Apartment Insurance: Liability, Programs, Costs & More
August 14, 2020
- Last edition
August 18, 2020
What is Apartment Insurance?
Apartment insurance is a specific niche within a broader class of coverage known as habitational insurance. (Read our Program Business report on habitational insurance here.) Apartment insurance focuses on risks involved with owning and managing apartment buildings and complexes. Habitational insurance covers one room to condos, HOAs, single-family units, up to multi-unit apartment, office, retail, and commercial mixed-use complexes. Taking our readers' knowledge beyond apartment insurance basics is the goal of this report.
Apartments are buildings or complexes designed to lease residential accommodations to families and individuals through a rental agreement. Apartment buildings range in size from small single-story to large multi-story structures. They can encompass providing anything from a few rental units to hundreds of living spaces in multiple building complexes. Some offer amenities such as swimming pools, laundry facilities, clubhouses, fitness centers, carports, parking garages, common grounds, extra storage space, and playgrounds.
Who Needs Apartment Insurance
Business entities such as limited partnerships, limited liability companies, or limited liability partnerships are the primary prospects. Their commercial real estate inventory of 25.8 million units mostly comprises multifamily apartment complexes.
Individual investors are more likely to own single-family and duplex rental homes, although some may need apartment coverages. As a group, individual real estate investors own 22.7 million units spread over 16.7 million properties.
What Is the Outlook?
Considering as an investment class, the long-term outlook for the multifamily sector looks good due to ongoing, steady demand. In the late summer of 2020, with the Covid-19 pandemic not contained in the U.S., the short-term outlook for the industry is downbeat. The virus has taken a heavy toll on the economy and pushed millions out of work. It has also strained the healthcare system and commercial real estate markets. July 24 was the expiration date of the CARES Act 120-day eviction moratorium for renters. It protected renters who participate in federal housing assistance programs or live in a property with a federally backed mortgage. Extensions are proposed. However, landlords are currently free to issue 30 days' notice for tenants to vacate properties.
The global advisory firm, Stout, estimates more than 40 percent of U.S. renter households will experience a rental shortfall during the current crisis. That means nearly 12 million families will face eviction before the year's end. Stout also reports 17 million renters will feel the impact or rent shortfall throughout the pandemic. 35% of American renters have either no confidence (14%) or slight confidence (24%) in their ability to make next month's rent, according to Statista.com.
Recovery in Due Time
It will take considerable time for the economy to rebound from the unprecedented number of layoffs and business failures caused by the pandemic. The initial response by policymakers to lower interest rates, pass stimulus spending bills in the trillions, and create loans to retain workers helps. There is a current gridlock on delivering new stimulus and legislative support from Washington. The scope of additional Federal assistance to come remains to be seen.
Most multifamily real estate investment analysts are looking past current, gloomy short-term conditions. They believe the pre-pandemic housing shortage that kept demand growing will return. Investors understand the need for housing remains constant. Likewise, the owners in the multifamily housing sector will continue to need proper insurance coverages to protect their property and liability risks.
Habitational insurance markets were hardening from disastrous losses due to wildfires, hurricanes, and hail damage before Covid-19. So, while demand may return, finding affordable and available insurance coverage is likely to become a more significant challenge for the apartment owner market.
Who Does it Cover?
Apartment coverage protects apartment complex owners. The range includes individual investors or a business entity such as limited partnerships, limited liability companies, and limited liability partnerships. In addition to the apartment owner, apartment risk management can extend to protect liability exposures to apartment managers and apartment management companies.
A property manager is a person or a firm that runs a real estate property for a fee. Property owners hire them to manage the daily operations of their properties. In 2006, the Bureau of Labor Statistics Office of Occupational Statistics reported 329,000 property managers employed in the United States. There is an expected increase of 50,000 by 2016.
Apartment insurance protects against such liability claims as lawsuits. It also covers lost rent income associated with insured losses experienced by the operation. Typical risks covered by this type of insurance include:
● Storms, fires, wind, and other catastrophic property damage
● Lawsuits arising from disgruntled employees and tenants
● Loss of income from rentals
● Fraud allegations
● Intentional litigious acts by employees
● Claims of misrepresentation
● Injuries on the property sustained visitors, employees, and tenants
● Vandalism and theft
● Loss from libel and slander
Advertising liability claims
Business Owner's Policy (BOP)
A BOP is a bundle of coverage that includes commercial property, business interruptions, and commercial liability in one package.
Commercial Property Coverage
Commercial property insurance protects damages and losses to apartment buildings, related structures, and contents other than that owned by tenants. It also covers such things as exterior fixtures, fences, and signage. An example of typical commercial property coverages, limits, and features included by Apartment Insurance Consultants (AIC), which you can find listed in the Program Business market directory, are:
● Building Ordinance or Law Coverage A: Included
● Building Ordinance or Law Coverage B and C: $1,000,000 combined per location
● Extended Period of Indemnity for Loss of Rents: 180 Days
● Equipment Breakdown: Included
● All Other Causes of Loss: As low as $10,000 per location, per occurrence
● Windstorm and Hail (Excluding Tier One Counties): $25,000 or $50,000 per location
● No Coinsurance
● Building and Personal Property: Replacement Cost
● Building Ordinance or Law Coverage A: Included
● Building Ordinance or Law Coverage B & C: $10,000,000 combined
● Extended Period of Indemnity for Loss of Rents: 180—365 Days
● Demolition and Increased Cost of Construction
● Boiler and Machinery: Included
● Terrorism: Included
● Real property includes fences, carports, signs, storage & pools: Included
Commercial general liability (CGL) protection, also known as landlord insurance, or apartment manager liability. It protects against claims of alleged or actual damage to property or third-party bodily injury claims from delivery and repair personnel, visitors, and tenants. An in-force CGL insures apartment owners and managers from lawsuits due to such injuries as:
● Slips and falls
Other personal injuries suffered by a person or persons while on the grounds.
General liability also covers losses to tenants if their property is damaged by management employees who enter the premises for repairs, inspections, or related activities. CGL also covers associated expenses and medical care when a tenant becomes ill due to issues caused by apartment owners or their employees. Some examples are if tenants suffer harm from fumes from new paint, fumigation chemicals, or management supplied furnishings.
Besides property damage and bodily harm coverage, a CGL policy pays legal costs in instances of reputational harm lawsuits for libel or slander. It also covers the costs to resolve claims of advertising injury. This situation occurs when another company claims the insured's advertising resembles theirs too closely and is hurting their business as a result.
Commercial general liability insurance helps to cover costs for:
● Legal teams to represent the business
● Witness fees
● Evidence costs
Judgments or settlements
Excess liability, also known as a commercial umbrella policy, is additional coverage. It applies in instances when the limits of the underlying liability policy reach its limits. While excess liability will cover losses included in the underlying policy, it excludes any claims not covered in the underlying policy.
These types of coverages and typical limits and deductibles are written under general and excess liability policies:
● Non-Owned and Hired Auto Liability: $1,000,000
● General Liability Limits: $1,000,000 / $2,000,000
● General Liability Deductible: $2,500 per occurrence
Excess Liability Limit: $10,000,000 per occurrence
Other possible coverages to consider include:
● Equipment/machinery coverage. This coverage protects you from the loss of income or damage resulting from covered equipment breakdown. For example, your steam boiler or your mechanical system breaks down.
● Worker's comp. This policy covers employees working on your premises from any work-related injury or illness.
Commercial auto coverage. Any vehicles owned and operated by your business must be covered under commercial auto coverage.
Depending on circumstances beyond those mentioned here are likely to be required for adequate protection for apartment owners and managers. Proper due diligence will reveal other risks to apartment owners resulting in providing additional new or enhanced forms of coverage.
Apartment Insurance Costs (and what factors affect the price)
There is an average cost in a standard $1,000,000/$2,000,000 General Liability Insurance policy for small apartment buildings. It ranges from $67 to $89 per month based on location, number of units, payroll, sales, and experience. Because of the complexity and scale of the residential rental market, providing examples of other insurance costs is not feasible.
Best Apartment Insurance Programs
Agents seeking to provide their clients with the best apartment insurance programs should partner with experienced underwriters. Listed in the Program Business market directory, Apartment Insurance Consultants (AIC) is a top choice.
In 1992, AIC formed the first group property program in Texas. With over 30 years of underwriting experience, AIC has seen changes in the insurance industry and grown to meet those changes. Its concentration is in the gulf coast states and the southwest. AIC's long experience makes it an expert in coastal property insurance.
AIC uses traditional risk strategies to provide competitive packages and rates and to maintain its leadership in the habitational insurance industry. It also uses alternative risk strategies to develop and implement niche programs designed to meet the needs of its clients.