Commercial property appeal

Six hurricanes in 2005 caused $57.3 billion in insured losses, according to Insurance Information Institute, with Hurricane Katrina alone accounting for $40.6 billion of that total. And while many of the stories in newspapers and consumer magazines regarding damage from last year’s hurricanes have focused on coverage issues related to homeowners policies, commercial establishments in coastal areas also suffered tremendously in 2005 from both property damage and business interruption losses.

Multiple warnings have been released by regulatory agencies, insurers and insurance associations urging homeowners to review their insurance coverage and prepare for a disaster scenario, but businesses also should carefully review their insurance plans, especially in light of the fact that Tropical Storm Alberto is bearing down on Florida as this issue of Insurance Journal goes to print.

Fitch Ratings recently reported that, like homeowners insurance in coastal areas, commercial property insurance rates are rising rapidly and availability is becoming tight. The ratings agency noted that “U.S. commercial real estate (CRE) values in coastal areas, and in particular smaller multifamily properties, may suffer as insurance companies reduce loss exposure to hurricane-prone areas by increasing premiums, raising deductibles, dropping coverage amounts and even dropping coverage altogether following the most active and most expensive hurricane season in 2005.”

According to Fitch, increases are running between 25 percent and 400 percent for windstorm and flood insurance premiums since the June 1 start of this year’s hurricane season. Deductibles, too, are rising, with increases of 10 percent to 15 percent of replacement value for renewals, compared to 2 percent to 5 percent last year.

Many commercial P/C insurance policies are negotiated contracts that may or may not cover flood damage, Fitch noted. Commercial flood coverage is available from the National Flood Insurance Program, but is capped at $500,000 for the building; an additional $500,000 in contents coverage can be purchased from the program.

Like flood insurance for homeowners, policies maintain a 30-day waiting period before the insurance is valid.

According to the I.I.I., excess flood protection provides higher limits of coverage than the federal flood program for flooding losses and is available from some insurers.

Because the commercial property insurance market has “changed dramatically,” since last year’s storms, Dallas-based Haynes and Boone LLP Insurance Coverage Practice Group (see page 12) recommends businesses closely scrutinize disaster and business interruption coverage currently available under commercial policies and negotiate the finer points carefully.