consider the following:

Property A: (underinsured)

Insurable value:	$10,000,000
Required co-insurance percentage:	80%
Coverage limit insured selected:	$7,000,000
Deductible selected:	$7,000
Loss amount:	$1,000,000

Calculation of Property A Coverage:

Required coverage of 80%:	$10,000,000 × .80 = $8,000,000
Percentage of coverage chosen:	$7,000,000 ÷ $8,000,000 = .875 (87.5%)
Amount of loss covered:	$1,000,000 × .875 = $875,000
Loss coverage less deductible:	$875,000 - $7,000 = $868,000
Loss amount less loss coverage:	$1,000,000 - $868,000 = $132,000

The insurance company will pay only $868,000. The remaining $132,000 is not covered and must be paid by the owner.

Property B (adequately insured)

Insurable value:	$10,000,000
Required co-insurance percentage:	80%
Coverage limit insured selected:	$8,000,000
Deductible selected:	$7,000
Loss amount:	$1,000,000

Calculation of Property B Coverage:

Required coverage of 80%:	$10,000,000 × .80 = $8,000,000
Percentage of coverage chosen:	$8,000,000 ÷ $8,000,000 = 1(100%)
Amount of loss covered:	$1,000,000 × 1 = $1,000,000
Loss coverage less deductible:	$1,000,000 - $7,000 = $993,000
Loss amount less loss coverage:	$1,000,000 - $993,000 = $7,000

The insurance company will pay $993,000 and the owner will pay $7,000 (the deductible amount).

Subrogation

Subrogation is when one insurance company pays a loss that it believes is rightfully the responsibility of another insurance company.

For instance, if a tenant causes a fire that destroys the entire building and the building owner’s insurance pays to repair the building and the other tenants’ insurance companies pay to restore their personal property, all the insurance companies may subrogate back to the original tenant’s insurance company. If the tenant was responsible for the fire, he should be liable for the damages to the landlord and other tenants. But if that were the case, every tenant would have to insure the full value of the building and the contents just in case.

By waiving the right of subrogation, the parties are agreeing that each will insure its own property and no matter whose responsibility the loss is, each party will look solely to its insurance company for the payment of its loss and its insurance company cannot seek recovery from the other party’s insurance company.

The waiver of the right of subrogation should always be bilateral and not unilateral on any one party’s part. There should be no exceptions to the waiver such as negligence or willful misconduct.