Even though the multifamily industry has recovered from residual COVID issues, owners and operators are still navigating elevated insurance costs, says Katie Santarelli, president of Wye River Insurance, a real estate and construction insurance brokerage and advisory services firm.
While there is some softening in property insurance, owners and operators are still dealing with stricter underwriting scrutiny particularly on older properties with NFPA 13R sprinkler systems and claims history. The liability rates, both general liability and umbrella, in the multifamily space have increased significantly for the first time in many years. Santarelli attributes these increased rates to broader economic factors such as elevated interest rates and inflation. There remains an imbalance in the overall cost structure for multifamily property owners.
“Today the market dynamic is lopsided, property rates have stabilized a bit but the liability rates have spiked,” she says.
In an environment where insurance costs are rising, multifamily owners and developers face significant challenges, but strategic planning can help mitigate some of these issues. Santarelli offers three key pieces of advice for navigating these challenges effectively.
1. Geographic Focus
Insurance premiums are highly influenced by geographic location, and Santarelli stresses that owners should stay informed about regional market conditions. For example, rates will differ between Florida, California, or the Washington, D.C., metro area due to varying risks like hurricanes or other natural disasters. She recommends regularly consulting with a broker or consultant to ensure premiums are up to date, particularly in volatile markets. A proactive approach can prevent budget disruptions caused by unforeseen rate hikes.
“To have a budget blown apart because insurance rates have increased by an aggressive percentage is avoidable if you’re using a broker or consultant that is engaged and aware of rates in a specific geographic territory,” she says.
It’s also important to check in every three or six months, especially if it’s a market that is more volatile where conditions can rapidly change.
“What ends up happening is the insurance premiums and rates in budgets become stale, and they forget about it,” she notes. “It’s important that these are evaluated on a regular basis.”
2. Subcontractor Work
Another crucial piece of advice is to ensure general contractors (GCs) have subcontractor default insurance (SDI). This type of insurance protects the project if a subcontractor defaults, covering the costs associated with delays and additional expenses. It also enhances the overall risk management of a construction project by identifying potential issues early, such as worker or labor solvency problems. Santarelli emphasizes the value of this insurance in keeping projects on track and reducing financial exposure
“SDI programs enhance the internal risk management process and programs, GCs really keep a very close eye on subs and potential labor or solvency issues,” she notes. “SDI improves the overall health of a project.”
3. Builder’s Risk
Last, Santarelli recommends partnering with GCs that maintain comprehensive insurance programs, including builder’s risk coverage. This insurance protects against damage during construction and can include LEG2 and LEG3 coverage, to pay for the cost to correct faulty work contributing to a covered casualty. Further, she notes it is critical for the owner and the contractor to be aware of protective safeguards such as lighting, security, water detection, and intrusion systems and adhere to these requirements. The GC must be aware of all requirements for safety, security, and protective safeguards and work with the owner to ensure compliance.
Santerelli adds that by focusing on geographic conditions, ensuring adequate subcontractor insurance, and partnering with contractors with strong insurance coverage, multifamily owners and developers can better position themselves in this challenging insurance environment.
