When you review your risk management operations and your insurance portfolio, keep in mind the most common errors risk managers make when dealing with real estate loss exposures. These errors are compiled and summarized for your convenience below.
- Property and business income insurance is not provided on a blanket, replacement cost, and agreed- amount basis.
First, the full blanket limit of all properties should be available to pay losses at any one location, if needed. Second, property should be valued on a replacement cost basis, so that the full value of losses would be paid without arguments about deductions for depreciation. Finally, an agreed- amount provision should be used to remove any coinsurance clause. Be careful to give some thought to determining the proper amounts of insurance to purchase for property and income losses. Often the amounts of insurance purchased for real estate are either too high or too low. - Not all named insureds or additional insureds are properly named on all policies.
This oversight can lead to the denial of claims when uninsured entities suffer property losses or are sued. The risk manager for the firm must make certain that all entities or persons with interests needing protection are named on the appropriate insurance policies. - The firm fails to obtain umbrella liability insurance.
An umbrella liability policy provides significant catastrophic loss coverage over and above the firm’s other liability policies and provides coverage in some unusual loss situations in which the firm has no other coverage through the underlying policies. - The firm fails to obtain various types of professional liability insurance.
Any firm acting in a professional capacity, such as a real estate broker, property manager, or leasing agent, has a professional liability exposure not covered under general liability or umbrella liability policies. Claims that allege professional negligence strike at the heart of one’s business reputation and can generate very high legal defense costs and judgments. Directors’ and officers’ liability insurance should be considered, as well. - The firm fails to obtain crime insurance.
Many firms convince themselves that all their own employees are honest, and that they would not employ anyone who might misappropriate funds. Many firms in the commercial real estate field handle funds for their clients and could be particularly vulnerable to dishonesty losses without sufficient dishonesty insurance coverage. Computer fraud and funds transfer fraud coverage, as well as other crime coverage, may also be desirable. - The firm fails to require that its contractors and tenants have adequate insurance and have signed hold- harmless agreements, and that contractors have provided performance bonds for large jobs.
These requirements protect the firm from losses caused by persons not under its control. - The firm has placed its own insurance coverage, or has accepted insurance from tenants or contractors, with companies that are not A-rated in Best’s Guide.
Know which insurance companies are providing coverage, and do not confuse the insurance agent with the insurance company. The best planned insurance program will mean little if the insurance company providing coverage cannot pay the loss. - The firm insures against small losses, but fails to insure adequately against catastrophic losses that can put the firm out of business.
For example, a firm obtains very low deductibles on its property and auto insurance, but fails to obtain coverage for equipment breakdown or flood and earthquake losses; or it fails to obtain appropriate environmental liability insurance. - The firm fails to heed insurance company loss control recommendations or fails to practice prudent risk management techniques.
This neglect results in higher losses and higher future premium costs. - The loss exposures of the firm have been misclassified in its general liability, automobile, and workers’ compensation insurance policies.
This misclassification can result in unanticipated additional premiums due when the policies are audited at expiration and, at worst, denial of claims. - The firm gives its attorney carte blanche to draft insurance provisions in leases or other contractual agreements.
Since most attorneys are unfamiliar with insurance coverages and appropriate wording, be sure your attorney works with a competent insurance professional when drafting insurance lease and contract provisions. Let the insurance expert advise the attorney concerning what coverages and provisions should be included so that the attorney can provide the proper legal terminology. - The firm fails to report claims on a timely basis or attempts to handle claims itself, which can void any valid insurance.
When the firm finally turns a claim over to the insurance company, the insurance company’s rights to handle or settle the claim properly may have been prejudiced, so that the company may be able to deny payment on the claim. - Commercial real estate firms tend to view insurance as just another overhead expense and to purchase coverage based solely on price.
Realize that you are purchasing professional advisory services similar to those of a CPA or attorney. Screen your insurance representative and insurance company carefully. Pay particular attention to the expertise of the representative, looking for the professional designations. Verify the longevity and reputation of the insurance firm and whether it has experience with accounts similar to yours in size and scope of operations.
This article is adapted from BOMI International’s course Law and Risk Management, part of the RPA designation programs. More information regarding this course or the new High-Performance certificate courses is available by calling 1-800-235-2664. Visit BOMI International’s website, www.bomi.org.