Is It Worth Having Building Insurance?

But being the owner of an apartment community puts you at risk for things that you may not expect, like a plumbing leak, a slip-and-fall accident in the parking lot, or even a windstorm that strips off half of your roof. The truth is, you know something bad will happen eventually. What you really need to be prepared for is the financial exposure if it happens. 

Yes, apartment building insurance is definitely worth it; in most cases, it’s a must, not a choice. Just one uninsured claim could eat away many years of your net operating income, prevent a refinance, or cause a loan covenant breach.

At What Point Do You Need Building Insurance?

You need the insurance as soon as you close on the purchase of the building, and likely sooner than that, because no bank is going to finance the transaction until it's arranged. In any case where you're getting a mortgage to finance the purchase of the building, you'll find that the lender demands evidence of insurance as part of the closing.

However, owning property free from a mortgage does not absolve you from liability. Liability becomes apparent on the day you sign the lease agreement, not the day when you clear the mortgage loan. If someone gets injured on your stairway or if a fire starts in one of your units and spreads to the other three, then it will not wait till you think you are ready. Insurance should already be in place before your first renter starts living there, not after making the first claim, and that is precisely why many landlords consult an apartment building insurance broker in advance.

How Much Is Home Insurance on a $400,000 House?

In terms of home insurance costs, when talking about a $400,000 detached single-family house, the cost will be somewhere between $1,800 and $3,200 per year, depending on geographical location, roof condition, and previous claims made. If you're talking about a different asset than a standalone house, then this price can vary quite dramatically. 

So, when dealing with an apartment worth $400,000, say an eight-unit complex, the cost of insurance will likely differ greatly and may depend on such factors as the presence of shared walls, more people walking around, increased liability due to the presence of tenants, and so forth.

What Is the 80 Percent Rule for Home Insurance?

The 80 percent rule is a coinsurance provision within almost all property insurance policies. It says that you must have insurance coverage of your home for at least 80 percent of the full replacement cost of the home. Falling below this mark would allow an insurer to reduce your claim payment, even if it was for partial damage, based on a coinsurance penalty formula.

What this means for homeowners in real terms:

• If the replacement cost of your property is $2 million, but your insurance is only $1.2 million (60 percent), then you are under-insured by the 80 percent coinsurance provision.

• The payment you get for a storm damage claim valued at $200,000 could be much lower as per the coinsurance penalty.

• You will reappraise your property annually or bi-annually to keep pace with rising costs of construction.

• An apartment complex general liability insurance, along with property appraisal, covers most of the gap that catches you unawares during claim time.

Is It Better to Have 80% or 100% Coinsurance?

The typical advice from insurance experts is to have insurance coverage for about 100% instead of being content with just 80%. The point of 80% coverage is to protect oneself from the penalty and is the floor, not the target for having insurance.

Owners who buy 100% coverage pay a bit more money in premiums but will not be charged the coinsurance penalty and will receive all the money required for rebuilding their property in case of a loss. In the last couple of years, rebuild costs have increased significantly, making the difference between 80% and 100% quite noticeable.

What NOT To Say When Dealing With Home Insurance

What you say when talking to an adjuster or carrier about a claim is more important than many homeowners know. Certain things you might say could end up shifting blame, downplaying your claim, or giving the insurance company an excuse for delaying.

Don't say these things when making a claims statement:

• "It's probably my fault": guessing about fault at this point may come back to bite you.

• "I've had this problem before": saying that you've had a problem before can be taken the wrong way.

• "I'm not sure how bad it is": generalizing on damage invites low offers; take pictures and write out specifics.

• "Take your time": don't let them take their sweet time with your claim, because they have a deadline too.

Being clear about what happened and when and having documentation will help things go smoothly.

Covering Your Bases: The Importance of Partnering with the Right Company

It's not just a check-the-box sort of thing: apartment building insurance changes with the age of your building and increases in rebuilding costs. The benefits of working with a company that really knows multifamily risk and can handle your apartment complex as something other than a larger home are significant when it comes to having an insurance policy that covers everything.

Moore Multifamily is the company to go for. As a commercial apartment insurance agency built specifically for the risks of multifamily real estate, we design policies based on the reality of your risk, not assumptions made for typical homeowners. We know how to speak the language of NOI, covenants, and portfolio risks, and we're worth talking to about your insurance needs at your next renewal.

Ready to learn more about what is missing in your current coverage? Contact us now for an evaluation of your coverage.

FAQs:

Why do you require a liability policy in addition to your property policy for your apartment building?

Your property policy will cover your structure; however, this won’t help with any injuries, lawsuits, or conflicts between residents. Liability insurance will be able to help in the case of any claims related to slips and falls, negligence, and other accidents with the amenities.

How frequently should a multifamily owner reassess their building's replacement value?

Typically, it is recommended that this be done every one to two years, as the cost of construction and labor can change quickly. Not doing so would make it easier than anything else to inadvertently fall below the coinsurance level and limit your claim.

Will purchasing your liability and property insurance together save you money?

For the most part, yes, as it is a practice where companies can offer discounts on package policies for owners who purchase both. In addition to saving money, it is easier to manage claims, as one incident involving injury and property damage doesn't have to be handled by two different insurance companies.

How does occupancy affect the premium of an apartment building?

High occupancy tends to increase foot traffic, wear and tear of common systems, and the liability risk factor. As such, high vacancy rates imply greater risk from vandalism and fires; hence, both considerations must be taken into account in evaluating the premium.

Is it possible for an owner to change insurers if he or she finds that the coverage is inadequate during the life of the current policy?

Change of insurance provider is possible; however, it often comes with the cost of cancellation fees and increased risks in case of bad timing of the change.