In a market and in a world of increasing risks, it is prudent for multifamily operators to have a firm grasp of their property’s exposure and correctly allocate precious resources. While insurance is an important tool “in the quiver,” there are a number of ways property managers can fortify their assets—both to the benefit of their bottom line and the resident body.
Heidi Much, vice president of risk management services at Village Green, believes that the industry is evolving in its perspective on risk management, and that certain elements that might have been under appreciated in the past are now being put on an even footing with more traditional approaches relating to insurance.
“We’re taking a more holistic approach to risk now than ever before,” says Much. “We’re not just looking at the physical building and the people, but we’re looking at the business risk as well. Cyber liability is a business risk. We’re looking at contractual risk. We’re looking at financial risks from the standpoint of: can I re-finance this property?”
In terms of specific methods for securing such areas of exposure, Much offers suggestions for property owners that encompass technological and contractual liabilities, guaranteeing a continuity of operation if and when mishap strikes.
“Try and assess where you have the exposure,” says Much. “Do a full audit of your IT. Do an audit of your third-party contracts. Try to assess where, if something goes down, you [can] still operate your business.”
However, insurance is certainly not something to be undervalued, and many operators are finding that the relevance of proper insurance is more pronounced in recent times. In terms of what types of insurance are the most effective in securing a property’s most valuable assets, opinion varies—and there are always nuances to each company and each community.
Scott Woodward, risk management director at Trammell Crow Residential, notes that while there is diversity in what operators choose to prioritize, certain fundamental forms of insurance are constant across most apartment communities.
“I think [it] depends on your perspective, but it would seem that at the top of everybody’s list is life safety, followed closely by first-party catastrophic loss, and for a developer, it would be the construction defect exposure,” says Woodward.
Much agrees and says that, from her perspective, there are two main lines of insurance that are essential to most every property, and that these often fall under the umbrella of a landlord’s insurance package.
“Each property buys things like all-risk property coverage, which would respond to the physical damage to the building,” says Much. “They would buy liability insurance and some form of umbrella coverage, which would reply to bodily injury of a third party or property damage of a third party. Those are kind of the two primary insurances that encompass landlord’s insurance right now.”
Yet while this type of package certainly covers much ground in terms of liability, it should not be viewed as the be-all end-all for one’s property. Steve Sachs, executive vice president and director of real estate and hotel practice at Willis Group, believes that insurance—like anything else—should be viewed as a unique business decision, with various elements coming into play.
“Whereas insurance is often looked at
as uncontrollable, I think really good owners look at it as just another operation,” says Sachs.
In terms of how to approach such an operation, Sachs offers his perspective on the basics of having a sound insurance and overall risk management policy.
“In my experience, I look at insurance as two prongs,” says Sachs. “One is finance—you’re transferring risk and making sure that when something happens, you [are able to] get off the ground. The other side is operations—identifying what are the right things that, if I do them well and often, I’m going to reduce my risks without increasing my cost.”
With regard to how the financial side is covered, many property managers have discovered an edge by requiring their tenants to purchase renters’ insurance. While some state laws prohibit this, such a tool is becoming more widely accepted in the industry by limiting loss on the landlord side of the equation, placing things like kitchen fires and break-ins under the tenant’s policy.
“My gut thought is that it’s going up because it’s a good risk management tool,” says Sachs. “The offset is that, for one, you can’t do it in low-income housing because there are often restrictions to requiring it, and you have to be able to require it. If you don’t require it, it’s not going to happen.”
Much agrees that such a requirement is necessary and that industry and resident acceptance is becoming more widespread, diminishing anxiety about a potential competitive disadvantage.
“I can only look from my own portfolio, and although Village Green has required renters’ insurance since 1993, we are much more diligent today than we have ever been about ensuring that residents actually have the coverage,” says Much. “It’s just a smart business decision, and residents aren’t balking at it anymore, because everybody’s doing it.”
Yet while the loss that could materialize from not having renters’ insurance is considerable, Much notes one area in which potential loss and liability is becoming profound—motivating industry insiders to revolutionize their outlook on risk and be prepared for threats that, years ago, would not have been conceivable.
“I think getting our arms around what cyber risks are out there is probably what’s on everybody’s front burner at the moment,” says Much. “Trying to identify where there are IT exposures… is probably kind of the highest-ranking issue in multifamily right now.”
Woodward believes that the prospects for cyber threats are very real, although in his mind, threats to multifamily IT systems are in the “gelatinous stage” and insurance companies have yet to create products to address such a problem. As such, the onus is still on third-party vendors to “transfer that risk through contractual indemnity.”
“There are insurance products that seem to be adequate, [but] I just don’t know that everyone’s convinced that it’s for them,” says Woodward. “And it stems from
history—we’re not seeing a lot of loss in this area. Everybody recognizes the exposure, though. We’ve seen it in other industries; we certainly give it the attention it deserves.”
Apart from keeping resident data and company records safe, another element relating to cyber security is the fact that many rent payments are now being paid electronically, posing an immediate threat to revenue and creating an impetus for multifamily operators to take IT threats seriously.
“There are a lot more landlords that are appropriately being paid through ETF or credit cards, and any time you have that information, there’s a risk of being hacked and having records stolen,” says Sachs. “So the question here is… every small business is exposed to this. And the reality is it’s a business for criminals. There are people who are looking for easy entrees.”