The ultimate in-depth guide to multifamily insurance from the Florida experts

March 15, 2023 | Market Insights

Explore our insightful conversation with Patrick Newton of Florida Condominium & Apartment Insurance

In an effort to always add value to our network of multifamily investors, our very own Joe LaFleur recently conducted an interview with Patrick Newton of Florida Condominium & Apartment Insurance to offer expert insights on the hot button topic of multifamily property insurance. Explore Joe and Patrick’s conversion below: 

Joe: Patrick is going to give us some excellent insights into multifamily property insurance, so I’m very excited to speak with him today. Patrick, how long have you been in the industry?

Patrick: I’ve been specializing in nothing but property insurance for condo associations and apartment complexes for 18 years.

Joe: Awesome. We’re going to go through a couple of questions that we have for Patrick, but first I wanted to provide a quick introduction. Patrick was a college football star as one of the team captains that took Florida State University to a national championship before deciding he wanted to crush the competition in the multifamily insurance business.

Everybody needs insurance, but it is a continuous battle because of how insurance has been changing in the industry. If you save a thousand dollars on insurance, that equates to about $15,000 of value to your property. Even though it seems like a very small thing to save some money, it has a big impact on your property valuation, which is very important to keep in mind. Patrick, are you ready to start going through some questions?

Patrick: Yes! Thanks for that warm introduction, Joe. I own an agency called Florida Condominium & Apartment Insurance. We are by no means a jack of all trades. We are highly specialized in just one industry segment—multifamily housing insurance. That’s all I know, and all I’ve ever known. If you’re going to have questions about any other kind of insurance, I’m not the person to ask. The biggest issue on everybody’s plate right now is property insurance. It’s the most volatile market we have seen since I’ve been doing this for the past 18 years.

Although there are a number of circumstances contributing to the insurance issue, at the end of the day, it’s a really simple supply and demand issue where the supply of property insurers has diminished in the past couple of years for the first time in a couple of decades. Not only has the volume of insurers diminished, but the amount of insurance they have left to sell is slowly dwindling. Just like any commodity, as the supply of property insurance that they have to sell runs out, they’re starting to charge a pretty penny, especially considering that when they look around and realize that the property insurers they’re competing with are not on the cusp of having a whole bunch more insurance to sell themselves. The cure-all for the circumstances is to increase the supply and have a greater supply of property insurers come to the state of Florida. When will that happen? I don’t know. Anyone that tells you they do know is speculating. The issue isn’t really just the hurricane exposure. These property insurers, the big bad 500 pound gorillas across the country that could come to the state of Florida and increase that supply and lessen the pain for all of us, they can reconcile their books with the hurricane exposure.

The part that they can’t reconcile is the amount of litigation that takes place in Florida. The last statistic I saw was that Florida is responsible for about 9% of the claims nationwide. While we are responsible for about 79% of the litigation that takes place within insurance, and I would certainly expect that number, the amount of the percentage of litigation that we’re responsible for to be much higher than the volume of claims that we’re responsible for. It’s a product of the fact that Florida has hurricane exposure and after every hurricane that occurs, anyone that has a claim is almost always dealing with the situation where the insurance company is trying to show that certain aspects of the damage were a result of previous existing situations that contributed to the volume of the loss. Frankly, we don’t hesitate in Florida to put a public adjuster in our corner when need be. You’ll hear a lot of agents disparage public adjusters, but I’m not one of those people. Historically, there’s a situation with personal insurance agency owners where they get a contingency check at the end of each year from the insurance companies that they place business with based on how profitable that insurance was with that insurance company. If you write $1 million worth of premium with an insurer and they only pay out $200,000 in claims, that insurance was profitable to the tune of $800,000 and the insurance agency owner is going to get a huge fat contingency check at the end of that year. In multifamily housing where you’re working with brokers, there are no contingency checks. Whether that association or apartment complex has paid $1 or $10 million by the insurance company, it doesn’t affect us by one penny. What affects us is how the insured is left feeling after the circumstance and whether or not they ask us to place their insurance the following year. If the litigation issue in Florida were somehow resolved, it would allow that greater supply of property insurers to come to the state, but it would also be a detriment to us as policy holders in the state of Florida. Considering the fact that the attorneys litigating those cases are being enriched thoroughly, they also have the strongest lobbying arm in the state of Florida. The chances of the Florida legislature somehow minimizing or limiting policy holders rights to litigate after a claim occurs is minimal. So, the question is, when will things get better? I wish I could paint a rosy picture about it, but that’s not what I’m here to do.

Frankly, the people that we talk to that own insurance companies and brokerages that perform the negotiations with the property insurers, they’re telling us it’s going to get worse before it gets better. I wish we had better news than that, but the fact of the matter is that’s the case and we’re seeing underwriting guidelines change rapidly. What is true today is very different from what was true 30 days ago. One of the biggest circumstances hurting us in the immediate future prior to the end of this year is that all of these property insurers that we buy coverage from here in Florida, they all buy reinsurance through reinsurance companies. It’s basically insurance for insurance companies and the cost of those reinsurance treaties when they renew are the largest driver for underwriters looking to determine what property rates they’re going to be able to offer.

The reinsurance treaties for all of the big commercial property insurers are renewed twice a year in January and June. As we’re building up to that reinsurance treaty renewal date in June, all of these property insurers are trying to make their books of business look more appealing in the interest of obtaining favorable negotiations at their reinsurance treaty renewals. In an effort to make their books look more appealing, they are often non-renewing risks or they’re offering 100% rate increases with much higher deductibles than were offered when the policy expired.

So after June, what will the circumstances be? No one knows, but it will definitely be a different circumstance. We’re hoping it allows these rates to loosen up a little bit, providing us with some more options in the property market, but it’s not ideal right now. Anybody that tells you what’s going to happen after June is throwing darts in the dark and we have to give budgets to people and it’s a very difficult circumstance. What we’re doing is issuing provisional budgets and saying, “Check back with us in mid-June and we’ll provide you with a revised budget at that time based on the reinsurance treaties that we see at the beginning of June.” Does that seem to make sense, Joe? Do you have any questions based on that little repertoire there?

Joe: I can see where it could have a big impact on reinsurance because that’s one of the major drivers of insurance costs. One of the questions we had from some owners that I polled was in regards to the coverage limits versus replacement costs—requirements on coverage limits versus lender required replacement, cost coverage versus what the lender is going to ask for. Would you mind giving some best practices in regards to coverage limits?

Patrick: The most significant piece of the conversation is even though it is illegal for lenders to ask for limits of insurance greater than the cost to replace a structure, if you’ve got a building with a $10 million replacement cost, you’re not allowed to purchase $12 million or $20 million worth of coverage. However, lenders will regularly ignore a replacement cost and request a limit of insurance equivalent to the amount that they’re loaning on the property. In their mind, they want to see in the event of a total loss, we want our entire loan covered. The reality is the maximum cost to replace the structure is the maximum limit that can be charged. It’s commonplace for us to deal with lenders and say, “Hey, the amount that you’re loaning on this property has no correlation to the actual cost to replace it,” because the amount that they’re loaning takes into account the value of the land and the location and other circumstances where on a replacement cost side, we’re talking exclusively about the sticks and bricks. The bigger issue that’s occurring nowadays is we’ll have a replacement cost estimate performed by an appraiser and sometimes the insurance companies, not the lenders, but the insurance companies will say, “Thanks for the appraisal, but we don’t feel that limit of insurance is sufficient. We would like for you to use this limit of insurance instead.” You have to keep in mind, there’s no insurance company out there that wouldn’t like to sell you a $30 million limit for a property that only has a $20 million replacement cost.

They would always love to provide you a greater limit of insurance than the actual cost to replace for two reasons. 1) If you’ve got a $20 million property and you’re ensuring it for $20 million, you’re paying X number of dollars for that $20 million. If you’re purchasing $30 million worth of property insurance, you’re paying more money and the insurer knows it’s only going to cost them $20 million to replace the structure. If they’re selling you $30 million worth of coverage and you have a total loss, they’re not cutting you a check for $30 million. They’re only covering the cost to actually replace the structure. It’s never a circumstance where they’re offering you a greater limit of insurance than is necessary, and they could potentially end up paying you a much larger loss because they’re offering you that greater limit. It only costs what it costs to replace the structure so they get more money on the front end from a premium perspective by artificially increasing those limits.

Also, the deductibles that we have for hurricanes are a percentage of that total limit of insurance. So 2% of a $20 million limit is only two-thirds of 2% of a $30 million limit. The larger that total insurable value goes, the greater your hurricane deductible exposure is, so that just increases the bar in terms of when that insurance company has to first start to pay. There’s a drastic increase in replacement cost values that we’re dealing with right now, and it’s really a kind of twofold circumstance. Frankly, in my opinion, these values that we’ve been using for years are a little bit undervalued. It used to be commonplace to have $70-$80 per square foot replacement cost, whereas now, those numbers are higher. They’re looking at $120-$140 per square foot. Of course, that all depends on the type of construction that we’re looking at.

The insurance companies oftentimes are pushing for $150-$170,000 per square foot. The only way to really offset the insurance company’s request for those really high limits is to have an appraisal performed and then push to have that appraisal used rather than the insurance company’s requested limits of insurance. Even still, if an insurance company is providing the best price and they’re saying, “Hey, we’re going to require you to use this limit of insurance rather than the limit of insurance stated in your appraisal,” sometimes you just have to bite the bullet because I would rather pay a lesser premium upfront, especially if it was significantly less for a policy where the insurer chose to value it at $30 million rather than a much more expensive policy from another insurer where they’re valuing the property at $20 million, so you can never really say all circumstances are equal.

We always want to have the lower limit. It all really depends on what the insurance company is offering, and in any situation at any renewal, it’s a matter of going to the 15 or 16 property insurers that write condo associations and apartment complexes and other multifamily housing in the state of Florida and seeing who is best and using the best number to drive down the price. We don’t say, “Hey, what’s your best price?” It’s kind of like going to a car dealership and saying, “Hey, what’s your best price?” If they’ve got a car on the lot listed at $50,000, maybe they own that car for $40,000 and maybe $42,000 is the least that they’ll sell that car for. If you walk in and say, “Give me your best price, you’re never going to see that $42,000 price.” But if you have someone down the street with a similar car, you say they’ve got it for $46,000, then you go back to your guy, maybe he’s at $45,000 now, then you go back to the other guy, maybe he’s at $44,000.

It’s the same thing with property insurance. We’re constantly taking the new best price that exists, sharing that with all the prospective property insurers and seeing if anyone can beat it. If someone does beat it, we take that new best price and we share it with the market and see if anyone can beat it. That process continues until there’s only one or two insurers left standing, and then those are the two that end up in the proposal that we provide to the property owner.

The important aspect of that is that you’ll never get the best price by simply saying, “Give me your best price.” You have to have a strategic process when you’re negotiating with these property insurers in order to achieve the best price that they can offer because they will never just throw out their best price unless they know it’s going to allow them to win the business. So by showing them where the rest of the market is, it gives them the ability to say, “Okay, if I give them this best price, I will be the best in the market.” In that circumstance, they’ll put their best foot forward. Does that kind of answer some of those questions, Joe?

Joe: Well, that leads into an interesting one that actually came up three different times from our survey, and that was your best practices advice for owners or the best way to shop for insurance coverage. As an owner, they’re trying to get the best possible price for the ideal coverage, but if you go to one agent and talk to them, then they lock out other carriers and there’s a lot of things behind there. 

Patrick: There’s no question that competition between agents is the best way for any property owner to drive pricing down to its lowest point possible. If you’re looking at an apartment complex and you have one broker and he’s going to all 15 property insurers, that broker really controls all the cards. Is that a bad thing all the time? No. If you have someone that runs a process similarly to the way that we do, that’s not a bad thing. But what you can also do is provide yourself the benefit of creating competition between those two brokers. I’ll tell people as a result of a previous agent or an incumbent agent having sent the submission out to all the markets, once those 15 prospective property underwriters, once they receive a submission from one agent, that’s the only agent that they’ll provide a quote to because they don’t want to end up in a position where they have two of their underwriters competing against each other with two separate agents, so they’ll only work with one agent.

Now if I’m talking to you, Joe, and it’s 30 days prior to your effective date, and we send this out to market and we don’t have access to any of those property underwriters because of a prior submission by the incumbent agency, I wouldn’t say to you, “Hey, we’re being blocked at all these insurance companies because that’s kind of a misrepresentation of the situation.” The incumbent agent in that scenario, he hasn’t sent a submission to all 15 prospective property insurers in order to block me. He’s sent a submission to all 15 property insurers because that’s what you expect him to do as a property owner, leave no stone unturned and search with every single option. The concept or conversation of, “Hey, he’s blocking me from accessing these insurance companies,” it’s really a misrepresentation. By requesting a quote from those insurance companies, he’s preventing me from having access to those insurance companies, but he hasn’t sent that submission with the sole purpose of blocking me and preventing you, the property owner, from having competition. He sent the submission because that’s what you expect him to do. 

When I come into a property 30 days prior to the effective date where we would fully expect to not have access to the various property insurers due to them having received a prior submission from the incumbent agent, I would have to go to you, the property owner, Joe, and say, “Hey, Joe, of these 15 insurers, they have a submission from the incumbent agency. I would like to have access to these three or four insurance companies.” The conversation I would have with you is, “Look, these insurance companies are the insurance companies that the incumbent agent had access to last year, the year before that, and every year prior, and in prior years, they were not successful at achieving negotiations with those three or four property insurers that was better than whatever policy you ended up going with.” 

Then the conversation is, “Look, you gave him access to these three or four property insurers last year and every year there prior. Now, in the interest of creating competition, I would like for you to give access to those three or four insurers to me so that I can go and control negotiations with those three or four insurance companies, and it provides a benefit to you, the property owner, regardless of whether or not I’m successful with those three or four insurance companies. I may not be successful at winning your business with those three or four, but you, as a property owner, will have been successful at creating competition between the existing agent and myself.”

Of course, nothing drives pricing down more effectively than competition between agents. Sometimes it’s just a matter of taking all of the cards out of one agent’s hands and making him realize we’ve got competition here because that incumbent agent is having conversations with his underwriters and the underwriters are saying, “What’s the target price?” They’re having to say, “We don’t really know exactly what the target is because we no longer hold all the cards. We need you to do anything and everything within your power to provide us the most competitive rate possible because there are three or four insurance companies that this other agent is bringing to the table and we have no idea what price they’re going to be.” It results in an incumbent agent having to sharpen his pencil because there is that unknown. What are those three or four insurance companies going to bring to the table, so there’s no question, just like with anything, whether you’re buying a car or whether you’re buying millions of dollars in property insurance, competition is the best tool to drive pricing down to its lowest point without any question.

Joe: When you’re getting quotes from an agent, let’s say they send you four quotes from four different carriers, so that means that they are locked on those carriers, they’re not going to compete against themselves. Is it a good idea or do you recommend that that’s shared with another agent that, “Hey, these are the quotes we got from these carriers, we need you to look for competitive coverage from alternative carriers,” or what do you recommend for the best process?

Patrick: Without a doubt. For example, we won’t even compete on a risk unless we have the expiring pricing from the existing policies. If we’re brought in late in the game, the likely circumstance is that the incumbent agency has gone to the major players. If the agent writes a lot of multifamily housing, there’s not one specific market that they know of that only I have access to, and I’m going to be able to pull that out of the woodwork and provide something better than the top four insurers that they were able to negotiate with. What you’re really looking to do is, prior to those four offers being provided, figure out a situation where you can have, of those top four insurers, two of them with one agent and two of them with another agent because now they’re fighting tooth and nail to win your business. The two underwriters that I have access to are asking me, “What’s the target pricing?” and I’m having to say, “We don’t know. The other agent has access to AM Risk and ICAT, so we need to do anything and everything within our power.”

Even if I’m not successful in winning business, the incumbent agent will sharpen his pencil as a result of that competition that you’ve created. Once you get down to the top four or five insurance companies, there is no silver bullet out there where somebody’s going to come in and be able to undercut that pricing. It’s sort of at that point, you’ve kind of got the best of what exists.

Joe: When should an owner start this process? Because there’s two scenarios we would operate a lot in. One is a purchase contract where they’re going to purchase the property, and the other is renewal, so when should they start this?

Patrick: The incumbent agency that you work with is going to send the submission out to the market 120 days prior to the effective date, even though we send that submission out 120 days prior to the effective date. We only send it at that time because that’s when the insurers accept submissions. It’s standard practice, everyone sends it out at that time. Then after that 120 day mark, nothing happens for 90 days. The underwriters don’t actually look at starting to put a pen to paper until you get within 30 days of the effective date, so that’s when the real negotiating begins to take place. As far as I’m concerned, if I’m a competing agent looking at competing for a piece of business, I just want to be brought in prior to that 30 day window. Of course, at that point in time, we will not have access to the property insurers that we want to. The prior agent will have already sent a submission that will be preventing us from accessing those property insurers.

I’ll just have a conversation with the property owner and say, “Hey, Joe, we would like to compete for this property of these 15 insurers that exist. We would like to have access to insurers A and B,” neither of which will be the property insurer that’s currently on the risk. If the owner of the property at that time is interested in creating competition, they can sign a letter that gives me control over negotiations with those two insurance companies. Essentially, the incumbent agent has been put on notice that they’re going to have to work tirelessly to retain the account. That’s the best situation that you can create is competition between the agents. It’s important that competition begins with the markets, meaning the property insurers are divided up between the two agents at least 30 days prior to the effective date.

Sometimes agents in my position will say, “We want to get the information prior to 120 days so that we can send it out when the other agent sends it out,” which that’s not how we operate because frankly at that 120 day mark, it’s a shot in the dark in terms of who gets which insurance companies. The way that the insurance companies work is they say, whoever’s submission we receive first after 12 o’clock midnight on the 120th day, that’s the agent who we’re going to provide a quote to.

In hearing that, you can understand why it’s a total shot in the dark and as a property owner, you don’t want to subject yourself to that because anything that a property agent like myself can achieve with any specific insurance underwriter is dependent upon the relationship that I have with the underwriter that I’m dealing with. Sometimes people will say, “You don’t want to shop this. We all go to the same insurance companies and we all get the same price.” And yes, we all do go to the same insurance companies, but do we all get the same price? Not by a long shot. What I can achieve with any specific property insurer is dependent upon the relationship that I have with the underwriter that I’m dealing with, and that’s why I say we’re not interested in participating in that shot in the dark at 120 days. We’d rather be brought in at 60 or 30 days to look at it strategically and I can say, “Hey, I know Brian and I know Susie really well at these two different insurance companies, these are the underwriters that I’ve got the best relationship with that will give us the best opportunity to win the business, so these are the two insurance companies that I would like to have access to.”

That’s the strategy of it. You don’t always have to start it 120 days out and when you bring another agent in after that 120 day mark like myself, we will always be blocked at the various insurance companies that we would like to have access to, which is no big deal. It’s a simple hurdle where we say, “Hey, Mr. Property Owner, would you like to create competition for your business? If so, of these 15 insurers, we would like to have access to these two or three.” If the person’s interested in creating competition for their business, then they’ll sign those two or three insurance companies over to us.

The last part of that conversation that I’ll always mention, which I said earlier, “Hey, Mr. Property Owner, if I’m not successful at winning your business, you will still have been successful at creating competition between agents, which of course will always drive pricing down.”

You can watch the complete interview with Patrick on Vimeo here.

Joe: That brings up another excellent question we had from some of the owners: What are your recommendations for best practice for a property owner to make themself very attractive to insurers so that they’re able to get the best prices for things that are under their control?

Patrick: The most important piece of underwriting info for any underwriter is the construction type and how new the roof is to see what type of risk we’re looking at. After that, the history of claims for the past three to five years is the most influential underwriting piece in terms of driving pricing up or down. Some people think, “If I just got a bunch of small claims, it’s not that big of a deal. I don’t have any big claims.” and that’s not actually the case.

If you were dealing with a property underwriter and you posed two situations to them, one situation where you had five water pipe breakage claims in the past three years, none of which exceeded the $5,000 deductible versus a single $100,000 fire loss on a different account, you would think they would say, “We’d rather have those five small claims that didn’t exceed the deductible rather than that one big fire claim that ended up paying out.” and that’s not the case.

The concept in insurance is frequency versus severity. Property underwriters would prefer a single severe loss that was an aberration (an act of God), that fire loss is not something that’s likely to repeat itself with those frequent water pipe breakages, even though they haven’t exceeded the deductible, that’s essentially putting an underwriter on notice. It’s only a matter of time. These things are going to continue and eventually one’s going to exceed the deductible. How do we know that? Well, there’ve been five in the past three years. One of the most important things you can do on the front end is be strategic with your claim filing. Frankly, water pipe breakages are the most common type of claim that we see far and away and there’s not a close second. When we’re dealing with water pipe wreckage claims, we don’t just fire off a claim right off the bat, we’ll talk with them and we’ll bide our time and we’ll assess what we think the damage may amount to. If we don’t think it’s going to exceed the deductible, we most certainly will not file a claim. We also have the option, “Hey, we’ve got a $5,000 deductible. We think this is going to be $3,000-$4,000. Let’s not file a claim, but in the event that it blows up to $10,000, we will want to file a claim and we reserve that right to file a claim in the future if the loss exacerbates and we’re able to still file a claim in the future by way of how we handle that loss initially.” We don’t just bring people in and have them fix it and then find out, “Hey, it’s $10,000 versus $5,000.” You have to document everything thoroughly with pictures in order to reserve the right to file a claim later. Because if you file a claim and you say, “Hey, this happened three weeks ago, everything’s fixed, it was $10,000 or filing a claim, the insurance company has a right to say, “You have to give us an opportunity to inspect the risk so that we can determine what the cause of loss was and how coverage may apply.” In that scenario, the insurer could say, “You never gave us the opportunity to inspect, so now this claim is going to be denied.” We can circumvent that issue by documenting the living heck out of the circumstance with pictures. As long as you take all those pictures documenting what took place from all different angles, you still reserve the right in the future to file a claim in the event that loss blows up to a point that exceeds your deductible, even though you may not have expected it to.

It’s essential to minimize those small claims and small claim filings even when you think they may exceed the deductible, but if they’re not going to exceed the deductible, you really want to try to have as few of those claims on your track record as possible.

There’s nothing worse than a renewal where there are a bunch of small claims, even if they haven’t exceeded the deductible outside of being cognizant of your claims history and trying to make your track record for the last three or five years look as clean as possible, you’re really looking at things like putting a new roof on the property, and these are not simple things. Rather than our practice, that’s something where you’re breaking out the checkbook and you’re spending lots of money.

When I think of best practices, I think more along the lines of what can we do in our day-to-day operations? Not, “How can I break out my checkbook and make my risk look more appealing to a property underwriter?” That would far away be the number one thing, and it also leads its way into general liability coverage as well.

What can we do to minimize the claims that we may have? Because whenever we’re shopping for general liability insurance each year, the history of claims for the past three to five years is the most significant piece.

The most common circumstance that we see is with slip and fall type claims, or any claim that someone’s injuring themselves in poor lighting. That’s one of those things that’s a real simple fix. Make sure that you’re constantly changing out the light bulbs because the Morgan and Morgans of the world love when someone calls in and says, “It was dark, I couldn’t see what was going on and I tripped over this and that.” You could also use common sense from a liability perspective when you’re walking around your property. We’re fortunate here in Florida where without the freezing, we don’t have lots of potholes in parking lots, but if you see circumstances like that, you can rectify those circumstances. 

Joe: Another question we had was if you own a property and you get a non-renewal or a termination of policy because of some circumstance, what are best practices for owners to know ahead of time so they can prepare and handle that situation?

Patrick: Yeah, that’s a great question. Let’s first talk about the liability portion. A prospective general liability underwriter is going to want to know what you have done to rectify any claims on your historical record. Any losses that have occurred in the past, you want the agent in my position who’s now shopping this liability policy with various liability underwriters to be able to say, “Hey, yes, circumstances A and B occurred, but circumstance A, which was a result of someone slipping due to a downspout not being connected. We’ve gone through the property and made sure that every downspout is now connected and circumstance B, where someone tripped over a raised seam in a sidewalk, we’ve since had one of those machines come out where they just shaved down all the raised lips on the sidewalk.”

You never want to have a circumstance that caused a loss that still exists when you’re shopping for insurance the next year. You want to always try to rectify those circumstances.

In regards to short term rentals, you’re really dealing with insurers that have underwriting guidelines that are not changing on an annual basis. Nowadays, they’re changing on a quarterly basis and insurers that may have an appetite for associations or apartment complexes that permit rentals for less than 30 days, may have an appetite for that now and at your renewal next year, they may not have an appetite for those short-term rentals.

That doesn’t mean that there isn’t another liability insurer out there that has an appetite. There will be other insurers that have that appetite, but most likely at a greater price point.

Joe: Another question we had was if an owner has five properties throughout Central Florida, when is the best time to start shopping all of them together versus property specific?

Patrick: A master policy is a big part of what we do. If you have five, $20 million apartment complexes, your purchasing power with that $100 million schedule is much greater than your purchasing power with five, $20 million condos individually.

There are some significant benefits to placing them all on one policy. Oftentimes, you can have what we call a PML or a probable maximum loss limit where I’ve got five of these properties that are $20 million a piece and they’re spread throughout Florida, there’s a very slim chance that a single storm is going to hit all five of my properties and create a $100 million loss. You can purchase a probable maximum loss limit and say, “Hey, in any single year, I don’t think I’m going to incur a worse case scenario, more than $50 million in losses, and you can purchase that lesser limit.”

Now, that applies exclusively to people that own their properties free and clear of a lender. If you have a lender, they’re always going to require you to purchase full limits of property insurance. Even in that scenario, purchasing with five complexes at $20 million a piece, you still have a much greater purchasing power when you’re buying all of that insurance at once rather than five separate $20 million renewals throughout the year.

As far as the timing of that, that’s actually a great question. People often want to try to put the timing of it around the new year so that it coincides with their fiscal year and budgeting purposes. You really do not want to put it around the new year.

Hurricane Matthew was the greatest example of that. After a storm occurs, insurers are not able to immediately quantify their losses. It takes months for them to figure out how much damage they incurred to their book of business. During that period between when a storm occurs in September and when they’ve reconciled their books by January or February, they put a reserve on these accounts. The reserve is saying, “Okay, we think this is maybe a half a million dollars in losses at this property. We really don’t know until we figure it out, we’re going to put a $1.5 million reserve on the account, which is them saying this loss could potentially blow up to $1.5 million.” They have to work on that worst case scenario until they’re able to quantify their actual losses. 

After Matthew occurred from that period between when the storm happened and it was roughly June 15th, there was 25-30% increases in property premiums that we were looking at while the dust was up in the air. By the time we got to January 15th and the dust had settled and the insurers had quantified their losses and realized as they do in most scenarios, that the actual loss sustained was far less than those reserves that they’d placed on the accounts, it dramatically changed the rates that they were willing to offer.

Between when Matthew occurred and January 15th, those rate increases were around 25-30%, but after they quantified those losses from January 15th, the increases were more like 10-15%. In understanding that, you can see the greater amount of time between the end of hurricane season that you can give yourself for that dust to settle in the event the storm occurs, the better off you are. 

Most of our properties renew as a result of that in March and April. Of course, you want to have your policies in place before June 1 when hurricane season starts again, because that’s really the worst case scenario to have your renewal take place during hurricane season, especially the harder hurricane season when you’re seeking renewal pricing while maybe a storm has already hit or there’s potentially storms bearing down on us. As beneficial as it is to have that renewal date sometime in the spring, it’s equally as detrimental to have that renewal date fall in the heart of hurricane season.

There’s also coverage provisions within these policies, which are quickly being taken away by the property insurers, but it used to be commonplace to have a calendar year deductible, meaning you only pay for your hurricane deductible once in any single calendar year. However, if that expiration date falls on September 1st, then you get hit by a storm on August 15th, you’re paying a big deductible. August 1st comes around, you now have a new policy. If you get hit on September 15th, you’re paying that big deductible again. In order to avoid a circumstance where you’re potentially paying that deductible twice in any single hurricane season, we always move those policies outside of hurricane season and into the spring. 

Joe: Well, that’s very helpful. We also had some direct questions in regard to the blanket policy. Let’s say you have five properties that you have a blanket insurance policy for, you have multiple lenders, so you have full coverage on each property, but you have a claim on one. Does that now affect your underwriting for the entire portfolio?

Patrick: It’s a really tricky circumstance, and it’s a great question. There are often situations where we’ll have a master policy in place and we will strategically break out one of those properties because it’s negatively affecting the rate on the master policy. There’s no one size fits all answer. It’s more of a case-by-case basis, but what you’re saying is absolutely correct. You can have a situation where you’ve got some properties down in South Florida that are negatively affecting the master policy rate and driving up the premium on policies that you may have in the middle of the state or in North Florida. Again, there is no one size fits all answer. That’s something that you need to talk with your insurance agent about and be cognizant of that circumstance and ask them.

Sometimes you will want to break a single policy out in order to avoid it negatively affecting the rate elsewhere. It also becomes tricky when you’re looking to allocate an amount of premium to one specific location when you’ve got five locations on a master policy and you’ve got a total limit of insurance. It’s not simple to say, “Hey, this portion is for this apartment complex and this portion is for this apartment complex.” You can’t just break it out according to, for example, if you had five apartment complexes that were precisely $20 million each and you had a hundred million dollar limit, you couldn’t just say, “Okay, 20% premium for each of these associations, for each of these apartment complexes,” because they’re going to have different construction types and they’re going to have different underwriting factors that affect them.

It’s not always going to be an equal situation where the premium can just be split up proportionately according to what percentage of the total limit of insurance each location accounts for. There are a lot of factors that contribute to the rate that’s afforded to each property, so it can be kind of tricky to break out an amount of premium for each property. 

There are most definitely circumstances where you want to be strategic in breaking out a single or multiple locations that could be driving up the rate for the whole property as a whole. You have to have the conversation, bring up that topic with your agent and discuss it with them.

Joe: We also had another question in regards to hurricane damage. What should property owners do to go out and get the best quotes after having hurricane damage and claims from those hurricane damage?

Patrick: That’s another great question. The last thing that you want is to be meeting a water or disaster remediation company for the first time after a loss occurs. Because number one, you’re going to be last in line in comparison to anyone else that has had an inspection performed by those disaster remediation companies prior to a loss. It’s becoming much more common nowadays for apartment complex owners to reach out to a specific disaster remediation company and it doesn’t cost any money to put a contract in place with them that says, “Hey, when disaster strikes, I want to be one of the first people on your list.” They’ll come to the property, inspect, look around, and do their whole dog and pony show. There’s not really much that occurs at that time, but what you’re really doing is reserving yourself a place in line for when that loss does occur.

Rather than calling people and saying, “Hey, we’ve got water all within our units. We need to get somebody out here sooner than later.” One of the best practices that you can utilize in that circumstance if you own multiple properties is to have multiple disaster remediation companies working for you. The primary goal for anyone looking to lessen the pain after a hurricane occurs is to go out and form a relationship with one or multiple disaster vendors because it all comes back to who’s first in line and they know that they’re going to have to be responsive if they want to maintain your business while you’ve got another vendor that you’re working with as well. The worst case scenario is you calling people after a loss has occurred for the first time and saying, “Hey, I need help.” You don’t want to be in that position.

Joe: How do those claims then affect when you go for renewals for your insurance policies?

Patrick: I mean, it’s the nature of the beast when a hurricane occurs and you have damage, it is what it is. We don’t purchase this insurance to not collect when we’re talking about small water pipe breakage claims. Yes, we will strategically avoid filing claims, especially when we know we’re not going to be able to collect any money in the first place considering that the volume of the loss is less than the deductible. When it comes to fire losses and hurricanes, it is what it is. You want to hope that the insurance company will do right by you because if you do end up having to hire a public adjuster, it doesn’t make you a pariah, but it’s not a good circumstance from a prospective underwriters’ point of view when you’re shopping for insurance the next year because part of the loss runs when it shows. Plus, oftentimes, the claim will still be opened. The prospective underwriters will say, “What’s going on with that claim?” and we have to be forthright and let them know that they had to engage a public adjuster because the insurance company was trying to give them a raw deal. Again, that doesn’t make us untouchable from a property underwriter’s perspective. Sometimes as policy holders, we have to do what we have to do, but we also tell people that some of our people will say, “Hey, I want to hire this public adjuster right now.” And I’ll say, “Hold on. We want to create a circumstance that allows me to most effectively sell your situation to property underwriters at the next renewal.” We’re not going to immediately call in this public adjuster before the insurance company has even had an opportunity to weigh in.

We play that process strategically. We say we’re going to let this property insurer come in and perform their claims adjustment and see what it is that they’re willing to offer us. If we don’t feel sufficient after that, then we can go and engage a public adjuster. If we’re just engaging with a public adjuster before the insurance company has even had an opportunity to do right by us, it’s sending the wrong message to future prospective property insurers that they’re not even going to be given an opportunity to try to do right by us. We’re just going to call a public adjuster from day one and start fighting you.

You can still hire a public adjuster, but you always want to be strategic about the sequence of events prior to that public adjuster being brought in because there’s nothing wrong with telling a property insurer at a renewal, “Hey, this other property insurer was giving them a raw deal. They didn’t have any choice. They had hundreds of thousands of dollars worth of damage and the insurer offered them $50,000 and told them to go fly a kite.” They had no choice but to bring in the necessary people and put those people in their corner in order to fight that insurance company. That’s a far cry from they hired a public adjuster prior to the claims adjuster even having the opportunity to inspect the loss.

Joe: It’s interesting that you’ve brought up small claims a couple times. Do you have a recommendation in regard to requiring every one of your residents to have renters insurance as protection for smaller claims within the units?

Patrick: On our end, when we’re shopping for insurance, we’re not able to drive pricing down based on whether or not there’s insurance within the units. Frankly, they don’t even really ask us if their renters have renter’s insurance. They’re looking at it as they insure the building. They’re going to be responsible for water damage that occurs to the building without regard to whether or not the unit owner has renter’s insurance. Because I’m not familiar with renter’s insurance myself, we don’t sell renter’s insurance. It’s a personalized agency type thing, but I don’t believe renter’s insurance provides coverage for damage to the building. I believe it just provides coverage to the contents that the unit owner has. Otherwise, the unit owner would be essentially double insuring parts of the building that the property owner has already insured.

Joe: Just to give you a quick example, I’ve had a couple of owners that require renter’s insurance. One of the issues that occurred was smoke damage because the resident left their apartment and left stuff burning on the stove for three hours and they were able to show that this was specifically because of the actions of the resident. Instead of making a claim on the property insurance, they made the claim on the renter’s insurance and collected.

Patrick: That would most likely end as a result of the fact that the resident or tenant was liable for the circumstance that they created. It wasn’t that the resident or tenant had coverage for the building, but they had liability coverage through that renter’s policy and they were negligent in having left the stove on, which resulted in the fire. There’s no question that if you are in the business of requiring renter’s insurance, there are some significant advantages that it can provide you and that’s a case in point.

In another circumstance, if they had filed a claim with the property insurer of the apartment complex owner after paying for the loss, they would likely have subrogated that renter’s insurance company and said, “Hey, your renter was negligent in having caused this loss. You owe us this amount.” There’s certainly some significant benefits on that end. Not to mention if you’re requiring renter’s insurance, I’ve got to think that you’re dealing with a different type of renter in comparison to renters that wouldn’t be willing to purchase renter’s insurance. Perhaps you’re getting a more responsible type of tenant in that scenario. But yeah, that’s a great example.

Joe: Another question we had was in regards to work being performed at the property that would then be shown as an upgrade to it for an insurance carrier. So this would be electrical work or plumbing work and what documentation that needs to be shown to an insurer where they feel confident that yes, this work was done and it was done correctly and we are willing to then possibly lower our premiums based on that.

Patrick: The end all be all, when we’re trying to prove to prospective property underwriters and liability underwriters is receipts showing the volume of money that was spent. You can have an electrician paint a rosy picture about work that was done, but at the end of the day, what really defines for them how much work was done is how much money was spent. They want to see receipts of the cost. We always get the question, when was the plumbing updated? When was the wiring updated? The answer is almost always as needed. People don’t come in and rip out functional wiring and functional plumbing lines. It’s always on an as needed basis. Anything that you do to the property, it really comes back to the volume of money that was spent on that circumstance and providing evidence of those circumstances, especially when it comes to electrical, because electrical upgrades oftentimes fires that occur that insurers pay are a result of electrical issues.

Paid receipts that show the volume of work that was performed goes a long, long way in proving those upgrades because there are some significant discounts associated with those upgrades, especially when you’re talking about the roof. If a roof is patched, it’s always nice to have a statement from the roofer on his letterhead saying the roof is in great condition, but nothing is more impactful than paid receipts It would be nice if there was a circumstance where we could incur the benefit of a rate reduction without having to show how much money we spent or without having to spend that much money in the first place, but that’s usually the most significant and impactful piece of information.

Joe: Is that more impactful than permits that were pulled and opened and closed versus a four point inspection from a licensed inspector?
Patrick: Yeah, it is because a permit just says, “Hey, we did stuff, and the paid receipt or the invoice says this is how much stuff we did.” The permits are a good thing, but that paid receipt or invoice showing the volume of money that was spent, that’s the real defining factor of, yes, you pulled a permit, but how much work did you do? Because you can pull a permit to change a single plumbing line versus showing a receipt that proves that you did a bunch of work. The permits are always good, but nothing weighs heavier than actually showing the volume of work that was done through an invoice or a receipt.

You can watch the complete interview with Patrick on Vimeo here.

Joe: Another question we had is who are currently the top five carriers in Florida? 

Patrick: It’s constantly changing around who has the strongest appetite, but you’ve got your typical players, your ICATs, your AM Risks, and there’s probably about half a dozen primary players in the marketplace. Frankly, all of us agents that write multifamily housing, we all have access to those insurers.

When I was talking earlier about there’s 15 insurers that we go to, yeah, we do go to those 15 insurers just because you never know who’s underwriting guidelines are changing and in the event they change, you want to find out about that right away. You don’t want to find out about that by way of losing a piece of business to another agent that was accessing all of the markets and was keen to the fact that this one property underwriter just changed their appetite. 

When you’re talking about dividing up the property insurers between two agents, when you’re trying to create that competitive bidding process, if you give the incumbent agent his choice of the top five markets, you’ve essentially stopped yourself. You’ve prevented yourself from really holding a competitive bidding process. If you were to ask me in that scenario, “Hey, we’d like for you to compete for your business. My person gets their choice of the first five property insurers and then you can have your next pick after that,” I’m going to decline to pursue your business because there’s not an opportunity there as a result of them having the top five or six markets. Divvying up those top five or six markets between two agents is really where you’re going to be able to obtain that competitive bidding process.

When I first got into this game my first few years, if you said my person gets their choice of the top five, I would’ve said, “Sure, I’ll try for it,” but the reality is as time has gone by, we now have the liberty of determining qualifying opportunities.

If one agent is given the top five or six property insurers, then there’s really not an opportunity for us. As a property owner, you would want to try to see if you could divvy up those top five or six between those two agents rather than giving one guy the top five draft picks and telling somebody else, he gets the top five draft picks and then you can have whoever’s left after that. Some agents will work on that business, but usually it will be newer agents that are looking for opportunities anywhere they can find them just like I did earlier on in my career.

Joe: So your recommendation would be let your incumbent agent pick two and then go to another one, two, or three max.

Patrick: I would say three. For our accounts, when we have competition come in, the concept is to be the champ, you have to beat the champ. The competition doesn’t get to take the number two and three insurance companies away from us. We’ll get the insurance company that we placed it with last year and then our choice of the next two, and then we will say they can have access to insurers three, four, and five. If I’m saying to you, “I must have these six insurers, what I’m really doing in a roundabout way is preventing you, Mr. Property Owner, from being able to create that competitive bidding process.” Because I know outside of these six insurers, the rest of them are going to have a prayer at writing this. It’s in your best interest even though oftentimes an agent will say, “No, we really want these top six.” If I’m looking out for myself as a property owner, I’m going to say you can have the insurer you placed it with last year and then your choice of the next two. I’m not going to give you the top six draft picks because that’ll prevent me as a property owner from being able to find a quality agent that will compete with you because you have all the best companies.

Joe: This conversation has been incredibly helpful. I learned a ton about insurance and I thought I knew a lot. Are there any parting words you want to leave everyone with?

Patrick: The one thing that you mentioned about the expiration dates, that’s one of the less obvious issues and we harped on it. It used to be very easy if your expiration date was in wind season to move it out of wind season, but for the past three or four years, that’s actually been very, very difficult.

Prior to 2018, if you had a policy that was $50,000 in hurricane season, you could tell that insurance company in February, “Hey, we want to cancel this policy and put a new policy in place with you for $50,000.” and they would say, “Great.” Nowadays, they’re requiring a much greater rate when you’re looking to change that policy. The issue is, if I have a policy that starts in August, and when I say, “Hey, I want to cancel that policy and put a new policy in place in February or March,” that property insurer that it’s with in August is the only insurance company that you can entertain an offer from in the spring.

The reason is you can’t shop that policy because the premium is fully earned, meaning they get to keep 100% of the premium due to the fact that the policy existed in part during wind season. The concept there is the wind exposure is 95% of the exposure for a property insurer in Florida. They’re not going to let you purchase a policy for half of the year, meaning June 1st through the end of November, and then cancel that policy after hurricane season and get half of your money back. They’ll get to keep all of that money. That’s why when you do move an expiration date, the only reason you can move that expiration date is because that insurance company that you’re currently with is providing you a prorated refund on that existing policy, which they don’t have to provide you, but they’re willing to provide you that prorated refund as a result of the fact that you’re going to be placing another 12 month policy in place with them in the spring.

You are able to move that expiration date, but only with that one insurance company that you’re with now because they’re providing you a reprieve and not saying “We get to keep all the premium for the next six months.” They’re saying, “Here, we’ll provide you a prorated refund because you’re agreeing to place another 12 month policy with us starting on March 1st.”

When those rates were the same, when a $50,000 policy in August was replaced by another 12 month $50,000 policy in March, it was a simple, lateral move, but now the case is, “Okay, we’ll cancel that policy and provide you a prorated refund for the remaining six months. But this new 12 month policy, it’s not going to be a $50,000 policy, it’s going to be a $75,000 policy.” And people are saying, “You know what? I don’t like that. I don’t have the ability to shop this policy because of that minimum earned premium provision.” They’ll say, “Okay, you know what? Let’s forget it. Let’s go ahead and let this policy run its 12 month course and then in August, we’ll try to find a different insurance company which hopefully won’t be offering us a $75,000 premium in comparison to the 50 that we’re paying now.” What we see almost invariably is that premium, which is $50,000 now, and then in the spring they offered us a 12 month policy for $75,000 and the property owner said, “No, I’m not going to subject myself to that increase.” Let’s wait until August when the policy renews when we can shop it with the whole market, suddenly that $75,000 price is gone and the best of what’s available in the market the following August is $85,000.

The rate increase that seemed like a raw deal in the spring at $75,000 is even worse in the next hurricane season in August when that policy renews. That’s even with all of the various property underwriters being able to quote that risk. And it’s just a product of rates that have continually been getting worse since 2018 and we don’t see an end run to it. For a property owner that has a policy that’s in the wind season now, it’s very difficult to move that policy out of the wind season. You can still do it, but you basically would have to bite the bullet in the spring and say, “I’m going to voluntarily subject myself to a rate increase now in March rather than paying on the lower price policy for another six months through August.”

Joe: Is that a recommended practice that you make to have people go ahead and do their renewals in the spring and start moving their day? 

Patrick: Yeah, you’ve eliminated that primary circumstance that we’re looking to eliminate, which is paying that deductible once in any single hurricane season and also having to deal with potentially a renewal during a volatile hurricane season. That’s also a terrible circumstance, but we’re also starting to see those hurricane deductibles that were so prevalent for the prior decade, more decade and a half I would say. Instead of offering a calendar year deductible where you only pay it once in that single policy, now they’re just providing per occurrence deductibles where you’re going to pay that big hurricane deductible percentage every time you get hit by a storm, whether your expiration date is in hurricane season or out of hurricane season. 

Right now, I would say from a best practices standpoint, it’s not as beneficial as it used to be. It’s still nice to not be renewing in hurricane season and then allow for some time for the dust to settle in between the end of hurricane season and when your policy renews. But the big driving factor initially in moving it out of hurricane season was being able to avoid having to pay that deductible more than once in any single hurricane season.

Quite frankly, those calendar year deductibles that were so prevalent for so long, they’re going away. They will come back at some point in time when the market begins to soften and then the justification for moving your expiration date will exist once again. As of right now, the primary benefit of having the calendar year deductible and only paying your deductible once in any hurricane season is taken away from us. That benefit being taken away takes away the whole purpose of moving the expiration data out of the wind season.

Joe: Patrick, thank you so much for joining us. I really appreciate it. 

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