Benchmarking your Property Insurance Programme
What is the “Right Price”?
Insurance is in many ways a unique product. It is probably the only commodity you will need to spend a considerable sum acquiring every year, but sincerely hope you never need to use. When you purchase insurance, you are effectively paying for a promise that the insurer will respond in a predetermined manner (pay a loss) to a given set of circumstances (an event giving rise to a claim) which might or might not occur in the future. You are sacrificing a “small” certain loss to avoid a huge, possible loss… and to sleep comfortably at night. Insurance is not tangible, like a stereo or a car, yet it can be very costly. Consequently, you need to make a determination on the quantity, the price, and the quality of the product long before you would need to use it. Cost is very often the principal determinant in the choice of an insurance programme, and there are a number of factors that contribute to this cost. Property insurance rates are based primarily on type and quality of construction, occupancy and location.
Obviously, a property constructed entirely of concrete (walls, floors, roof) would constitute the most fire and weather-resistant type of structure, and would attract the lowest rate. Conversely, a property constructed entirely of wood, with a wood shingle roof, would attract the highest rate. There are other construction-related factors that have a bearing on rate, in particular, the condition of the structure. If your property has been fitted with hurricane straps, has fire hose reels and fire extinguishers installed, provides CCTV monitoring or is connected to a monitored central alarm system, some insurers will consider these factors when setting rates.
A building that has not been maintained, or where the housekeeping is sub-standard (accumulation of trash, overloading of electrical outlets, improper storage of flammables) would also cost more to insure. If your property is close (less than 30 for a 1-storey structure) to another of inferior construction, or which exhibits other negative features such as those mentioned, or where the occupancy is considered more hazardous than your own, that property could negatively affect your rate, as well.
If your property on the coast where it would be subject to high seas or tsunami, or in an exposed location unprotected from windstorm, or in an area subject to land slippage or flooding, then the insurer will likely charge a higher premium, and might restrict the coverage available, or increase the excess (amount which you have to pay in the event of a loss).
Very often, once the initial insurance purchase is made, little thought is given to your changing needs as years go by, so your insurance policy could become “stale” or inadequate to meet your needs if you do have a loss. Your coverage needs to be reviewed regularly (at least once per year) and updated whenever you make changes that might affect your operations or values, e.g., a condominium property that installs a pool, or adds another level, or opens a coffee shop on the premises would need to advise their insurer in each case to ensure that the appropriate coverages are in place. A homeowner who replaces their regular television set with, say, a more expensive plasma screen, or decides to add a garage, or lease the property, would likewise need to advise their insurer or broker in each case.
Your insurance policy provides coverages in two ways. Firstly, there are the “standardâ€ coverages, which are listed in the main body of the policy, and then there are “extensions” or “enhancements” which are added as needed to each individual policy. Many of these enhancements are “occupancy specific” and may be included without significant additional cost. However, you need to know what to ask for. This is where the services of a professional insurance advisor or broker are invaluable. Insurers also offer “package” policies, primarily for personal lines and small businesses, which include a number of different coverages under one policy at a discounted price. Where available, package policies can provide significant savings. The scope and extent of coverages and limits provided by different insurers and different policies do vary from one insurer to the other, however, and it is important to understand those differences, particularly where one package appears to be significantly cheaper than others of a similar type.
For the residential investor (villa, condominium) a homeowners package policy will cost between $5.00 and $6.50 per thousand for the best quality properties, based on the replacement cost of the insured structures. This will include residential liability requirements and a number of the enhancements previously mentioned.
Contents coverage will usually attract a rate that is $1.00 per thousand higher than the building rate.
Basic “standard” excesses vary between $500 and $2,500 per loss, with higher excesses applicable to such exposures as seawave and landslip, and 2 percent of the sum insured in respect of “catastrophe perils” – hurricane, windstorm, tornado, typhoon, volcano, earthquake.
Limited discounts are available for higher “standard” excesses, say $5,000 or $10,000.
Included in this cost are public liability limits from $250,000 to $750,000 or even $1,000,000 with additional costs for higher limits. Increased premiums may be charged for additional exposures such as a swimming pool, coffee shop or other amenities, or if the property is rented short term.
For private homes and condominium package policies, coverage is also included for legal liability for injury to domestic employees only (housekeepers, gardeners, etc), but limited to two or three. A greater number would attract an additional cost.
Seawalls, revetments, and other sea defences, and retaining walls will often require engineers’ reports before they may be insured, and once approved, will usually attract a rate of $7.50 – $10.00 per thousand of replacement cost, with higher excesses, e.g., $10,000 per loss.
There are some additional “non-tangible” costs that could result from a major loss which need to be considered. These include professional (surveyors, architects, engineers) fees, costs of debris removal, loss of rental income. Most of these are automatically included in the property policy at a set percentage of the sum insured, but the property sum insured should be increased accordingly to include these costs, over and above any coverage for damage to tangible assets.
Rates for other commercial risks vary by occupancy. For example, an office building might attract a rate similar to a condominium for property insurance, but the coverage would not be a “package” and it would be necessary to arrange for other coverages such as burglary, cash, public and employers liability coverages separately. While package policies are available for businesses of this nature, rates would be higher to include the additional coverages.
Generally the more “hazardous” the occupancy, the higher the rate, with occupancies involving industrial processes rated at the higher end (over 1 percent).
There are two types of stamp duty which you will encounter when considering a property policy.
Firstly, there is a 1 percent stamp duty levied on every loss payable under a Fire policy. In a major loss this could be considerable, so the 1 percent is insured as an additional item, thus the policy pays the stamp duty for the loss, not the insured, who simply pays an additional 1 percent of the annual premium for the coverage.
Secondly, whenever an insurer issues a new property policy or increases the sum insured on an existing policy, they are required to levy a stamp duty of 1/40th of 1 percent of the sum insured. For example, for a $5 Million property this amounts to $1,250. If you change insurers every year, therefore, you are paying that additional amount every year.
Role of the Broker
Because of their experience with a wide range of clients and insurers, a qualified insurance broker can provide an invaluable service in negotiating your insurance programme to provide the most comprehensive coverage, at the best rates, with the “right” insurer. Very often, a broker does not need to change insurers to get you the “best deal”, and can therefore save you the additional stamp duty costs you might incur.
It is better to choose your broker carefully, as you would any other professional advisor, provide them with a letter of appointment, and let them explore the market on your behalf, than to initiate a “bidding war” and make a choice strictly on the basis of cost. The cheapest insurance (broker) is not always the best.
Your broker should also be able to add value to the relationship with a broad range of general insurance and risk management advice, and to assist in the speedy settlement of your claims.
Prepared for Terra Caribbean’s The Red Book 2010 Pink Pages by Richard E. Ince, President, Atria Insurance Brokers
Richard Ince, an insurance professional with over 35 years experience in both Canada and Barbados, is President of Atria Insurance Brokers Inc. a local general insurance broker, and Atria International Insurance Managers Inc., captive insurance managers and consultants. He is a Chartered Insurance Professional (CIP) and a Certified Risk Manager (Canada).
Implications for the Developer
There are a variety of exposures that will invariably arise from the activities of those individuals and companies whose business it is to acquire, develop and manage property. Whether it is the simple ownership of land, the installation of services, a small residential development or a full-scale commercial project, the developer will need to be protected by insurance. As soon as the developer acquires land, they assume a duty to make it safe for anyone venturing onto it.
No special duty of care is normally owed to the trespasser (other than the duty not to set traps or intentionally endanger), however the definition of trespasser would not necessarily include the neighbourhood children using the land as an impromptu cricket ground, or a pedestrian taking a habitual shortcut.
We are aware of a colleague who recently purchased a lot consisting of several acres of rural land and, as he was clearing his new acquisition, discovered not one, but three …continued from page 92 uncapped, unwalled wells under the overgrown bush and grass. Fortunately none of them were wide enough to swallow the tractor with which he was clearing the land, but had a neighbourhood child fallen into one the result could have been disastrous – for everyone.
Even if the property owner goes to the pains of fencing and posting signs, they are not entirely relieved of liability, especially in the case of children.
The law is also very clear about bringing, keeping or allowing to be brought or kept anything on to the property that could if it escapes, cause damage to neighbours or their property. Tacitly permitting the local farmer to graze his prize bull might be problematic for you if it escaped from your land and causes injuries or damage.
Therefore, as soon as the land is acquired it is wise to make sure the public liability insurance coverage is in place with an adequate limit to provide protection in the event of a claim.
Apart from the aspect of an accident occurring on the property, having public liability coverage in place provides the significant advantage of protection afforded from the legal cost of defending against a claim, whether that claim is genuine or not.
As the developer considers the project and begins planning, his insurance broker can provide useful advice about the establishment of fire divisions, building separations, fire doors, exits, fire protection and other issues that might affect the insurance rating of the final project. The broker can also document the hurricane reinforcements and other structural features incorporated into the structure that may eventually be obscured by finishes.
This will all help to ameliorate the ultimate insurance rate charged on the completed project. Moreover, many of these upgrades, if planned from the outset, will have a minimal impact on the overall project costs, if at all.
If the developer is involved in the tendering process as a way of acquiring new projects, the bidding process usually includes the necessity for submission of a “bid bond” with the tender. Bid bonds are traditionally a percentage (usually 10%) of the project cost and may be issued by a financial institution or an insurer.
Prior to project commencement, coverage will be required for the activities that will be carried out on the site, including liability for damages or injuries to others. A Contractor’s All Risks (CAR) policy is a specifically designed multi-coverage (or package) contract to cater to the needs of the builder.
This policy will not only provide coverage for the actual ‘bricks and mortar’ but may be extended to include coverage for equipment and temporary structures on site and liability exposures. The CAR may include protection for the development owners, contractors and sub-contractors exposures on the same policy. Arranging cover in this manner will afford less opportunity for ‘drop-outs’ or ‘gaps’ in cover that may occur between sub-contractors and main contractors who each arrange their own coverages. CAR policies can often be negotiated on an annual basis with periodic reporting, based usually on value of work done in the reporting period.
If the project involves work likely to cause vibration, such as blasting, piling, drilling, or even the constant passage of heavy vehicles, the developer may be considered liable for damages to neighbouring structures caused by the vibration.
It is essential, then, that extensive structural surveys (including photo-documentation) of neighbouring premises are conducted to record their condition prior to commencement of the project to verify the authenticity of any future claims for vibration damage that may emerge as the project progresses.
It is important to note that a standard exclusion appearing in practically all public liability insurance contracts relates to professional negligence. The developer would normally arrange Errors and Omissions, or Professional Liability coverage, for architects, engineers and other professionals in their employ. If professional services are outsourced for the project, as often happens, then proof of adequate insurance coverage should be obtained in the form of Certificates of Insurance from their insurers.
An employer is held responsible for the acts of his employees in connection with their employment, even when those acts may be in contravention of a direct order, or contrary to an established system of work. When the actions of an employee cause injury to another employee, or when an employee is injured in the course of his/her employment, they may have the right of redress against their employer if it can be shown that there was “negligence” on the part of the employer. Under these circumstances the employer’s liability may arise from several causes such as failure to provide a safe environment, failure to provide a safe system of work, failure to hire responsible personnel, or failure to provide adequate training.
Employer’s liability policy provides protection against claims of this type. It should extend to include employee-employee liability. The policy will also cover defense costs.
There are a plethora of other insurance coverages that the developer requires in order to be adequately protected, including coverages for buildings and contents, vehicles, goods and cash in transit, fidelity coverage, business interruption, marine cargo, valuable papers, accounts receivable and so on.
In addition, a measure of protection may be afforded to employees against medical costs arising from sickness or accidental injury, on a 24-hour basis, through group health and sickness plans.
The services of a competent, knowledgeable broker are invaluable in navigating through the maze of insurance options. The broker’s intimate knowledge of the market and working relationship with many insurers can help to facilitate placement of the insurance coverages at the most competitive costs.
The broker’s role in documentation and negotiation, as well as their ability to advise on insurance options and assist in documentation and negotiation of claims, can save the client many hours and a great deal of frustration, as well as a considerable amount of money.
Prepared for Terra Caribbean’s The Red Book 2009 Pink Pages by Richard E. Ince, President, Atria Insurance Brokers