Property Insurance in the Time of COVID
By Mark Fogarty
6 min read
Rising Premiums and Prolonged Lawsuits Backed by Hedge Funds
The COVID-19 pandemic has created some thorny property insurance problems for owners/managers: Increased premiums. Lawsuits backed by deep pockets. The need to factor force majeure into costs. A spike in multifamily severity claims.
The good news is that so far, no spike of claims has yet to take off in the tax credit arena, at least according to an informal poll taken at the recent Virtual Asset Management Conference of the National Housing & Rehabilitation Association, where 92 percent of respondents said they had yet to put in a COVID-related claim.
Milton Pratt, executive vice president of New Jersey developer The Michaels Development Co., in framing the discussion on property insurance at the conference, said, “I should be spending my time thinking about how to create new projects. Instead, I spend an unusually large amount of time thinking about how our property insurance affects our development business.
“It’s really becoming a challenge for us and is driving some of our decisions on where we work, how we work and what kind of projects we’re doing.”
On the casualty side of things, according to Ryan Dwyer, president of Lexington Co., Boston, there have been some double-digit rate increases, and a spike in the severity of multi-family claims.
“Claim costs are going up exponentially,” he said. Driving factors include “social inflation,” where claims that formerly could be settled for $500,000 are now settling for $1 to $1.5 million.
Up by Double Digits
Matthew Smyth, vice president, major accounts unit, at Conner Strong and Buckelew, Philadelphia, agreed with Dwyer on the increase in premiums. “It’s tough,” he said, starting with double digit increases on property insurance.
“They’ve gone up 15 to 20 percent to start, going as high as 60 to 70 percent in some cases. With general liability, 15 to 20 percent to start, 30 to 40 percent depending on losses.”
Pratt reported that the experience of conference attendees bears that out, as 56 percent of respondents to an instant poll reported they had seen rate increases.
Besides increases in premiums, another big impact of the current environment is litigation funding. According to Dwyer, attorneys are partnering with claimants, allowing them to stay in litigation for longer periods of time. Some of those attorneys are funded by hedge funds, according to Pratt.
“Ultimately, that drives up the cost of that claim,” he said. In the past year, 40 percent of Lexington’s larger claims have involved some sort of litigation funding. “That drives up the premium cost to you folks,” Dwyer told the meeting.
That funding allows the claimant to stay in the claim a longer period of time because “they have an arrangement with this investor, so they’re not inclined to settle as quickly because they are being compensated along the process,” said Dwyer.
“The combination of that and dragging the claim out longer tends to result in higher settlements. If they didn’t have this funding mechanism by private equity or venture capital firms, they would be a little more eager to settle the claim.”
Dwyer also sees a potential liability in a new social factor – having Millennials on juries.
A Heavy Hand On Judgments
“They want to compensate claimants for a lot higher dollar amount than other folks do,” said Dwyer. “I’ve seen this play out in a handful of cases. They see baseball players making millions and millions of dollars. A couple of million dollars is nothing to them.”
Pratt asked about potential exposure to owner/developers if their employees contract the virus.
“Most of our workers are essential workers, front line. During the past three to four months we’ve had 1,500 to 1,600 employees out in the field every single day interacting with the public,” he said of Michaels Development.
“That’s the million-dollar question,” said Smyth. And besides workers comp that extends to residents as well. “There could be some potential negligence there.” If you’re making the decision to open things up, opening up a pool, follow CDC guidelines, he added, and take employee temperatures. “Make sure all your I’s are dotted and your T’s are crossed.”
Dwyer agreed. “We do have a communicable disease exclusion we’re using and I strongly urge your broker to take a close look at it.” Though not designed with pandemics in mind, there are some, like Legionnaire’s Disease or salmonella that might be covered.
The Force of Force Majeure
Pratt asked with the level of social unrest going on in the country, if that could qualify as a force majeure event under a typical policy.
Smyth said the issue of force majeure is where a lot of industry time and energy is being spent currently. “It requires a conversation between you and your builder risk carrier,” he said, especially on the definition of a cessation of work. Carriers have been granting builders some rhythm here, he said.
“As we go forward, there will be a lot of changes. The owners are going to develop things around that force majeure clause to provide better protection for them.”
As for the overall impact of unrest that has followed the police killing of George Floyd and protests by the Black Lives Matter coalition, Dwyer said, “From a multifamily exposure, so far I haven’t seen it have a big impact on rates in this space.”
Smyth said, “It had a short-term impact on the property marketplace. When the riots were just getting under way, carriers were putting a moratorium on providing that coverage on new projects. That has since been lifted. I don’t think it’s going to be at a catastrophic level.
Looking at the market overall, there has been “a ton of change” in insurance, according to Dwyer. Over the last two years capacity has contracted. “It’s just a handful of players that are willing to play in this space,” he said.
Becoming Risk Averse
In addition, companies are a lot less likely to take on big risks. Carriers now are looking to exposures of $5 to $10 million rather than $25 million, meaning it now takes more carriers to build up that level in coverage.
With the spike in severity in claims, Dwyer said, carriers are looking to reduce volatility in their books of business.
“If they put up $25 million, they can get hurt pretty quickly. If they put up $5 million or less, that removes a lot of volatility.”
Pratt got in the last word for the panel, noting that an instant poll of NH&RA attendees showed 92 percent of them have yet to file a COVID-related claim.
“Maybe we can get a break on our policies, Matt and Ryan,” he said.
Story Contacts:
Milton Pratt, Executive Vice President,
The Michaels Development Co., Camden, NJ
mpratt@tmo.com
Matthew Smyth, Vice Ppresident, Major Accounts
Conner, Strong & and Buckelew, Philadelphia
msmyth@connerstrong.com
Ryan Dwyer, President
Lexington Insurance Co., Boston
Ryan.Dwyer@aig.com
