5 Rules of Multifamily Insurance

Discover the 5 rules of multifamily insurance. Insurance for multifamily properties is a hot topic these days and here is what every investor needs to know to protect their assets from potential risks (and save the most money too).

Top 4 Reasons for Multifamily Insurance

A good multifamily insurance policy will protect you from:

1. Natural disasters (fire, flood, hailstorms, etc.)
2. Tenant and employee injury.
3. Theft by tenant or employee. If you own property long enough, your tenants and employees will steal from you.
4. Discrimination lawsuits. There have been cases where landlords didn’t go through the screening process correctly and denied an application for renting. The next thing you know, they’re being sued for discrimination. Without insurance coverage, you are paying legal bills and settlement costs out of pocket and that will likely wipe you out financially.

Rule #1: Don’t Be Under-Insured

The most important rule of multifamily insurance is to have enough insurance to cover total replacement costs. You need to have enough insurance to rebuild your apartment building in case of fire or other disaster. I experienced this first hand when fire burned down one of my apartments. You can read about it here: Fire Burns My Apartment Building. We rebuilt the property from the ground up and because we had great insurance, everything was covered. If we had been underinsured, it would have been a disaster.

And not having enough insurance is often simply due to not updating your insurance to keep pace with inflation. For example, a 9,000 square foot, 12 unit apartment will cost around $300 a square foot to rebuild today. That’s $2.7 million to rebuild. But here’s the problem: the cost of rebuilding has skyrocketed due to inflation. So, if your insurance policy is pre-covid and you are insured for $2 million (because four years ago $2 million was sufficient coverage), and your apartment burns down today, you are $700,000 short. For most investors this would mean foreclosure. So have your insurance agent update your total loss coverage and you will be protected against total loss.

Rule #2: Get Ample General Liability Coverage

General liability coverage protects you when you’re liable for accidents or injury. You need this coverage because you are liable for any accident or injury that happens on your property, even if it’s unintentional. That means, if you have a 12 unit building with 12 people you have 12 potential lawsuits. That’s how you need to look at multifamily liability insurance. Your general liability clause should include coverage for lawsuits, judgments, injuries, negligence, discrimination, and cover medical bills and the legal costs.

Rule #3: Get Adequate Business Income Coverage

Business income coverage covers loss of rental income due to damage from fire, flood, or other disaster. It covers rental income loss, payroll costs, and can sometimes include your mortgage and tax payments. But you need to pay attention here because often the amount of coverage is arbitrary and not based on real numbers. Instead, you need to calculate rental and payroll losses for one year of business interruption and get coverage for that amount. This is so important but is often glossed over. Don’t gloss over it, pay close attention to the numbers.

Rule #4: Get Ordinance and Law Endorsement (Building Code Coverage)

The ordinance and law endorsement clause covers the cost of repairing or rebuilding damages according to current building codes and bylaws. It is supplemental insurance so you need to add it to your multifamily policy. For older apartments that were built when building codes were less strict, building code coverage is especially important. If you don’t have building code coverage, the additional costs of upgrading to meet current building codes will fall on you. If you have building code coverage and part of the roof is blown off your fifty-year old apartment building, your insurance will cover the cost of rebuilding according to present day building codes.

Not only do you need to be covered to meet building codes, you also need coverage to meet bylaw requirements. If only part of the roof is damaged, some bylaws require you to replace the entire roof, not just the damaged portion. You don’t want to find yourself in the situation where the insurance will cover the damages but not meet bylaw requirements. That could cost you tens of thousands of dollars. So, the ordinance and law endorsement clause are supplemental coverage you really do need to add to your multifamily insurance. It doesn’t cost a whole lot more to add, but it can save you tens, if not hundreds of thousands of dollars.

Rule #5: Watch Out for the Co-Insurance Clause

A co-insurance clause is essentially a penalty for being underinsured and it can be a hidden, so you need to find out if it’s in your current policy and understand what it is. Here’s how co-insurance works:

Let’s say your multifamily insurance policy has 100% co-insurance. Your apartment building should be insured for $2 million, but you only have insurance up to $1 million. You are underinsured by 50% and now you have a $500,000 insurance claim. Because you have 100% co-insurance and you’re underinsured by 50%, the insurance company will only pay $250,000 of your $500,000 claim. This is called a 50% co-insurance penalty. So watch out for this in your policy. If your insurance company is adamant it be included in your policy, make sure you’re properly insured.

2 Multifamily Insurance Bonus Tips

Tip 1: When NOT to File a Claim
There are times when it makes sense not to file a claim. If the damage is minor and the cost of repair is less than $10,000 it may be best to just pay for it yourself. It may seem like a lot of money, but often the deductible is at least $5,000 so the amount the insurance company will pay out is minimal. Plus, not only could filing a claim increase your premium, but it also adds to your claim history. Every time you make a claim, it increases the likelihood your insurance won’t be renewed. So consider the cost of the damages before you file a claim. Filing it may not be worth it.

Tip 2: Require Tenants to Have Renters Insurance
Renters insurance is relatively inexpensive for tenants but beneficial to you as a landlord. It covers their personal possessions and the contents of the unit in case of damage. So if there is a fire or flood and their furniture and personal belongings are destroyed or damaged, their renter’s insurance will cover replacement costs. It can also reimburse them for temporary housing costs if the unit needs repair. Implementing this simple requirement reduces your potential claims, which saves you money on premiums.

Every successful multifamily investor has a mentor. Learn more about our Protégé Program here: https://www.commercialpropertyadvisors.com/protege-program/