Premium Shock

Premium Shock

Commercial insurance by Jean Gruss | Editor/Lee-Collier

The insurance hikes Florida homeowners experienced have spread to owners of commercial property. Now, the state is stepping in.

The insurance fiasco that has hit homeowners is now spreading to the commercial sector.

Owners of commercial buildings are seeing their premiums increase from 50% to 500% as they face another uncertain hurricane season. In multi-tenant buildings, owners who can't pass the increases to their tenants are taking big hits.

"There are real estate deals falling through because of the inability to get coverage," says Wells Purmort, manager of Purmort & Martin Insurance Agency in Sarasota.

Now, the state insurer of last resort, Citizens Property Insurance Corp., plans to step in to insure commercial buildings as a result of the recent change in the law. Insurance industry executives expect Citizens to start writing multi-peril policies within the next three months.

"I think it's a great thing that Citizens will step into the marketplace," says H.A. "Bud" Hornbeck II, president and chief executive officer of Lutgert Insurance in Naples.

Others aren't so sanguine. "It's the socialization of insurance," says Scott Gregory, an associate with Oswald Trippe and Co. in Fort Myers. "The state will be in competition with insurers."

Some don't hold out hope that Citizens will fix the long-running problems. "They've screwed up the whole mess so that it can't be fixed overnight," says Purmort.

London calling

Fact is, many standard insurance companies are dropping customers and many don't write new policies, forcing agents to shop for policies on commercial buildings in the so-called "surplus" market.

The surplus market, which includes Lloyds of London, was generally limited to insuring unusual and high-risk situations. But now, it seems commercial buildings all along the Gulf Coast fall into that category.

The problem with the surplus market is that it's much more expensive. Hornbeck says premium quotes from surplus companies can be as much as 500% more than standard carriers. The deductibles are higher too.

In one recent case, Hornbeck says a client with a building on U.S. 41 in Naples paid $22,000 a year in premiums last year with a standard carrier that included windstorm damage. The carrier didn't renew the customer's policy and recently got a quote from a surplus carrier for $72,000 with a $500,000 wind-damage deductible.

The windstorm policies from surplus companies are particularly expensive. Owners can obtain wind coverage from the state, but it's capped at $1 million. One downtown Sarasota landlord was looking at an additional $80,000 in premiums to insure a building against wind damage in excess of $1 million.

In some cases, landlords are going without excess windstorm insurance, gambling that storms will stay away or that their building will withstand a hurricane. "We've seen a lot of people take that road," Hornbeck says.

But going without excess windstorm coverage - "going bare" in industry parlance - may not be an option if there's a mortgage on the property. Still, some landlords are scouring their loan agreements because in some cases lenders don't specifically require windstorm insurance.

The problems are particularly acute for owners of buildings built before 1995, when codes were looser. "It's causing a lot of pro forma headaches," says Gary Tasman of commercial real estate brokerage Cushman & Wakefield in Fort Myers. "Some landlords are absorbing some of those costs, others are passing them on [to tenants]," he says.

"We're getting to a point where it's getting truly burdensome," says Ray Sandelli, senior managing director of commercial real estate brokerage CB Richard Ellis in Tampa. Retail tenants are likely going to suffer the most, as many leases are drafted net of expenses such as insurance and any increase is passed on to the tenant. "Somebody has to pay the freight somewhere and ultimately it goes back to us as consumers," Sandelli says.

Sandelli says the dramatic rise in commercial-building insurance rates began in the middle of 2006. "It's all happened in a fairly quick time," Sandelli says. However, he says legislators have been surprisingly quick to address the issue and broaden Citizens' scope to include commercial buildings. "The governor has been very quick to respond," he says.

However, Sandelli says insurance isn't the only factor that's behind the rising costs of ownership. For example, taxes have risen rapidly as valuations spiked in recent years. "It's hard to separate one issue," he says.

Citizens joins the fray

The legislation that emerged from the recent special session of the Florida Legislature authorizes Citizens to provide commercial nonresidential coverage.

The big questions now are how much coverage will be available and what the rates will be. "One number thrown around is insuring property of up to $5 million in value," says Sam Miller, executive vice president of the Florida Insurance Council.

No one knows what Citizens' rates will be and whether they will be competitive with private insurance companies. Insurance brokers speculate that they'll find out in May or June.

Meanwhile, Citizens will incorporate windstorm coverage for commercial properties from the Property and Casualty Joint Underwriting Association (PCJUA). The PCJUA is a state program that provides windstorm coverage for commercial buildings for a maximum of $1 million.

The idea is to have Citizens provide multi-peril insurance to owners of commercial buildings, including windstorm damage. It's not clear whether landlords will be able to pick and choose which perils they want Citizens to cover. Citizens officials couldn't be reached.

Another worry is whether Citizens will require landlords to bring older buildings up to code before writing a policy. That's a costly proposition, though Miller says lawmakers are considering helping owners harden commercial buildings with state funding.

While this is happening, there are indications the market may be recovering. Miller says reinsurance rates for insurers of commercial buildings are declining and capital is growing more plentiful. "There are early signs that the crisis in the commercial market may be easing up," Miller says.

In the end, the state may end up issuing policies for the most vulnerable buildings. "They'll write business that nobody else wants," says Hornbeck.

REVIEW SUMMARY

Industry. Insurance

Trend. Rising premiums for commercial buildings

Key. The state's role remains a wild card, but the market for commercial-property insurance may improve.

Premium advice

Premiums on commercial nonresidential buildings have risen by as much as 500% for some owners, but commercial real estate and insurance brokers say there are steps landlords can take to blunt the impact.

First, owners of older buildings should consider bringing their buildings up to the most recent codes. "It's a big cost," acknowledges Scott Gregory, an associate with Oswald Trippe and Co., an insurance brokerage firm headquartered in Fort Myers. A hurricane window can cost as much as $900, for example.

However, updating a building to the newest codes will help owners obtain coverage and lower their premiums. "In the long run they need to retrofit older buildings to at least 1994 or 2000 building codes," says Wells Purmort, manager of Purmort & Martin Insurance Agency in Sarasota.

Commercial real estate brokers are helping landlords offset rising premiums with savings in other areas, such as taxes. For example, in Tampa, CB Richard Ellis Senior Managing Director Ray Sandelli's valuation group reappraises properties to appeal the tax assessor.

Restructuring the debt on property can also help landlords' bottom line. "The process today means you have to look at all the components," Sandelli says.

Investors should take extra care when buying buildings that have been built before 2000. "It's causing a lot of delays in our business," says Gary Tasman, a commercial real estate broker in charge of the Fort Myers office of Cushman & Wakefield.

Tenants are scrutinizing the common-area maintenance (CAM) terms of leases now more than ever. CAM includes insurance, taxes and upkeep of the common grounds and in recent years those costs have increased substantially. Some tenants are now demanding caps on CAM increases. "Landlords aren't in a hurry to grant caps," Tasman says.

-Jean Gruss