5 Ways to Avoid a Multifamily Property Insurance Disaster

Insurance coverage and policies for commercial multifamily properties are different than with SFRs or 1–4-unit properties. There are multifamily owners who assumed that the type of policy which worked for their SFR investment property was good enough and didn’t review the details. They unfortunately had an initial disaster turn into a financial catastrophe. Here are five ways to avoid a multifamily property insurance disaster.

Named Insured 

This one is the biggest factors regarding your multifamily property insurance policy. A question to ask is, who qualifies as an insured? Depending on how you and your partners structure the partnership, there can multiple entity names on one policy. If a loss occurs and the individuals or entities are not listed properly on the policy, coverage could be denied. This will be the biggest “Get out of Jail Free Card” for the insurance carriers to not pay a claim. Make sure the all the entity names and/or individuals are correctly named and on the policy. 

Replacement Cost vs Actual Cash Value

There are two types of valuation methods when insuring a real estate property, Replacement Cost and Actual Cash Value. Replacement Cost coverage is always recommended as the company will pay to replace the damaged property if they are not able to put it back the way it was originally. On the other hand, actual cash value coverage will only pay based on what the depreciated value is at the time of a loss. 

Blanket versus Per Building Limit

When it comes to the property limits for a policy, there are two different ways carriers will insure a multifamily apartment complex. These limits will include the building values, business income amounts, and any business personal property on the complex. The two different types of policy limits are blanket limit and building limit. A blanket limit policy will cover all buildings located within a complex under one total insured value (TIV). On the other hand, a per building limit will be broken out by building. To understand better, think of a per building policy as a magnifying glass on each individual building. Since the buildings are now considered individually, there is a bigger spotlight on them in the event of a claim.

For example, let us say there are 50 units in a total of five buildings spaced across the complex. The total insured value for this property is at $3 million with total business income at $600,000 (including rents and all other income the property brings in for a 12-month period), and $10,000 for any additional maintenance equipment located on the property. 

A blanket limit policy will lump all three of those values together which comes out as a total of $3,610,000 for the entire complex. 

A per building limit policy will break each building down individually. One building might be valued at $500,000 and another at $750,000 depending on several factors including square footage, number of stories, age, type of construction, etc. 

If just one of these buildings is damaged, the blanket policy will cover the damage under the total number for the entire complex ($3,610,000), while a per building policy will limit coverage to under just the value of that building on an individual basis and its associated business income. 

Wind Hail Deductibles 

Another important consideration on your property insurance policy are the deductibles. There will be a deductible for the normal causes of losses, but for wind and hail losses there will be a separate deductible on the policy. 

In more recent years, there will usually be a percentage deductible for any wind or hail losses. This percentage is usually between 1-5% depending on location, age, previous loss history for the property, and current state of the insurance market. 1% sounds like a small amount when it is stated out as a percentage on the policy. The catch is the 1% is a percentage of the Total Insured Value ($3,610,000 in this instance). 1% of $3,605,000 is $36,100. Depending on the insurance carrier the base of the Wind Hail Deductible will be different. 

In the event of a loss for the property, the Wind Hail Deductible can be devastating and contribute to the overall financial difficulties. Therefore, it is critical to verify the actual dollar amount of the Wind Hail Deductible. 

Equipment Breakdown

Equipment Breakdown covers “accidents” that occur internally within the equipment. It will cover almost any type of equipment such as heating and cooling systems (HVAC), printers, and computers. In the event an HVAC pipe bursts internally, Equipment Breakdown will cover it. If a property catches on fire and burns the equipment, Equipment Breakdown will not cover it, but property coverage will. When looking over a quote for an apartment complex, double check to make sure Equipment Breakdown coverage is on a quote or policy. This coverage is a must have on a multifamily Insurance policy.  

Summary

Knowing what is included on your property’s insurance policy and how the policy will protect your property is essential in the event of a claim. If not reviewed, an accident can turn devastating very quickly if you don’t know you were not properly covered. The best way to deal with a claim is before it ever happens and managing your property’s insurance risk control starts with what is included on the policy.