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Insurance Due Diligence for Apartment Buyers

insurance due diligence

Current Conditions of the Insurance Marketplace Makes Insurance Due Diligence a Critical Concern for Property Buyers

The insurance marketplace is challenging for apartment buyers, with rising premiums and declining insurer availability. We are strongly recommending that buyer representatives counsel their clients to conduct thorough due diligence on the insurance-related implications of their purchase. Making some small enhancements to the due diligence and closing process will enable your client to save thousands of dollars on their insurance costs.

Key Due Diligence Concerns

Current and Prior Insurance Coverage

We recommend the buyer obtain a complete copy of the current insurance policy for the property, not just a Certificate of Insurance. The policy will include the insurer, amount of coverage, deductibles, and applicable endorsements. The policy will provide important information to the buyer’s insurance agent or broker, concerning correct insurance to value, the quality of the risk for insurability, and availability of insurers (e.g. is the policy written with an admitted, preferred insurer versus a non-admitted, surplus lines insurer).

Whenever possible, the buyer should obtain copies of the prior policies for a five year period.

Claims History and Loss Runs

We recommend the buyer obtain 5-year loss runs from the seller, available from the current and prior insurance companies. The seller may have many years of favorable loss experience that enables the buyer to obtain discounts not otherwise available as a new owner.

These loss runs should be obtained early in the due diligence process, and again immediately before taking ownership. “Loss runs” is the generally accepted term in the insurance industry for a history of all claims submitted and amounts paid by the insurer for those claims. The loss runs may be obtained by the current owner from their insurance agent or broker, or from the insurance company directly.

If issues are encountered with obtaining this information, contact our office as we may be able to assist with finding the correct contact at an insurance company to request the loss runs.

A new building owner will have difficulty obtaining this information after closing, without the full cooperation of the seller. The previous insurer(s) will not provide loss runs to the buyer, as they were not the named insured on the policy.

Failure to obtain this information will impair the buyer’s ability to obtain insurance and receive discounts based on favorable loss history. Without these loss runs, the buyer will be viewed as a “new venture” for insurance purposes and costs will increase accordingly. Additionally, fewer insurers will be willing to insure the property.

Obtaining Loss Runs Immediately Prior to Closing

The buyer should obtain loss runs from the seller as a condition of closing, preferably within 30 days of the closing date. The buyer’s insurance representative can use these loss runs to increase the number of available insurers and obtain discounts for favorable loss experience. However, the loss runs must be dated within 90 days of the effective date of the buyer’s new insurance policy.

Concerns with Adverse Loss Experience

A claims history with adverse loss experience is immediate cause for concern. Losses of any type will potentially increase insurance costs 150% to 450%, reduce the available number of eligible insurers, and introduce further exclusions to the policy depending upon the nature of loss.

As an example, a water damage claim of any severity may result in insurers attaching a deductible of $25,000 to $50,000 (or greater) for water damage claims to the buyer’s policy.

Confirm and Obtain Proof of Property Updates

In the current insurance marketplace, insurers are no longer accepting assurances that buildings have been updated without supporting documentation. 

If any remodeling, upgrading, and/or updating has been performed by the seller, the buyer should obtain the maximum amount of documentation evidencing the scope of work performed. The insurance industry is particularly concerned with the following types of building updates and upgrades:

  • Roofing
  • Plumbing
  • HVAC
  • Electrical
  • Smoke Detectors – Hardwired with Battery Backup
  • Fire Sprinkler Systems – Tested and Certified

Ideally, the buyer should obtain the following documentation of the updates:

  • Building permits and permit approvals
  • Approved bids and other scope of work documentation
  • Invoices and receipts for work performed by contractors
  • Invoices and receipts for any equipment purchased (e.g. air conditioning systems, electrical panels)
  • Photos of work in-progress and completed

Property Conditions

Prospective buyers should be wary of property conditions that are considered adverse in the insurance industry. Certain conditions will affect the insurability of the property and inhibit the buyer’s ability to obtain insurance. These conditions include, but are not limited to:

  • No building updates performed in the last 20 years unless building is <20 years old
  • No documentation available for building updates
  • Roof more than 20 years old (certain exceptions apply for tile roofs)
  • Wood shake roofs
  • Electrical panels from the 1950s through 1970s of certain types, including but not limited to:
  • Aluminum wiring
  • Horizontal balcony railings, or vertical balcony railings with large spacing between rungs
  • Unfenced swimming pools, or fenced swimming pools without self-locking door
  • Bars on windows without emergency release mechanisms

Age of Property

With the current insurance market conditions, buildings built before 1990 are increasingly difficult to insure. Unfortunately this represents the vast majority of apartment buildings! It is imperative to address the issues above through the due diligence and closing process to assure that the buyer can obtain insurance at a reasonable cost.

Conduct Property Inspection for Insurance Purposes

In addition to the property inspection for loan purposes, consideration should be given to inspection for insurance purposes. Navion conducts insurance inspections for our clients with inspection measures toward identifying and avoiding property conditions, such as those detailed above, that are difficult and/or costly to insure.

Pro-Forma Estimates of Insurance Costs

The seller’s current insurance costs should not be used as the basis for pro-forma expense estimates. The seller may be benefiting from a long history of prior coverage and favorable claims history, with an insurance policy that has been “grandfathered” from an insurer that no longer writes new business. In all likelihood, the buyer will be paying more for a policy with identical coverage. Confirm the estimated cost with the buyer’s insurance agent/broker prior to closing.

Engage the Buyer’s Insurance Agent/Broker Early

In the insurance industry, we are accustomed to securing insurance coverage for buyers late in the closing process. This results in a rush to obtain insurance coverage for the buyer. It is essential that insurance not be an afterthought in the buying process.

Along with the due diligence criteria above, engaging the buyer’s insurance representative early allows time to evaluate the target property for insurability, estimate insurance costs, and engage the maximum resources toward locating and securing eligible insurers before a buying decision is made. The result is lower insurance costs for the buyer.

For More Information

Our firm is an independent agent/broker with decades of specialized experience in insuring apartment properties. We are happy to discuss your clients’ specific needs. For additional information or to schedule a consultation, please call (877) 424-7005 or contact us here.