Bad Ideas in a Post-9/11 Marketplace

By now, every property owner has been reeling over his or her insurance renewal premium quotations. To further add insult to injury, coverage has been watered down through a number of different approaches:

• Lower limits and sub-limits
• Higher deductibles
• Diminished coverage enhancements
• A new round of exclusions ranging from terrorism to toxic mold and mildew

Some ideas have been floated by those involved to address this situation, but they are decidedly poor: (1) Reducing insurable values for building, contents, and business income so that the property insurance rate will apply to a lower rating base. (2) Making up for higher insurance costs by ignoring needed repairs or postponing such expenditures. (3) "Getting even" with your insurance company by submitting every possible property claim because "that's what insurance is for." (4) Delaying timely premium payments because of cash flow considerations. (5) Loosening building security to save on your budget. (6) Making board decisions without first consulting appropriate professionals — lawyer, architect, or engineer. (7) Not adopting or not enforcing anti-discrimination policies with respect to employees or potential unit-owners/shareholders.

What should we make of each idea? What courses of action should be taken? Here's what you should know when considering such proposals:

(1) Reducing insurable values. Taking this tact, many buildings, which have been historically underinsured, will be rejected by prospective underwriters. In the event of a major loss, the inadequate valuation can work against you in the claim settlement process.

(2) Making up for higher insurance costs by ignoring needed repairs. When the management company for a group of buildings with a high rate of water damage claims asked how to fix the insurance they were told to fix the plumbing system instead. This was a costly proposition but it would have saved on the repair costs in future insurance premiums, as well as adding to the quality of life for the residents.

(3) "Getting even" with your insurance company by submitting every possible property claim. Submitting a high frequency of small claims will send the wrong message to your current and/or future underwriters. You should be demonstrating to them your willingness to absorb minor losses and save your insurance coverage for larger claims and catastrophic events. Because water and smoke damage claims must be dealt with, insurance experts encourage groups of buildings participating in a master program to opt for a higher per occurrence deductible, say $10,000 instead of $2,500, and create a fund for the difference to settle smaller claims in-house. Further, group purchasing power may create some economies of scale as an underwriter can afford to spend the time working on one submission for 30 buildings as opposed to 30 separate sets seeking quotations.

(4) Delaying timely premium payments because of cash flow considerations. Insurers have become much more strict in requiring extended premium payments. This is true whether the insurer has offered a payment plan or the premiums were financed. In the past, insurance companies offered to reinstate a cancelled policy after arrears were paid. Today, they are not so willing to reinstate. Further, it is not advisable for any insured to develop a reputation as a poor payer as this word gets around rather quickly and can shut doors to new companies.

(5) Loosening building security as a budgetary saving. Risk management techniques are more important than some insurance considerations. Once again, security has qualitative as well as quantitative benefits: there is reduced opportunity for vandalism as well as reduced physical threats to occupants.

(6) Making board decisions without first consulting appropriate professionals. A history of Directors & Officers liability insurance suits against a board can cost more in future premiums than increases in traditional insurance costs. (For a detailed discussion of this subject, see "Hotline: Risky Business," Habitat, June 2002).

(7)Not adopting or not enforcing anti-discrimination policies. To begin with, discrimination (race, age, sexual orientation) of any kind is not a socially acceptable practice — and is illegal, to boot. Therefore, a board should adopt a wide-ranging anti-discrimination policy and then provide the mechanisms for strict enforcement.

Every property and every business must cope with extraordinary increases in their insurance costs. It becomes incumbent upon management to take whatever steps may be available to blunt the impact of this phenomenon.

Herbert H. Feldman is president and CEO of Alpha Risk Management, a 29-year-old risk management consulting firm.