Commercial Real Estate Insurance Practices – Emerging Challenges in the 2020 Market

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Commercial real estate risk management faces challenges abound despite a healthy investment environment. Here are six commercial real estate challenges and their impacts on insurance coverage and rates.

Going Green and Commercial Real Estate Risk Management Implications

According to Investor Management Services, commercial real estate (CRE) properties produce 30% of all worldwide greenhouse gas emissions. Investor Management Services predicts this percentage will grow to 50% if CRE owners do not take steps to become more environmentally conscious.

From green roofs to low-flow plumbing fixtures, CRE owners can reduce their environmental impact. Such steps can yield higher profits and satisfy consumer demands. However, as you build green, consider the insurance implications of the green movement. Because green structures may be more expensive to rebuild after a loss, insurance valuations may be higher. However, something as simple as better lighting or improved ergonomic design of a commercial building’s interior can cause a 0.7% decline in employee health insurance costs, according to the US Green Building Council. This is an annual savings of about $70 per employee. As CRE owners continue their push for environmental designs, it’s important that their brokers understand the insurance coverage implications and closely align coverage with building improvements.

Environmental Challenges in Commercial Real Estate

According to Partner Engineering and Science, environmental risks can be the most expensive hazards faced by commercial real estate owners. Their site outlines three issues: vapor intrusion, radon gas exposures and emerging contaminants. Chemicals used in firefighting, in food manufacturing and in substances that degrease and increase stain resistance can all cause environmental damage.

Environmental incidents can be extremely expensive to remediate. Choosing the correct environmental insurance coverage is important. It is critical that property owners have the correct coverage for the environmental exposure. Mold issues that may impact tenancies, underground storage tanks and vapor intrusion into adjacent buildings are exposures that require specialized coverages. Working with brokers experienced in recurring and emerging environmental risks in CRE can help you tailor coverage to your risks.

Climate Change Risks and Commercial Real Estate Insurance Challenges

It comes as no surprise to CRE owners and managers that climate is hurting profits. CRE managers pay deductibles or self-insured retentions after significant storm or hurricane property losses. They face higher premiums and lower property limits in today’s hardened insurance market. CRE managers feel the effects of climate variance firsthand.

According to Forbesclimate poses a “significant threat to both residential and commercial buildings and can negatively impact a real estate investment.” This Forbes article points out gradual risks, such as ongoing sea-level changes. It also discusses sudden risks, such as increasing water intrusion from storm surges.

The Forbes article recommends a few proactive steps to help CRE owners and managers prepare for climate change impacts.

  • Evaluate climate risks as part of any CRE investment decision.
  • Mitigate with seawalls, drainage, elevation changes, or other tactics.
  • Ask your insurance carrier for their input. Insurers’ loss-prevention technicians can help you survey your risks and develop proactive risk-mitigation measures.

To learn more about how climate affects today’s commercial property insurance market, read our article about how insurance rate increases in 2020 will impact the CRE marketplace.

Changes in Construction Practices Impact Commercial Real Estate Risk Management Practices

The commercial real estate investment industry will be the center of great changes in 2020 and going forward. With more Americans moving to urban centers, the demand for commercial housing grows. Urban infill projects and the need for speedy construction and building techniques that do not require highly skilled labor will drive innovation in prefabrication and continue the movement toward frame buildings. In one study, labor shortages delayed completion time for real estate projects in 44% of responding firms.

PwC predicts that by 2025 over half of commercial construction activity will occur in emerging markets. These are the US, China, India, Indonesia, Russia, Canada and Mexico. PwC states that 2020 will be a key year because buildings in economies like the US will need sustainability ratings for increased profitability as sustainability affects building value.

In addition, amenities that improve the tenant experience will be a major trend in making commercial buildings more user-friendly. These innovations include smart thermostats, voice-activated security and other technologies.

Cyber Risk and Other Fraud Challenges 

A Deloitte analysis on cyber risk in commercial real estate recommends, “…addressing [cyber] risks through a program to become secure, vigilant and resilient….” The report states that the CRE sector “considers itself to be relatively less at risk from a potential cyberattack.” This is because CRE firms keep less consumer-identifiable information (PII) and intellectual property on their systems. The report warns that CRE information technology systems hold personal information such as credit card numbers and banking information. This PII is enough to generate cyber concerns for CRE owners and managers.

New trends in wire transfer fraud also can strike CRE firms. The Deloitte report states, “Many CRE companies have expressed concern about potential cyber vulnerabilities in wire transfer processes….” Many of these wire transfers involve large dollar transactions. According to the report, insiders provide the information needed for 37% of data attacks in real estate. It’s imperative that your cyber coverage, as well as your coverage for theft and embezzlement from within the organization, protects you in the event of a cyber or internal fraud loss.

According to Deloitte, “Many CRE companies are inadequately prepared for cyberattacks.” And after a cyber strike, coverage limitations, policy definitions and coverage wording can limit or altogether eliminate your claim recovery.

The insuring agreement spells out the risks the policy will cover.  A single cyber policy may contain up to ten insuring agreements. This can make shopping for cyber coverage confusing. An experienced agent who understands some of the coverage snafus that occur in cyber can help guide you in your cyber coverage search.

Employment Challenges in Commercial Real Estate

In both the construction of new commercial real estate and managing properties after they’re built, CRE owners face employment challenges. With record unemployment, managers struggle to fill positions with quality candidates. Connect Commercial Real Estate reports that the tighter job market forced CRE apartment operators to “renew their compensation packages against competitors” and outsource labor-intensive jobs like painting.

Using casual or outside labor to perform tasks can create risk management challenges. Casual or day labor rarely carries insurance. While the organization may consider the helper an independent contractor, the administrative law judge in the state where that person sustains an injury makes the decision if the employee files a claim. Therefore, you may be better off using only licensed contractors. Obtain certificates of insurance to protect against a costly workers’ compensation claim in the event of an injury from an uninsured worker.

In addition to obtaining a certificate, ask for a waiver of subrogation from subcontractors or contractors who may be on your premises. According to the International Risk Management Institute, a subrogation waiver is “An agreement between two parties in which one party agrees to waive subrogation rights against another in the event of a loss. The intent of the waiver is to prevent one party’s insurer from pursuing subrogation against the other party. Generally, insurance policies do not bar coverage if an insured waives subrogation against a third party before a loss. However, coverage is excluded from many policies if subrogation is waived after a loss because to do so would violate the principle of indemnity.”

Consider this incident. You hire a plumbing contractor who comes on your premises if plumbing issues arise. Rather than going to the truck and getting his ladder, he uses a ladder he finds in one of your storage areas. The ladder fails and he falls, breaking his leg. Without a waiver of subrogation, his insurer may pursue your insurance carrier for the cost of his workers compensation claim. While the waiver of subrogation won’t always prevent a successful claim, it helps in many instances.

A New Decade of Challenges Lies Ahead in Commercial Real Estate

This new decade will present many risk management challenges for CRE owners and managers. Insurance will continue to develop to meet the needs of the emerging risks faced by business owners. Working with an agent experienced in commercial real estate risk management can help you choose the broadest coverage at the most competitive price.

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