Ensure Your Investments Are Insured

By Manuel Fishman, Shareholder, Buchalter Nemer

The return on investment in real estate is what drives most of us to get up and go to the office. Building, developing, operating and marketing the right project requires vision, diligence, political skills, development of relationships, efficient and experienced team members, and being able to manage to a budget. Lawyers help in various aspects of this. But the whole process could be blown because of one accident or occurrence–be it defective construction, poor maintenance and security procedures, ineffective vetting of vendors and contractors, unforeseen weather conditions and natural disasters, and failure of building systems leading to interruptions of services. This is why having insurance on your investments is crucial.

With December being the month when most property and casualty insurance policies are renewed and premiums are fixed for the next year, here are some guidelines for securing the necessary insurance.

The best reason for proper insurance is the hidden “duty to defend” that is contained in each insurance policy for a covered incident. Whether the duty to defend is from an insurance company lawyer or a lawyer you select and is paid for by the insurance company, the biggest cost of any claim is the duty to defend. Insurance consultants make sure an incident is covered, and that the cost is manageable and competitive, while lawyers ensure the language in a lease, construction contract or property management agreement properly allocates risk and requires insurance to back up the risk.

The first step in the process is to run through a hypothetical casualty with a professional. Does your lease require or provide for rent abatement? And what is the trigger? Are utility interruptions covered? Are you in a retail or service industry and does a third-party “hack” of your computer database raise issues of losing confidential customer information? If there are unusual weather conditions, such as blizzards or flooding, what is excluded from coverage (think the Boston snowstorm of 2014 and Hurricane Sandy)? Have you looked at the liability coverage amounts in your contracts and thought about increasing them? Who is primarily responsible for insuring tenant improvements, and what happens to the insurance proceeds if a lease is terminated? What does it mean when a tenant says it has a large “self-insured retention”? Running through all these hypotheticals is very valuable.

Next, owners and managers should review contract language providing for allocation of risk to third parties, such as tenants and vendors. The operative concepts are indemnification and release. Are they consistent in your contracts? Are they broad enough to cover anticipated incidents? Property owners need to understand that when an insurance company pays an insured on a claim, the insurance company has the right to step into the shoes of the insured and pursue any third parties that may be responsible for the loss. This is called “subrogation.” Think of what that might mean if an insurance company starts suing your tenants for losses the tenant pays for through operating expense, and you will understand why most contracts contain waivers of subrogation.

Who is paying for the insurance? And who pays for the deductible under these policies? Is the cost included in operating expenses, and to what extent?

Finally, do not overlook corporate errors and omissions coverages.

While we all get caught up in whether a certificate of insurance is worth the paper it is written on (and there are some good arguments that challenge the worth of these certificates), it is still industry custom to get these certificates and to maintain trigger systems that alert real estate managers of the target expiration date. Other procedures are available to confirm that an insurance policy is in effect.

2017 is shaping up to be another good year for commercial real estate–make sure the returns are not lost through a failure to review loss prevention procedures and legal documentation that supports allocation of risk.