Rod Khleif Real Estate Investor, Mentor, Coach, Host, Lifetime Cash Flow Through Real Estate Podcast.
Commercial multifamily properties are places where many people live, work and visit. In addition, they are also places that contain hazards like stairways and elevators as well as homes that contain valuable electronics and jewelry. For all of these reasons, it is necessary for multifamily property owners to protect themselves from loss with adequate insurance coverage.
In this article, I will review the recommended types of policies and the considerations that should be made before purchasing insurance.
Policy #1: General Liability
General Liability insurance protects against claims for bodily injury and third-party property damage. For example, suppose that a tenant woke up early on a cold winter morning and slipped on an icy sidewalk. In the fall, they break their arm, which puts them out of work for four weeks. In such a situation, a tenant may sue the property owner claiming that they should have done more to maintain the icy sidewalk. Their lawsuit could ask for damages to cover their medical expenses, lawyers fees and lost wages.
To protect against a scenario such as this, multifamily property owners should carry General Liability Coverage sufficient for their property type and size.
Policy #2: Property Insurance
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Property insurance protects against damage to the physical structure of the property. To protect against this scenario, multifamily property owners should carry adequate Property Insurance coverage and there are two general types to choose from.
Coverage can be obtained per building if there are multiple structures on the property where each building has its own separate coverages and deductible(s). This can be helpful for big-ticket items like mold, but per building limits, tend to be lower and can be reached quickly if the expense is significant.
Or, coverage can be obtained under a whole property policy that covers everything, regardless of the number of buildings. In either case, the actual face value of the policy will depend on the size and value of the property.
Policy #3: Business Income Coverage
A commercial multifamily property is a business. When a property suffers damage that causes an interruption in the flow of normal business income, business income coverage can provide protection. When choosing a Business Income policy, there are several considerations:
• Actual Business Income: Covers whatever rent was being collected. May go back as far as 12 months.
• Actual Loss Sustained: Covers actual expenses that need to be paid out of pocket.
• Time Frame: Determines how long the business income coverage is viable after the event occurs. 12-18 months is recommended.
• Waiting Period: Determines the time period between when the event occurs and when the coverage kicks in.
• Payroll Limit: Sets how much payroll expense the policy will cover. At least 60 days is recommended.
Based on these considerations, the amount of the policy may vary significantly from one property to another.
Policy #4: Umbrella Liability Policy
An Umbrella Liability policy is one that provides additional coverage over the stated business owner limits. We recommend this type of coverage to ensure that there are no gaps in the General Liability coverage. For this policy, there are several key considerations:
• Occurrence: Coverage determined by how many times something is expected to happen and may have a per-occurrence limit or total limit.
• Aggregate: Determines the amount that can be received per year.
• State Rules: Each state may or may not have individual limits on liability. Property owners should work with their agent to determine state rules.
• Terrorism: Provides coverage for acts of terrorism that may not be covered in a General Liability policy.
Making a Claim
Regardless of the policy type, there is bound to be a time when a property owner will need to make a claim. When doing so, there are eight factors that should be considered:
• Insurance Adjuster: The adjuster is an individual hired by the insurance company to assess the value of the loss and to provide an estimate for compensation. Because they are hired by the insurance company, the adjuster has an incentive to provide the lowest estimate possible. Their report can be trusted, but should also be verified for accuracy.
• Public Adjuster: A public adjuster does the same thing as the insurance adjuster, but the key difference is they act as an advocate for the insured party. They provide a second opinion and can be extremely helpful when recovering funds in a particularly large loss.
• Engineer: If the damage to the property is structural, the insurance company may elect to hire an engineer to examine the structural integrity of the property. While they have specific expertise, it is important to remember that the engineer represents the insurance company.
• Attorneys: If there is a disagreement between the property owner and the insurance company, it is possible that both sides could hire an attorney to represent their interest. The attorney(s) are responsible for negotiating on behalf of their clients and for working together to find a mutually beneficial solution.
• Timeframe: Each policy should outline the timeframe in which the damage/loss needs to be fixed or mitigated. Failure to act quickly could result in claims adjustments (for example, water damage must be addressed immediately).
• Depreciation: There are two types of settlements: (1) Walk-away settlement and (2) Depreciation Recovery. A Walkaway Settlement is the cash value of loss and it may be less than the alternative. Depreciation Recovery provides cash, less a holdback until repairs are complete.
• Reimbursement: Multiple parties may be involved in signing the settlement check. With agency debt, settlement must flow through the lender or risk default.
The claim process, especially for bigger losses, can take some time so it is important to make them as quickly as possible.
Summary And Conclusions
Insurance is a must for commercial multifamily properties. The amounts and types needed are unique to the property and the market in which it is located. Generally, there are four types of policies recommended: General Liability, Property, Business Income and Umbrella Liability. You should work closely with an experienced agent to determine coverages and deductibles.