As an apartment owner and manager, what's the worst thing that could happen to you? A fire, a flood, a tornado, a hailstorm?

Any of the catastrophes listed above would cause a massive disruption to most managers' business operations, a major hit to cash flow, and a huge interruption to residents' lives. How to handle any of these scenarios? “Prepare, prepare, prepare.” That's the advice of Dan Wayne, whose company owns and manages 1,800 apartments in California, Nevada, and Colorado.

And Wayne should know. His company, Argentx Management Services, survived a devastating fire in 2006 that destroyed most of a 152-unit apartment community and killed two people in Long Beach, Calif. Managers were ready, safety measures were in place, and employees were in regular touch with first responders in the local community.

What went wrong? The same thing that can go wrong anywhere—human error. That can be just as unexpected and devastating as what insurance carriers like to call an “act of God.”

But worse than experiencing a disaster is being unprepared for the aftermath, according to multifamily operators and other industry professionals. And a huge part of being prepared is making sure your insurance plan is not just adequate, but comprehensive. On top of that, multifamily owners and operators should make sure they have good relationships with their insurance providers, local officials and first responders, and—as much as possible— their tenants. Good will goes a long way, multifamily operators say.

To be adequately prepared, owners and operators of multifamily properties need to have proper insurance policies in place, along with procedures that will help them get back up and running as quickly as possible.

Relationships matter

Before any of that can happen, though, it's important to develop good relationships with a knowledgeable, reputable insurance agent who can steer the owner away from either spending too much money for unneeded coverage or skimping too much on coverage that's important to have, like business interruption insurance.

“Having a good insurance carrier is worth a lot,” said Tom Aderhold, president of Aderhold Properties. He suggests owners get to know their insurance agents and use one broker for all their policies. “Have him bring to you the options that are out there for all types of coverages. Then you can make an informed decision as to how much risk you want to take.”

Any insurance agent worth her salt will provide a suite of services for her multifamily clients so they can better understand and manage their risk. One of the first: running what's known as a PML, or probable maximum loss, study. This is a report that looks at the size of an owner's portfolio and the various types of risks the properties are exposed to (for example, are the apartment communities sited in earthquake territory, or in a tornado-prone area?), and then calculates, in dollars, what the probable maximum loss is to that portfolio in the case of a catastrophe.

“This is how you'd know what limits to buy,” said John Racunas, a senior vice president with Lockton Insurance Brokers, Inc., the 10th largest global insurance broker. “A lot of people don't know what limits to buy, and they just guess. In some cases, they're overinsured, and they're paying more premium than they need to pay. In some cases they're underinsured. A lender would use that same modeling to tell the borrower what the lender is going to require.”

Besides property and casualty, workmen's compensation, and general liability insurance, owners might also want to make sure they have coverage for errors and omissions, especially if they raise money through selling securities; directors and officers; third-party discrimination (typically part of an employment practices liability policy); and punitive damages— though in some states this kind of coverage is legally prohibited.

Companies that accept rental payments online also ought to consider including coverage for cyber risks in their insurance policies, said Racunas. “If that credit card information was breached, that's a huge deal.”

It's also important to review your liability insurance and make sure it covers unexpected events such as assault and battery, hazards such as lead paint or mold, and employee misconduct, said Racunas. “Don't necessarily just take the off-the-shelf version of anything,” he said. “Insurance companies have exclusions that could wipe out a smaller owner.”