When selling habitational insurance—the line that offers coverage for owners of condos, apartment buildings and other multi-unit dwellings—one of the crucial mistakes an agent or broker can make is assuming that all equipment-breakdown coverage is alike.

So those looking to avoid an errors & omissions problem need to understand the importance of securing coverage with a carrier that has a product that can be specifically tailored to meet all of an insured's equipment-breakdown needs, advises Carmen Suarez, underwriting manager for Preferred Property Program, a subsidiary of JGS Insurance, Holmdel, N.J.

“An insured can experience a catastrophic loss due to mechanical failure if, at time of loss, the proper coverage, including loss of income, is not in place,” Suarez says.”Our equipment-breakdown policy written through CNA provides this valuable comprehensive coverage.”

Pete Romano, senior vice president and department manager for Lockton Cos. LLC in Denver, agrees that purchasing the right boiler & machinery policy is essential for owners, noting that “when there are claims, they can be in the hundreds of thousands of dollars. Lockton's habitational clients are large apartment owners and managers, so [the proper boiler & machinery policy] is a requirement for them.”

Romano adds that standalone boiler & machinery policies are one of his company's more profitable lines of business.

But selling standalone coverage in the equipment breakdown area has become “extremely challenging,” says Suarez, because of generic, “boilerplate” package deals: the boiler & machinery part of commercial property/casualty is now typically included as an add-in for minimal or no additional cost with the master-property coverage that is required of an apartment owner by lenders.

The challenge for producers, then, is to work closely with their clients to help them determine whether this standard boiler & machinery language truly offers the coverage they need—or leaves them exposed to unexpected—and expensive—risks.

Boiler & Machinery Trend Alerts: Thermal Imaging; Green Is Red Hot

Boiler & Machinery coverage requires safety inspections to be done, and some carriers, to differentiate themselves, are offering a high-tech freebie: thermal imaging, which allows building owners to find hotspots in electrical equipment by virtually seeing what's going on behind the walls, Romano says.
Some insurance companies are trying to differentiate themselves in this arena by offering policy enhancements or endorsements to provide free equipment upgrades that would allow a habitational property to get certification as a “green” or LEED certified building—at no extra cost, Romano says.

“The green movement is definitely catching on,” he says. “This is a big deal for owners and managers.”

Suarez agrees that carriers have caught on to the “need to be green,” she says. As an added incentive, many carriers will pay for green-equipment improvements up to an additional pre-set dollar amount, or an additional percentage over policy limits, at no additional cost to the insured.

EIL Explosion

Five years ago, only five major carriers were writing pollution or environmental-impairment liability (EIL) insurance—and only with basic black-and-white coverage.

“Now there are over 30 carriers in the market, writing cover that has broadened significantly, and prices have come down,” says Sharon Burger, assistant vice president and environmental-risk specialist for Lockton Cos. “It's still a discretional purchase in most instances, but a lot more clients are choosing to purchase it now. That's a very dynamic change.”

As in the boiler & machinery segment, the highly competitive EIL marketplace also has insurers offering green-materials endorsements to set themselves apart and lure clients, says Burger.

And green is a top concern among habitational owners today. “There's a big push in that sector,” says Burger. “[Owners] can attract renters as a LEED-certified property,” she says, referring to the Leadership in Energy and Environmental Design program, which rates buildings based on how sustainable they are to build and operate.

The Dirt on Mold & Other Pollutants

Mold is a major pollutant that habitational owners probably think they have coverage for—yet mold is generally excluded on general liability policies and limited, if listed at all, on property policies, Burger says. “There are all kinds of caveats. Usually when people think about pollutants, they are thinking about industrial-type chemicals, but really the definition of pollutant is broad and includes mold and bacteria.”

Catastrophic occurrences, like last year's oil spill in the Gulf of Mexico and more recently, Hurricane Irene, which battered much of the eastern United States in August, can also cause EIL claims, says Suarez of Preferred Property Program.

“Many toxins and pollution can be carried onto the premises through flooding or even heavy rains. The cost to remove these toxins would not be covered under a package policy,” Suarez says. “In today's world of mergers and acquisitions, real estate companies need to be aware they may be acquiring more than just a building or vacant land—they may also be acquiring hidden pollution exposures such as contaminants from prior operations or neighboring properties.”

Suarez advises that owners need to purchase first-party coverage for themselves and third-party coverage for adjoining properties. They should also make sure coverage is provided for known and unknown, or historical exposures, such as leaking underground-storage tanks. Common exposures include herbicides, pesticides and pool chemicals.

Preferred Property Program has an Environmental Impairment Program underwritten through Greenwich Insurance Co. that is designed to specifically meet the needs of habitational real estate's pollution/environmental exposures, Suarez says.

Another area of pressing concern in habitational insurance is the potential of older buildings to contain hazardous substances, especially lead paint, which can be covered under a pollution policy, Burger says. She notes that the Lead Renovation, Repair and Painting rule passed in 2010 by the Environmental Protection Agency requires that a lead-based certified contractor perform renovations to pre-1978 habitational buildings. And some lenders do require a pollution policy for older buildings.

EIL Trend Alert: Breaking Bad (Meth Labs)

Another burgeoning issue addressed by EIL coverage is the problem of clandestine methamphetamine labs, which “barely existed” a decade ago and are “incredibly toxic” and expensive to clean up, Burger says. In the not-too-distant past, methamphetamine clean-ups were predominant only in certain pockets of the country where. “But now it's just spreading,” Burger says.

A coverage enhancer called Crisis Response Coverage, available in Umbrella and Pollution policies, can protect meth-lab clean-up issues, and carriers are starting to use this to differentiate themselves in the market, Burger says.

But because there's so much growing competition in insuring this space, a lot of carriers are updating their standard forms to simply reference methamphetamines in their coverage.

Easy In, Easy Out—But Only Experts Thrive

The Habitational field is a very easy business to get in and out of for carriers, says Steven Gross, chairman and CEO of Metro Insurance Services Inc. in Springfield, N.J. The agency specializes in multifamily residential properties through its long-standing partnership with Chubb Custom Market Inc., a division of The Chubb Group of Insurance Cos.

“During the soft market, to the extent that a carrier wants to increase its top line, all they have to do is open the faucet for habitational business—and they get plenty of it,” Gross says.

But Habitational does require a special expertise, Gross says. And Metro believes it has gained plenty of it through its coverage of literally “thousands of customers” through Chubb's multifamily policy package that includes apartments, condo associations, and large multi-unit residential properties in the 48 contiguous United States. The minimum premium is generally $25,000 or more, offering P&C, auto, workers comp, an umbrella policy and machinery breakdown. The package also offers special enhancements.

Metro is starting to see some displacement of business in the package-policy area, Gross says. “A lot of carriers seem to be getting some religion and are being much more careful on risk selection,” he says. “As a result of that, we're seeing a lot more new business submissions.”

Typically, Gross says, a new carrier will start out writing a lot of business, “get killed in respect of losses,” then exit the business very quickly. “What we're seeing now is the result of the carriers that jumped in a couple of years ago and are not getting the results.”

COMMERCIAL UMBRELLA

Robert Mackoul For Commercial Umbrella, Metro turns to Mackoul & Associates Inc. of Long Beach, N.Y., which has been working with co-op and condominium clients in the New York metropolitan area for some 25 years, with more than 700 clients, says Chairman and CEO Robert E. Mackoul.

Mackoul & Associates is among the top 20 retail insurance agencies serving habitational clients in the New York metropolitan area; some 85 percent of the condo associations in the New York City region divide their business among these agencies. Mackoul has a spinoff agency just for commercial umbrella, New Empire Group Ltd. of Island Park, N.Y. New Empire's commercial umbrella coverage limits begin at $1 million with options up to $100 million for most real estate risks. Limits vary in different parts of the country.

“If you want to write business in New York City, almost every condo or co-op carries limits of $50 million to $100 million,” Mackoul says. Chubb or Chartis Inc. would supply the first $25 million of coverage, with New Empire layering on the umbrella cover in increments of $25 million, he says. Co-ops or condo associations in other big cities like Chicago or Boston would need to carry similar high limits. For the rest of the country, the limits most often fall in the $5 million to $25 million range but can go up to $50 million, he says.

“In New York, if somebody has a lawsuit, they have their attorney on speed dial. In Ohio, Idaho, Indiana, Iowa and such, it's more likely that they will pick themselves up, brush themselves off and say, 'We've got to be more careful next time,'” Mackoul says.

Personal Service

With the continued soft market in habitational umbrella, Preferred Property is focusing on providing high-quality customer service to its clients as one way to differentiate itself, Suarez says. During the aftermath of Hurricane Irene, for example, the company, which itself was hit with flooding and power outages, remained open to assist its agents and brokers, using just a single generator to power phones and computers.

Such dedication to customer service is being noticed by Habitational insureds, says John Holt, director and community association manager for HOAMCO, the Homeowners Association Management Co. in Prescott, Ariz. HOAMCO services some 45,000 homeowners in associations throughout Arizona and New Mexico.

“Every association is like a snowflake,” Holt says. The one common concern among them is pricing and services. “These associations are all dealing with the same problem: trying to maintain costs to keep dues at an appropriate level.”

Some are increasing deductibles to keep their rates down; they can't reduce coverage because it's mandated. But associations will switch insurance agencies for a good price-and-service-combo, Holt says.

“We've moved a number of association accounts to a new or a local insurance agent that just bends over backwards for them,” he says. “Local folks are much more helpful and know the market.”

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State of the Market: Key Trends in Habitational Insurance

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