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A spate of recent natural disasters and a changing civil litigation environment have set the multifamily insurance market on a course for rising rates, lower capacity, and reduced appetite for risk. Stakeholders in the growing multifamily development market will need seasoned brokers and field-tested programs to adapt effectively to this new insurance landscape.

Between the hurricanes, wildfires, and windstorm events of the last several years and increasingly plaintiff-friendly litigation laws in states like New York and California, multifamily insurance markets will continue to harden with no end in sight. For savvy owners and operators, viable solutions are out there, and the current market will not forgive those who attempt to maintain the status quo.

Property: Elevated losses mean higher rates and less capacity

Markets across the U.S. have struggled to recover from recent catastrophes, the unusual frequency and severity of which has put insurance carriers in a scramble to reassess their appetite for risk in the face of enormous losses.

Certain asset classes have taken a particularly hard hit, including distressed wildfire business, garden-style multifamily, and the hospitality sector. These classes have seen rates increase by ten, twenty, or even fifty percent. Multifamily properties with a history of claims, suppressed insurance rates, or facing carrier non-renewals can experience increase as high as 25 percent.

Casualty: Increased litigation drives more claims and losses

New regulations in major markets have led to a substantial increase in litigation against multifamily owners, operators, and developers. New York’s “Scaffold Law” assigns strict liability to contractors and building owners for worker falls, while California’s “habitability claims” allow tenants to file claims regarding the status and living conditions of a property. Other states are considering similar laws, and claims and losses are already climbing fast.

Insurance carriers have responded, along with rate and deductible increases, by adding habitability exclusions to many multifamily policies. Many firms have also begun using crime reports and other data to refine risk profiles for individual properties, hoping to offset some of the additional casualty risk.

Adapting to a new insurance market

For many multifamily owners, operators, and developers, 20 to 25% rate increases make the status quo on their insurance program non-viable—this new and hardened market is not easy to navigate. Fortunately, there are steps both multifamily stakeholders and their brokers can take to adapt and mitigate some of these rate hikes, exclusions, and non-renewals.

Multifamily owners and operators can help avoid the particularly painful heights of rate increases by improving their portfolio’s profile with carriers. They should catalog and communicate the specific attributes and procedures that lower risk on their properties, and—if they have any open claims—monitor those claims and maintain a clear, steady line of communication with brokers and carriers.

Brokers should perform thorough, data-driven evaluations of client portfolios, establishing a Probable Maximum Loss for individual properties and carefully selecting a strategy to build the best program possible. This might include separating and/or reconfiguring portfolios, considering loss limits, and networking with new or emerging carriers to widen the field of options.

Want to learn more? Check out our State of the Multifamily Industry 2020 report!

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