In the July/August issue Morgan McMillan, a senior broker with insurance firm McGriff, Seibels & Williams, based in Dallas, talked with APARTMENT FINANCE TODAY about recent catastrophic flooding and storms across the country and how apartment owners can protect their properties. Here is part two of that discussion.

Q: What's wrong with an owner looking for the cheapest rate when it comes to insurance?

A: Owners can usually get good pricing in bulk buying. When a disaster happens, you realize that going the cheapest route isn't always the best route.

Here's a real life example. Our firm went in and evaluated one multifamily group that has 60 properties in its portfolio. A woman had been managing the insurance policies on these properties for 10 years.

The firm had a separate policy for each property. Each one had a separate renewal date. Some weren't even with the same insurance carrier. So the policies had different language. Some properties had no flood coverage; some had flood coverage.

The situation was that each time they purchased a policy, they bid it out to get the cheapest deal. Unfortunately, if anything catastrophic had occurred to them, they wouldn't have had any idea which locations had coverage. And their investors in the properties would certainly be asking the question: Why wasn't my investment protected?

At one point, I opened a folder on one of the properties and asked where the insurance policy was, and the woman managing the policies said, “You mean it isn't in there?” Who knows if that policy had even been renewed?

Apartment owners who are managing their portfolios like this are going to be in for a lot of surprises, should something terrible happen. This was a fairly sophisticated multifamily firm. The alternative to this would be one policy that covered all properties that had standardized limits.

Q: What can apartment owners do to maintain their business in the event of something catastrophic, while their claims are being processed?

A: With the kind of flooding that occurred in Iowa, insurance companies are all backed up. Adjusters are busy looking at damages. You're looking at a loss of rental income. If you have a plan to get apartments back in order, you could probably charge more rent than the next guy. If you can get your properties up before the competition, renters have to come to you. You want to have pre-determined agreements.

Q: How can an owner do that?

A: Let's say you just built a new apartment complex. When that is sent out to bid with contractors, part of the bid requirement should be that the owner is given the first right of refusal for work to be done on the premises in the event of a disaster. That means that the contractor, if he wants to build or remodel at my property, he has to sign an agreement that in the event that a tornado comes through town and hits the property or if a flood occurs, they've got to respond and do the repair work that is needed before he moves to the next guy.

That's something you can arrange in your contract with the general contractor. That's really part of a disaster preparedness/risk management plan.