Morgan McMillan, a senior broker with insurance firm McGriff, Seibels & Williams, based in Dallas, talks with APARTMENT FINANCE TODAY about recent catastrophic flooding and storms across the country and how apartment owners can protect their properties.
Q: Will the recent flooding in Iowa and storms across the Midwest affect the price of insurance?
A: Overall pricing is not going to change much because right now we are in a very soft insurance market. The price of insurance has been dropping for the last 18 months. It’s probably going to give some of the insurance carriers an excuse to slow down the decline a little if they can. It’s going to take a lot more than what happened in Iowa for pricing to increase. It would take something like a couple of Category 3 storms to make landfall this summer. If a couple of large hurricanes hit and many insurance renewals occur in December, I would pretty much guarantee that pricing is going to go up.
What will likely happen, though, is there will be a tightened-up supply of coverage in some areas, some issues with more restrictions and exclusions as for how a policy is going to apply.
A lot of the flood damage is going to be covered by the National Flood Insurance Program (NFIP), which is basically a subsidized program that is controlled by the government for the most part. Most owners will have purchased coverage under the NFIP because it’s not that expensive. Some apartments owners that aren’t so savvy don’t purchase this.
Q: How does the NFIP work?
A: An owner should purchase an insurance policy in addition to the NFIP because the national program is just for flood damage. Maybe that will cover up to $1 million per building. Say, however, that an owner did not buy any NFIP coverage. Then they will look to their current policy to provide that coverage. NFIP is a good first layer of protection that is too cheap to not purchase.
The key thing to note about the national program is that it only provides coverage for property damage. It does not provide coverage for loss of rents. It’s important for apartment owners to have coverage for business interruption as a result of a storm. Let’s say a property owner suffers damage to the entire first floor of an apartment building. That could mean many units for which they aren’t receiving rents until the damage gets fixed. If an owner just has NFIP, they may be in trouble.
Generally, coverage for loss of rents is subject to a much higher deductible. Apartment owners should maximize what’s available through the NFIP, but also they need to make sure they have a solid risk policy that will provide another layer of protection. A good agent or insurance broker can walk them through that.
Q: Can apartment owners take advantage of the soft insurance market?
A: Absolutely. If they are renewing right now, it may be possible to lock in rates to guarantee that no matter what happens this summer, they’ll know what their rates will be all the way through next year or maybe even for a 24-month policy period. It’s incredible: There has been over a 20 percent price decrease this year. If an apartment owner can lock in rates, and say they own some coastal properties that end up taking some hits in a storm, they will gain an easy six months to a year on the competition. A buyer can react before the insurance industry can react.
Q: What do apartment owners need to know about insurance to protect their investments?
A: It’s very important to know what type of coverage they have. Some property owners don’t know. An agent or a broker can say, ‘Hey you are covered. You have flood coverage.’ Maybe the agent is an owner’s brother-in-law, and he trusts him. That’s a mistake. An owner needs to go to someone impartial that will direct him through an insurance strategy.
Many people can’t tell you what flood zone their properties are located in. There’s wording hidden in these policies that protect insurance carriers. It’s very possible that an owner’s policy provides coverage for a property so long as the building is not within 1,000 yards of say Zone A, which is basically where it floods.
A good agent or broker will do the due diligence and conduct a flood determination and find out in which flood zones an owner’s properties are located. There are generally higher deductibles for property owners whose assets are not located within the 500-year flood plain. That’s a problem that owners are facing now in Iowa and other areas where the flooding was so massive.
Q: What is the best advice for dealing with insurance agents?
A: Don’t believe a broker when they say simply, ‘You’re covered.’ That’s a signal that you need to seek out someone else. It’s a lot more technical than that.