Property Insurance 101

The Hard Insurance Market

The insurance market is in its 8th year of being a hard insurance market. 

A hard insurance market is basically when:

There is a limited number of insurance carriers available to offer consumers insurance coverage. 

For those insurance carriers that do offer coverage, their insurance rates are much higher than when there was a soft insurance market. 

Available insurance coverage tends not to be as broad, and insurance carrier underwriting guidelines are more restrictive. 

The reasons for this hard insurance market are one or more of the following: 

• reinsurance, 
• deferred maintenance, 
• unfavorable unwriting characteristics, 
• loss
• location

Reinsurance

Reinsurance is insurance that an insurance carrier has on each insurance policy that is written. Officially, they are called treaties. Reinsurance treaties dictate rates, underwriting guidelines, and restrictions. They guide the insurance market.

Impact on Policyholders

Policyholders should anticipate being affected by the changes in the current insurance market. 

Maybe they have already been affected, are currently experiencing these changes, and/or will in the near future. 

Changes you will most likely see:

What you will most likely see is insurance coverage from a household named, California Admitted Insurance Carrier will be shifted to an insurance carrier(s) that you are not familiar with, that are California non-admitted. 

California Admitted Insurance Carrier

A California Admitted Insurance Carrier is:

• Domiciled in California
• Follows the rules and regulations of the California Department of Insurance
• Insurance coverage is typically much broader than the non-admitted insurance market policy forms 
• much more competitive in insurance premiums
  

The policyholder also has access to the California Insurance Guarantee Association (CIGA www.ciga.org), which will pay up to $500,000 per claim if the California admitted insurance carrier goes insolvent at the time of covered loss. 

Insurance coverage could also be split from a package insurance policy (Property and General Liability under one policy) to monoline insurance policies, i.e, one for Property and one for General Liability. Again, coverage is anticipated to be more restrictive, and premiums are higher. 

Lastly, there will be more exclusions than normal with the Surplus Lines insurance carriers. 

Tip: Please be sure to ask questions of your insurance professional when renewing insurance coverage or procuring new coverage. 

Available Insurance Policies for Owners

The type of available insurance policies for owners is the following:

• Single Family Home / Dwelling (HO3 or DP3)
• Landlord (HO4)
• Condominium Unit Owners (HO6)
• Commercial Building Owner
• Business Owners Policy (BOP)
• Package (Property and General Liability under one policy)
• Individual Owners – Residential or Commercial Buildings
• Monoline Property
• Monoline General Liability

Building Limits & Valuations

Purchasing adequate limits of building limits is very important. The majority of paid claims are not total devastation. 

However, if there were a total loss, you want to have adequate limits to rebuild. The decision on what limits to purchase falls on you as the policyholder. Insurance carriers and agencies will rely on third parties in order to obtain estimates for replacement cost on buildings. 

• Most subscribe to either CoreLogic Marshall Swift or Veris,k which are subscription sites. They do state their information is accurate; however, we have found their valuations are very conservative. 
• Public real estate sites provide data, but not replacement cost valuations. 
• Commercial Real Estate Appraisers and/or general contractor bids are the most accurate way to determine the most accurate replacement cost of a building(s).

Property Insurance Coverage

Property insurance coverage is the coverage that provides for perils such as fire and water losses. 

There are two areas to pay attention to when purchasing insurance. 

• One area is the policy forms and endorsements on how claims are adjusted.
• The other area is additional Property insurance policy forms that should be added or considered when renewing or setting up an insurance policy. 

What to Look for in a Property Insurance Policy

Without taking a deep dive into each form, please see below for a checklist of items to look for in a Property insurance policy:

Area 1 (Property Policy Forms/Language for Adjustment of Claims):

• Basic / Broad / Special Causes of Loss Form
• Special Causes of Loss Form is the broadest 
• Replacement Cost Basis (RCV) / Actual Cash Value (ACV)
• RCV requires the insurance carrier to provide modern-day materials at the time of covered loss
• ACV will depreciate the property at the time of covered loss
• Blanketed Building Coverage / Scheduled Building Coverage
• Blanketed coverage adds up all buildings at one or all locations in the policy, providing one building limit for the time of coverage loss
• Scheduled coverage provides a maximum payout for each building in the insurance policy as it is scheduled in the policy.
• Co-Insurance
• This is a penalty in the form of a percentage to the policyholder at the time of loss for underinsuring a building. 
• Lenders prefer co-insurance to be waived during the policy period via Agreed Value Clause or Agreed Value endorsement

Area 2 (Additional Property Insurance Coverage That Should Be Considered Added to the Policy):

• Appurtenant Structures – Structures not attached to the building, such asa  shed or gazebo
• Business Personal Property (Contents) – Tables, chairs, etc.
• Loss of Income/Rents – Provides for these losses of income or rent at the time of covered loss
• Fidelity Bond (Employee Dishonesty) – Loss of funds out of operating and/or reserves for a building from an employee stealing money
• Sewer, Drain Backup Coverage – This coverage is not automatic and needs to be requested in order to provide coverage for these types of water losses
• Building Ordinance Coverage A, B, and C – This coverage is not automatic and needs to be requested in order to provide for:
• Coverage A: Contingent Liability (Loss to undamaged portions)
• Coverage B: Demolition
• Coverage C: Increased Cost of Construction (Building Code Upgrades)
• Equipment Breakdown Coverage – Sudden and accidental failure of the boiler or machinery. Also covers electrical arching
• Terrorism – Typically, not automatic coverage. This coverage has to be offered to all policyholders if they want to be added when purchasing coverage.
• Earthquake – This coverage is not included and would need to be purchased on a standalone basis
• Earthquake Sprinkler Leakage – This coverage is not typically included. It should be strongly considered if a building has fire sprinklers

Earthquake Insurance Coverage: 

An earthquake is a peril that can cause a total loss to your property. An owner can improve upon a building, make it more sound if a significant Earthquake hits the San Francisco/Greater Bay Area, or transfer the risk to an insurance carrier that provides coverage. 

The trade-off is the expense of paying an annual insurance premium. Until late 2024, Earthquake insurance premiums were very expensive, almost cost-prohibitive. The rates for this coverage have come down by 20% since. 

General Liability Coverage / Excess or Umbrella Liability:

General Liability provides coverage for 3rd party bodily injury or property damage. 

Examples would be 

• a slip and fall claim (bodily injury) 
• and a garage door/date closing on a car (property damage). 

Excess Liability or Umbrella Liability is an inexpensive way to increase the limit of the underlying liability insurance policies. For example, a $5,000,000 Excess/Umbrella Liability insurance policy that is over an underlying General Liability insurance policy increases the total limits to $6,000,000 per occurrence. 

Tip: It is a good business decision to purchase at least General Liability and consider adding an Excess/Umbrella Liability insurance policy.  Sometimes, a lending institution or a contract with a 3rd will require a building owner to purchase General Liability and even have some level of Excess/Umbrella Liability.

Employment Practices Liability and Workers Compensation:

There are additional liability insurance coverages that you should consider purchasing if you are an employer. Earlier, we discussed that a Fidelity Bond covers employee dishonesty such as stealing funds, computer and wire transfer fraud, and social engineering. A Fidelity Bond falls into the Property insurance portion of insurance coverage. 

Employment Practices Liability (EPLI) and Workers Compensation are on the liability side of insurance. 

EPLI will protect you if you have a claim for something like discrimination (1st and 3rd party) and/or wrongful termination. 

Workers Compensation has two sections: 

• Coverage A (Workers Compensation), which builds coverage into the policy for sudden and accidental events
• Coverage B (Employer’s Liability) provides coverage if you cause injury to an employee. Typically, if you are a corporation, Workers Compensation is mandatory. EPLI is optional.

As you see, there are many “ins and outs” in purchasing and placement of insurance coverage. It is essential that you align yourself with an insurance professional who is looking out for your needs before their own. 

Tip: The best practice is to interview with several insurance agents and brokers.  Agents tend to be employees of an insurance company selling that company’s policies. A broker works independently. They work with many insurance carriers to find the best insurance deal on your behalf. It’s more common to see insurance agents sell personal lines insurance and insurance brokers sell commercial lines.

This article was contributed by Dennis Socher, Senior Vice President, HOA Practice C N C.

If you have any further questions, please reach out to the BanCal team.