Five Tips to Combat Rising Insurance Costs
As a site owner or manager, you understand the severe financial consequences that can result from things beyond your control, such as a loss due to fire, flood, weather, or other causes. In addition, whether it’s a legitimate claim or not, you could also face expensive legal difficulties from liability claims associated with on-site crime, common parking areas, and site amenities such as swimming pools and playground equipment.
While you may understand the importance of having appropriate insurance coverage to provide a safety net for your assets and protect you against liability, you may have noticed your insurance premiums creeping upwards. In New York City, Mayor de Blasio recently announced a campaign to educate New Yorkers about the rising costs of flood insurance, and a commitment to conduct a study of the costs of insuring multifamily buildings. “Hundreds of thousands of New Yorkers along the city’s 520 miles of coastline face significant increases in their flood insurance rates—especially at a time when many can least afford it. Yet again and again, we see the impact of flooding on our communities,” de Blasio said in a statement.
With rising operating expenses, owners have an incentive to find ways to manage insurance cost increases and reduce risks. Here are five tips to help you do so.
Tip #1: Take Higher Deductible
One way to minimize an increase in your site’s insurance premiums is to ask your insurer for a higher deductible. Insurers will charge lower premiums if you’re willing to assume more risk of paying losses out of your own pocket before turning to your insurance.
If your insurer offers you a lower premium in return for a higher deductible, take a look at the claims you’ve made over the past few years before you accept the offer.
Compare how much money you would save now in premiums if you took the higher deductible with how much you could end up paying out as a result. It may well be that you will save money by taking the higher deductible, especially if you don’t have many claims.
Make sure you have enough cash flow to handle the new higher deductible so you can cover losses out-of-pocket until you reach the deductible, says affordable housing expert Stuart Hartman. If your new deductible is, for example, $20,000, you’ll need enough cash each year to pay claims until you’ve met the $20,000 deductible. Otherwise, you’ll have to ask HUD’s permission to borrow from the site’s replacement reserves or to use residual receipts, says Hartman. A couple of big claims could drain these accounts quickly, he warns.
Tip #2: Lower Unnecessarily High Coverage Limits
Check to make sure you’re not paying for too much insurance coverage. But be mindful that you don’t reduce your site’s insurance below the minimum insurance required in your site’s regulatory agreement with HUD and lenders, and in HUD Handbook 4350.1, Chapter 21, Section 2.
When it comes to liability insurance, many sites are over-insured. Umbrella liability coverage of $15 million or more makes no sense in most cases. Practically speaking, the higher your coverage, the more someone suing you may demand. People tend to be willing to settle lawsuits for less money when they know your insurance coverage is lower, Hartman explains. So don’t over-insure your site.
If you want to reduce the amount of property insurance coverage you get, do so only after getting an “insurable replacement cost” valuation—that is, an estimate of how much it would cost to replace your site if it were destroyed. If you underestimate your site’s value and lower your coverage, you could end up leaving your site underinsured.
Tip #3: Show Insurer You Have Risk Management Program
You may be able to persuade an insurer to lower your premiums if you can show that you have taken steps to manage risks that contribute to insurance claims and lawsuits, says Hartman. The best way to do this is to start a risk management program that identifies, evaluates, eliminates, and/or controls potential hazards at your site. Here are three steps you should take:
> Step #1. Conduct site inspections to identify potential hazards, says Hartman. Look for the types of conditions that could cause injury, such as heaves in sidewalks, electrical hazards, improperly stored flammable materials, gas leaks, lead paint problems, mold, and broken smoke detectors. Many of these conditions are also health and safety hazards that REAC inspectors look for during inspections—so you should be inspecting for these when preparing for your REAC inspection.
> Step #2. Develop appropriate plans to eliminate or control any existing hazards—and then put those plans into action. For example, develop a mold remediation plan to eliminate moisture and mold problems, and regularly monitor fire alarm equipment and smoke detectors.
> Step #3. Keep records of your inspections and other efforts to reduce risks so you can show your insurer that you’ve been diligent in managing your risks, Hartman suggests. These records can also help you later on if you’re sued for negligence.
Tip #4: Insure ‘High-Risk’ Sites Separately
Insurers consider some sites riskier than others and charge accordingly, says Hartman. For example, insurers may treat sites for elderly and disabled residents as “high risk,” in part because of the frailty of residents and frequency of injuries from falling. Other examples of high-risk sites include sites in peril zones, such as hurricane or tornado zones, or even high-rise buildings in earthquake-prone areas.
If you’re insuring a number of sites together in a pool, consider separating out your high-risk sites from your low-risk ones, says Hartman. Depending on the rates for each type of site, it may be cheaper to pool sites this way. High-risk sites can inflate the premium for all your sites because your insurer may unnecessarily give your low-risk sites high-risk ratings based on their association with your high-risk sites.
For instance, say you own 50 sites—40 of them are family sites and 10 of them are sites for the elderly. Talk to your insurer about pooling the 40 family sites together and insuring them separately from the 10 sites designated for elderly or disabled residents. By doing this, you’ll very likely pay a much lower average cost for the family sites. Even though the cost of insuring the elderly sites separately may be a bit higher, the cost savings for the family sites might exceed any cost increase for the elderly sites if you pool them this way—resulting in an overall savings in your insurance premiums.
Ask your insurance agent to run the numbers for you based on various types of risk pools to come up with the most cost-effective way to pool your sites, says Hartman.
Tip #5: Shop Around
For some types of business insurers may charge vastly different rates. So periodically it could be beneficial to do some comparison shopping for your insurance coverage. You can do this by making sure that the agent you’re working with is getting quotes from multiple insurers. Contact a second agent to get quotes or contact an insurer directly if you have reason to believe it may have preferable rates for your business.
Stuart Hartman: Vice President of Operations, Retirement Housing Foundation, 911 N. Studebaker Rd., Long Beach, CA; www.rhf.org.