ants infuse cash and add value to your property, the insurance company looks at factors that could result in a higher
How the premises are used will affect the property insurance
rate. For instance, as we see from the example above, a restaurant carries a higher risk than other types of businesses
would. As a result, it costs more to insure a restaurant. Of
course, a restaurant isn’t the only type of business that carries a
Let’s take a look at a few other types of tenants that carry a
higher risk and will increase your premiums. Some of these
tenants will add great benefit to your building, but increase the
risk of insurance exposure nonetheless.
Subsidized/Section 8 Tenants – Section 8 tenants can be attractive to landlords, generating guaranteed rent paid for by
the government. However, it’s critical to keep in mind that
insurance companies view subsidized housing as a high risk.
Why? First, Section 8 tenants have less interest in maintaining
a property that they don’t really pay for. Second, there’s often a
higher crime rate that typically comes with low income tenants.
Laundromats and Auto Repair Shops – For a host of reasons,
insurance companies have determined that these businesses
have a higher risk of claims for the landlord than most businesses, thus increasing the cost of insurance. This is the case
even when the tenant has their own insurance!
Housing a Daycare, Allowing Pets, or Hiring Armed Security
Guards – These benefits can add tremendous value to your
property and are a proven tools for tenant retention. However,
they also dramatically increase the risk to your insurance company and premiums shoot up accordingly.
2. LOCATION, LOCATION, LOCATION
When conducting due diligence, investors often don’t realize
what the cost of insurance will be on their property. One of
the reasons for this is that not all properties are created equal.
Just because the building you’re considering investing in is
the same size or even the same type of building as a building
you’ve invested in previously, the cost of insuring the properties could differ dramatically.
Consider this: You own a 100-unit brick building in Atlanta,
Ga., and you pay $275 in insurance per unit. You’re now looking at a similarly built 100-unit building in New York City and
estimate that your cost will be around the same. Here’s where
the unpleasant news comes in. It could cost more than double because of the location. Liability insurance in New York
City can be more than triple that of Atlanta, Ga. That’s because of the foot traffic and the high percentage of lawsuits in
New York. For this reason and more, it’s always a good idea
to get a real estimate of insurance based on your unique set
Properties located in high-crime areas will usually incur higher
insurance premiums. Another factor to consider is whether
your property is located in an urban area where there is easy
access to a fire station or fire hydrant, which serves to lower
your rates. By comparison, if your property is located further
away from a fire station or fire hydrant, it might cost more
Surrounding neighbors can also impact the cost of insuring
your building. For instance, suppose your property is located
near a fireworks factory or a refinery. Obviously, there’s going to be a greater risk that your building could be collateral
damage in the event of an accident at one of those neighboring
businesses. While it might not seem fair, that means there is a
higher risk for a claim on your building, which will result in
higher insurance premiums.
3. LAPSE IN COVERAGE
Have you ever had a lapse in your property insurance? If it’s
just a couple of days, it might not seem like a big deal, but in
reality, a lapse of even a day or two could spell trouble later on.
This is because liability insurance claims are based on the date
they occurred, not when they’re reported or filed as a lawsuit.
Think about this for a moment: You forgot to mail in your insurance premium a couple of years ago. Since your payment
was late, you had lapsed coverage. Once you realized the error,
you immediately mailed in the payment. Everything is good,
right? Unfortunately not.
Since your payment was late, you’ll be viewed as a higher risk
and your insurance rates will rise accordingly. Remember, it’s
all about risk. Having a year or more with full coverage will
usually give you the coverage history to restore your premiums
4. INCREASED COST OF CLEANUP
I recently had a claim on a $5 million property coverage for a
28,000-square-foot building in New York City. That’s $175 in
coverage per square foot, enough to build a whole new building! What the insured didn’t consider was the cost to clean up
after a fire. The cleanup and emergency work itself added an
additional $50 per square foot.
Insurers often use an industry calculator such as Marshall &
Swift to calculate the cost of rebuilding a property. It may be
tempting to underinsure your property for cheaper premiums,
but think twice before taking that risk, it could bite you later if
a claim is made.