Protecting Your Real Estate Investments In The Current Marketplace
SINCE MARCH, COMMERCIAL TENANTS HAVE STRUGGLED TO PAY RENT. Companies have yet to return to the office, indoor dining is still problematic and rising infection rates still loom large. In the absence of a new stimulus package, on-time payments will likely decline even further. Many restaurants and hotels have closed and will not reopen.
FEDERAL AND STATE GOVERNMENTS CONTINUE TO BAN EVICTIONS, LEAVING LANDLORDS IN LEGAL AND FINANCIAL LIMBO. Even when these moratoriums are lifted, it will be months before the eviction process can be formalized by the courts. Even then, it not clear that owners will ever see the money owed.
THIS CRISIS HAS CONFIRMED HOW QUICKLY DEBT AND EQUITY CAPITAL LIQUIDITY CAN SLOW. Risk returns are challenging to predict, and concerns around longer term defaults and losses persist. Some large cities are experiencing a “net exodus” as businesses and families pack up and leave for good. Even for those that stay, the “new normal” may mean less office space is needed. As a result, the industry is likely to see further defaults and consolidation.
INCREASED SOCIAL UNREST HAS LED TO PROTESTS, RIOTS AND LOOTING ACROSS THE U.S. The overall scale of the damage is unclear as many of the losses fall within the owner/landlord’s deductible. According to CNBC, the total damage from the Rodney King riots in 1992 was $775M (nearly $1.5B in 2020 dollars) – and this was in just one city. Further, state and local officials have been reluctant to crack down on the unrest and have been more tolerant of what they see as insurance losses.
CIVIL COMMOTION IS GENERALLY COVERED UNDER MOST FIRST-PARTY POLICIES, but carriers may look to restrict or exclude those coverages if this unrest continues. Such coverage also doesn’t cover business interruption absent property damage. Businesses already struggling with the impact of COVID-19 may additionally have trouble validating any business interruption loss.
SECURITY IS NOW A MAJOR CONCERN AT MANY COMMERCIAL ASSETS, and many high-end retailers have increased the presence of security at their locations. It is important that these retailers clearly address contractual and risk management issues with the security firms. Additionally, heightened security under stressful conditions can sometimes lead to headline events and cause reputational damage.
THE REAL ESTATE SECTOR IS PARTICULARLY VULNERABLE to premises-related liability claims including crime, slips and falls, elevator claims, and carjackings. Casualty carriers have been inundated with claims related to assault, battery, shootings and other related incidents. Because of this, many have instituted tighter guidelines, evaluating crime scores by zip code and declining to write certain jurisdictions altogether.
SOCIAL INFLATION AND THIRD-PARTY LITIGATION funding are driving up verdicts and enabling plaintiffs to resist settling.
BEST PRACTICES FOR NAVIGATING THE CURRENT MARKET:
? START EARLY: Insurance programs now take longer to put together. Develop an early, realistic plan; include discussions with potential market partners.
? HAVE A DETAILED UPDATE FOR UNDERWRITERS AND CARRIER CREDIT OFFICERS: Be upfront and transparent about the impact of COVID-19, but also highlight positive trends.
? EVALUATE DESIRED COVERAGE: In today’s environment, understanding coverage terms, sublimits and deductibles that could be under pressure is key. Plan for “must have” versus “nice to have.” Additionally, conduct a review of lender, partnership and management agreements to understand if certain insurance requirements will need to be negotiated
? ASSESS THE ACCURACY OF EXPOSURES: Exposures including payrolls, property values and business interruption calculations may need to be updated. Ensure that values are scheduled based on underwriter’s new minimum standards and include complete COPE data. Address vacancies up front, include sprinklers, security, heating and financial ability to maintain the property despite potential declining revenue.
? REVIEW THIRD-PARTY SECURITY AGREEMENTS: Be prepared to discuss third-party security agreements, especially as respects risk transfer and insurance; relationships with local police departments for intelligence and support; frequency of property walks and lighting checks; and property rules regarding guest access.
? HIGHLIGHT MEANINGFUL LOSS CONTROL EFFORTS: Showcase all proactive steps being taken to avoid or mitigate losses. Be prepared to address with the underwriters and include itemized: ? Capital expenditures aimed at risk improvement ? Due diligence procedures for new acquisitions ? Inspection and risk identification techniques ? Staff training with regards to loss mitigation ? Loss prevention techniques related to fire and water damage prevention ? Steps taken to minimize damage from civil commotion or vandalism ? Records and accounts of negative publicity on the internet and its potential implications
? REEVALUATE THE MASTER PROGRAM: Consider whether a master program is still the best option. Increasingly, clients are navigating the market by regionalizing or fragmenting asset coverage based on geography, asset class and CAT exposure.
? REMAIN REALISTIC: The hard market is likely to be here for the next 12-24 months, as near zero interest rates and rising loss severity persist. Costs can be best managed by paying careful attention to the financial efficiency of retentions and limits. Lockton’s analytic suite can help model expected outcomes and provide guidance around target pricing. Clients can also help “sell” their story in the marketplace. At a time when carriers are inundated with submissions, strong risk control efforts, a well-designed strategy and supporting analytics can be a differentiator and improve the overall outcome.