How to Make an Insurance Broker Go Silent
Part 7 of 8: What Your Insurance Broker Isn’t Telling You
The #1 mistake real estate companies can make when it comes to insurance is buying stand-alone programs for each asset or investor portfolio. When I ask why it’s structured this way, I typically get what I call the Montell Jordan refrain of “This Is How We Do It”, or the more common variation is “This Is How Our Broker Did It.”
When I recommend consolidation, this is typically how the conversation goes:
Real Estate Company: “Won’t consolidation reduce my limits of coverage?”
On paper, more policies seem like more limits and coverage, but it’s not. You can structure liability policies to allow the aggregate limit (a typical example is $2M) to apply individually. Every liability policy has a clause called the “Separation of Insured” that defends each named insured individually. Lastly, you can buy umbrella/excess coverage to increase the total limits. In property coverage, you can aggregate the limits into a blanket limit which actually will provide more coverage than stand-alone limits as individual buildings can now share from a larger pool.
Real Estate Company: “Hmm. But you’ll probably have to reduce or restrict coverage provided, right?”
Not exactly. You’ll actually find this improves your coverage terms. Coverage sub-limits are a function of the size of the insured values and square footages. The larger the premium, the broader the terms or the larger the sub-limit options offered. There are often exposures – for example, development land or vacant buildings – that a standard carrier will not insure on an individual basis. In a master program, it’s included and less expensive. Important coverages such as no coinsurance, ordinance or law and loss adjustment expense are included for no charge as opposed to the additional premiums charged on smaller policies.
Real Estate Company: “More coverage sounds like more cost, and we don’t want to pay more than necessary.”
Hate to break it to you, but if your program is stand-alone you’re already paying more than necessary. Besides gaining economy of scales as discussed a moment ago, there are also filed fees for policy production, state filing and minimum expense loadings. We’ve found that these factors combined will on average save clients between 15% to 40%* on their insurance spend – which means more money back in your pocket.
Real Estate Company: “But what if one property has a loss – won’t all the rest have to pay for it?”
Insurance policies are typically written on 12-month terms. If there’s a large loss, the pricing is set for the remainder of the term until renewal. At renewal, you can make the determination to remove the location or continue down the path of a master program. In practice, we’ve found the larger premium will absorb shock losses better than individual properties which can be subjected to significant increases or, even worse, cancellation. Consolidation provides stability and flexibility on program costs.
Real Estate Company: “Wow. Why hasn’t my broker told me this?”
Sometimes the best answer is silence.
Our team of real estate experts won’t leave you in the dark. If you’re ready to learn more about consolidation, contact us.
*Please note individual results may vary.
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