BOTTOM LINE: ASSET MANAGEMENT

APARTMENT FINANCE TODAY • MARCH 2008

The Insurance Whirlpool

How better risk management can help you break out of the costly insurance cycle.

By Morgan Ryan

Many multifamily companies are stuck in a perpetual cycle. This article will attempt to break that cycle down for you, and hopefully, break you out of it. With commercial insurance prices as low as they’ve been in decades, now is a good time to escape the “insurance whirlpool.”

The cyclical effect goes like this. At some point you grow, get busy, and along the way forget to mind the store. It is a well-known fact that most multifamily companies are very flat as organizations and run very thinly staffed. When this happens, overall insurance costs can start to creep up for a variety of reasons. This may force you to take on more of the work. Increased costs cause you to shop your insurance more than usual, which takes up more of your time. (The industry is very well known for bidding out its insurance more than most.) You get more business, you have less time, you perform less risk management, shop more, and the cycle continues.

Here are a few helpful hints to help you break out of the cycle.

Choose wisely. In the confusing world of insurance agencies, you are essentially going to pay the same amount of money for a good broker as you are for a bad broker. Whether you’ve decided to pay a fee or a commission, most people are surprised they can get a Mercedes for the same price they pay for that Pinto. To save yourself time and money, choose someone that you trust, who’s full service, and who comes with industry references. For example, a broker with a great claims department will assist in preparing proofs of loss and in negotiating with insurance company adjusters. Any assistance in maximizing your final loss recovery will ultimately lower your overall cost of risk.

My firm picked up an apartment management client after Hurricane Ivan hit the Southeast in 2004 when the company realized the hard way, with no claims advocacy, that it had accepted 60 cents on the dollar for its loss.

Along those same lines, realize that your insurance broker works for you. In the age of transparency, don’t be afraid to ask a few questions. I am always surprised when I uncover companies paying both a fee and a commission—unbeknownst to them. In 2007, my firm uncovered two such unscrupulous brokers both taking an “extra” hidden commission—both in excess of $175,000.

Manage your time. Hundreds of companies exist that manage between 500 and 10,000 apartment units whose insurance is handled by a one- or two-person insurance agency. Many apartment management executives spend parts of their day doing what a full-service insurance shop would do better and faster—for the exact same amount of money they pay their broker now. If this sounds familiar, have a little fun. Call your insurance agent and say, “I’d like you to start collecting rent checks and cleaning the pool at Holiday Isles for me.” He or she will probably say, “Excuse me? We’re an insurance agency.” Then you can reply, “Exactly! So tell me why am I allocating premiums and trying to get this claim paid.”

What should your broker be doing for you? Negotiating the best 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 isn’t doing the work it should be on your behalf, upgrade.

Consolidate, consolidate, consolidate. One thing that I see day in and day out that can cut insurance costs and increase productivity is the consolidation of insurance policies. If you are renewing 17 different policies throughout the year, lumping them all together under one master policy will help you win in a couple of specific ways. First, when you consolidate policies, the increased premium gives you better leverage with the insurance companies. This will decrease your premium rate and avoid some of the frictional cost of the multiple policies. This is key when handling multiple ownership entities.

If you were misinformed in the past and heard that consolidating isn’t possible, don’t believe it—take another look.

The second benefit you’ll find is free time to spend on activities that actually make you money.

Everything is negotiable. My firm acts as a risk management consultant for several large real estate portfolios. In that capacity, it has seen several companies get themselves into a pickle regarding lender insurance requirements. Two years ago, we caught wind of a very large multifamily organization that had just purchased $90 million worth of insurance on its Florida properties.

In the rush and secrecy that can sometimes surround deals, some of the due diligence and contract review must have fallen by the wayside. The foreign lender, in an effort to collateralize the loan, required the insurance to be written for the full amount of the loan (essentially insuring the land itself in the process). This turned what was to be a blockbuster deal into something less sweet.

Save your company some real money: Read the insurance requirements, do your due diligence, and swim out of the insurance whirlpool.