Multifamily Insurance: Prices Keep Going Up, but Can You Afford Not to Have It?

Building on fire Shutterstock_474281881 It seems like there are stories published every day about how expensive multifamily insurance premiums are getting. With such large increases, it might be tempting to put off updating your existing policies or even cancelling them.

But the question remains, do you want to risk not having enough coverage should there be a devastating natural disaster or massive damage to your property? Do you not want to recover losses due to theft and injury? What if an employee sues you for wrongful termination or sexual harassment?

Although it is not required by law, insurance is your protection from such catastrophes. Nothing beats excellent coverage by a reputable company when you need it the most.

But it’s getting so expensive!

One of the primary threats to multifamily investment returns is rising insurance costs. Insurance premiums for this industry have significantly increased over the last two years, dating back to early 2021 and intensifying in 2022. And the trend will continue into 2024.

Multifamily investors have reported 40-50% increases in premiums and in certain cases, insurance premiums have doubled. In addition, apartment owners are also faced with increased deductibles and self-insurance limits.

Not only are apartment owners realizing a lower net operating income, but they may also face the inability to secure financing for new investments. Higher deductibles will require larger capital reserves, forcing some property owners to sell.

What is Multifamily Insurance and why is it so important?

When buying insurance, any residence larger than a single-family home and which can accommodate more than one family is considered multifamily. Multifamily rentals often have individualized standards for risk and coverage, which can be covered with multifamily property insurance. 

Multifamily insurance, sometimes known as apartment insurance, should protect you from potential liability claims, such as lawsuits, and cover you for lost rent income that you may experience after a loss covered by your insurance. 

Such losses may include:

  • Vandalism
  • Theft
  • Natural disasters, such as fires and storms
  • Loss of income from rentals
  • Advertising liability claims

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There are several different types of multifamily insurance:

Property Insurance

Property insurance protects against damage to the physical structure of the property. 

Coverage can be obtained per building if there are multiple structures on the property where each building has its own separate coverages and deductible(s). This can be helpful for big-ticket items like mold.

 Or, coverage can be obtained under a whole property policy that covers everything, regardless of the number of buildings. In either case, the actual face value of the policy will depend on the size and value of the property.

General Liability Insurance

General Liability insurance protects against claims for bodily injury and third-party property damage. For example, if a tenant is injured due to your negligence, you will be covered for damages, including medical expenses, lawyer’s fees and lost wages.

Umbrella Liability Policy

An Umbrella Liability policy is one that provides additional coverage over the stated business owner limits in order to ensure that there are no gaps in the General Liability coverage. For instance, this policy will provide coverage for acts of terrorism that may not be covered in a General Liability policy.

Business Income Coverage

When a property suffers damage that causes an interruption in the flow of normal business income, this coverage can provide protection. It can help you recover lost revenue and pay your expenses during the time it takes to repair your property and prepare it for the return of your tenants.

Based on various considerations, such as business income, sustained loss, waiting period and payroll limit, the amount of the policy may vary significantly from one property to another.

Employment Practices Liability Insurance (EPLI)

EPLI provides coverage to employers against claims made by employees alleging discrimination based on sex, race, age or disability as well as wrongful termination.

Flood Insurance

Depending on your property’s location, flood insurance may be a necessary type of coverage to consider. Standard property insurance policies typically do not cover damage caused by flooding, which can be a significant risk for multifamily properties located in flood-prone areas.

Workers’ Compensation Insurance

If you have employees working on your multifamily property, workers’ compensation insurance may be required by law in your state. This type of coverage can provide compensation for medical bills and lost wages if an employee is injured or becomes ill while on the job.

What is a small multifamily investor to do?

The small investor needs to have multifamily insurance almost more than the larger property owners who may have greater access to funds should a disaster occur. “Mom and Pop” landlords should work with their accountants to find the means to cover the needed insurance premiums.

There are economies you can take to lower your operating costs that will not affect your bottom line, such as carefully screening your potential tenants with an AAOA tenant credit check. Bad tenants will cost you in the long run with rental property damage, late rent payment, evictions, and vacancies.

The value of excellent insurance cannot be over-emphasized. This is one area where you should not shop by price. You want to choose a company that will respond quickly and work with you to get your building back to operating condition as quickly as possible.

As emphasized in Forbes, “Insurance is a must for commercial multifamily properties. The amounts and types needed are unique to the property and the market in which it is located…You should work closely with an experienced agent to determine coverages and deductibles.”