Fall 2019: Real Estate & Hospitality Insurance Market Update

The real issues for the property market are accurate valuations and claim creep. The first issue, the underreporting of values, has caused insurers, who thought they were in excess of a location’s value, to be stung when claims came in excess of the reported values. Underwriters are no longer turning a blind eye and, as one senior property underwriter stated, “We’re increasing our rates when we don’t believe in the values being reported.” Further to that, we are seeing insurers push for the occurrence limit of liability endorsements (OLLEs), which effectively limit the recovery to the values reported plus a 10%–15% margin. The punchline is it’s never been out of vogue to tell the truth and report the correct values.

Claim creep is the second issue. Claim creep happens when a claim is initially reported at one value and escalates due to anything from delays in repairs, increased labor and construction costs, or unscrupulous contractors and other consultants. Given that loss histories are like sick dogs, you can be assured that they will follow an account for the next five years.

Finally, convective storms (hail, tornado and non-Tier 1 wind) are becoming more prevalent in a wider geographic swath of the country, causing the greatest damage to multifamily, industrial flex and storage just by virtue of the exposure to roofs. Percentage deductibles for hail are becoming more common, as are limitations on roofs that are older than 15 years.

The following is a snapshot of rates by asset classes and geography. In all cases, an individual account will be rated on its own loss history and, particularly, on its risk profile.

Commercial Liability and Umbrella

The general liability (GL) market is relatively stable (up 5%) for all asset classes other than multifamily, which is experiencing eroding claims costs and unprecedented umbrella/excess losses. The capacity for this asset class is shrinking with limited new capacity coming to market. GL carriers are scrutinizing construction and vendor contracts, particularly when a client develops. Recent crane collapses have put pressure on the contingent liability market, and clients need to adjust construction budgets accordingly or consider an Owners’ Controlled Insurance Program (OCIP) to mitigate costs.

Pollution Legal Liability

Mold has truly become a dirty word for the hospitality and multifamily industries, with insurers attempting to increase deductibles and sublimit coverage. Further to that, property insurers are frequently adding nominal sublimits to their policies to limit additional liability, thus driving the need to procure separate pollution legal liability coverage. If development is being contemplated, Phase 1s and 2s will be required to negotiate the appropriate coverage and, in the case of fixed property portfolios, it is recommended to maintain coverage in disposed assets in the event claims bubble up in the future.

Professional Liability

D&O for public RE&H companies is trending slightly higher (up 5%–7%), while private company D&O is fluctuating between flat and 5% growth. E&O is most likely the least understood coverage, so think malpractice. If a fee is earned for any service (management, leasing, fundraising, etc.), it has an E&O exposure.

The other two exposures that need no introduction are cyber and employment practices liability. The magnitude of cyber intrusions is staggering, and no one is immune. This coverage has become as necessary as commercial general liability, and companies ranging from small family offices to large publicly traded companies have been hit. Your cybersecurity is only as good as your entry-level AP clerk, so training is essential. On the EPL front, wage and hour suits are mushrooming. Some EPL policies may offer a sublimit, but generally there is a five-figure deductible and limited coverage. Separate policies are available, but given the current environment, the premiums are substantial and coverage is geared toward companies with well over 1,000 employees.

*Indicates 2% wind and hail deductibles.

**Note: Sixty to seventy percent of the select-service hotels are frame construction, which the standard markets don’t want. Eighty to ninety percent of the full-service hotels are noncombustible or fire-resistive, which are much more desirable regardless of location.

***These rates are for single carrier placements but for shared and layered programs, which have meaningful exposure to convective store, flood or wind, the rates could be roughly 20% higher.

Takeaway

Be prepared with comprehensive underwriting data, claims information, loss control protocols and honest valuations. This cycle may be bumpy, but it is actually less volatile than post-Katrina. The best advice is to invest in the capital expenditure that mitigates claims (roofs, electrical) and fire/life safety, and to commit to training at a property level. Nothing matters more than an engaged owner and manager.