Habitational Market Sector Breakdown
In the U.S., there are 48.5 million rental units. Research from the 2015 Rental Housing Finance Survey identifies two primary types of ownership:
Individual investors – This group owns 22.7 million units spread over 16.7 million properties. The tendency for individual investors is to own single-family and duplex rental homes.
Business entities – These operations organize primarily as limited partnerships, limited liability companies, or limited liability partnerships. Their holdings represent 25.8 million units, which consists mostly of multifamily rental inventory.
Multifamily Real Estate Outlook
Here is an excerpt from the CBRE Multifamily 2020 U.S. Real Estate Market Outlook
Mild Slowdown in Apartment Demand
The overall multifamily vacancy rate likely will rise by 20 bps to 4.5%, still below the long-term average of 5.1%. Rent growth will edge down to 2.4%, under the long-term average of 2.6%.
As a result of slower economic growth, apartment demand is projected at 240,000 units in 2020. That is 20% less than 2019’s estimated 300,000 units. Millennials will continue to move into homeownership, albeit at a modest pace due to affordability issues. Nevertheless, multifamily demand will remain sufficient to absorb most of the new supply and to lower concessions in oversupplied markets.
Although the CBRE report is not dated, it was most likely written before the full onslaught of changes brought on by the Covid-19 pandemic. As with all business models, the effects of Covid-19 are difficult to predict until it abates or is brought under control. Therefore, it’s advisable to take the timing of the report’s predictions under consideration when using it to inform your planning.
What Is Habitational Insurance?
Habitational insurance covers risks to commercial residential properties, including apartment buildings, rented houses, condominiums, homeowner associations, and more. Owners of rental properties face an unusual combination of hazards. That's because they have risk exposures for rental properties such as apartment and condominium complexes, but also for the people who occupy them. As such, habitational insurance blends components of homeowner insurance and business insurance with a variety of liability concerns.
Who Needs Habitational Insurance?
The responsibilities for landlords go beyond insuring and managing their businesses, and the building and units they rent to tenants. They also have liability exposure from tenants and their visitors, and from those employed in the service of maintaining their rental properties.
There is a simple litmus test for who needs habitational insurance. If a person or business owns rental property, they need some form of coverage. The gamut of those who require habitational insurance runs from renting one room to a single tenant to operating multiple apartment complexes. The bottom line is if someone rents space of any size or housing configuration to one or more persons, habitational insurance is advised. In some cases, it is mandatory to protect against the range of risks associated with this type of business.
The following list includes typical prospects for habitational insurance:
● Single-family home rentals
● Duplexes
● Apartment complexes
● Condominiums and townhomes
● Co-ops
● HOAs
● Multifamily housing units
● Hotels and motels
● Bed & breakfasts
● Mixed-use residential and commercial buildings
● Boarding houses
● Student dormitories
- Timeshares
What Does it Cover?
Habitational insurance covers commercial residential properties. Its coverage includes many unique aspects not found in a standard property insurance policy. Habitational properties, such as those listed above, have comparable risks and needs for property and liability insurance. Most policies cover fires, slips and falls, vandalism, water damage, hail, explosions, building codes, pollution, vehicle damage, theft, windstorms.
Here are details of some usual risks covered under habitational insurance:
● General liability: It covers legal fees and medical bills for injuries sustained by tenants and visitors to the property. It also protects against claims of reputational harm and advertising injury.
● Wind, fire, and storm damage: Makes payments for cleanup and remediation for property damage and destruction caused by wind, fire, or storm. Flood and earthquake coverage is generally available and recommended for locales with known exposure to those risks.
● Loss of income: Like business interruption insurance, this coverage replaces the loss of income (rent) due to occurrences written into the policy. It may cover ongoing expenses such as employee salaries and other costs incurred during the remediation period.
● Vandalism and theft: Damage due to vandalism is often expensive to repair. Theft coverage protects insureds against losses to the property of others that are on the insured’s premises or in their possession.
● Signage: Standard habitational property insurance does not always cover damage to outdoor signs. When included, it covers damage from fire, wind, theft, and vandalism.
● Equipment breakdowns: Protects against damages to physical equipment and technology due to internal forces. These include power surges, electrical shorts, mechanical breakdowns, motor burnout, and operator error. Damage caused by external forces, such as wind and fire, is covered by commercial property insurance. Physical damage to computers is covered, but the software that runs on them is not. Software requires cyber liability insurance.
- Environmental cleanup: Covers losses due to damage from exposure to pollution and includes financial loss due to clean up and, or third-party liabilities.
Apartments & Condominiums
Apartment building insurance protects from losses due to damage caused by tenants, pets, vandalism, natural disasters, and other named hazards. These policies offer coverage for public spaces, mechanical issues associated with the structures, and office spaces designated for apartment management use. Coverage extends to clubhouses, swimming pools, garages, carports, and other related structures.
These coverages are typical of those offered by Apartment Insurance Consultants (AIC), which you can find in the Program Business market directory. To provide a representative example, here is some of what is included in AIC’s program for apartment insurance:
Replacement cost, Agreed Amount, No Coinsurance, Blanket Limit per Location, Building Ordinance or Law Coverage A, B & C included, Extended Period of Indemnity for Loss of Rents, General Liability Limits of $1M/$2M, Non-Owned and Hired Auto Liability, Excess Liability limit of $10M, Boiler and Machinery and Terrorism Included, Real Property Including Fences, without excluding Carports, Signs, Storage, and Pools.
Condominium association insurance offers insurance coverage for public spaces, mechanical issues associated with the condominium, and office spaces designated for condo use. It also covers clubhouses, swimming pools, garages, carports, and other structures.
A typical set of coverages for condominium insurance from AIC includes:
Replacement cost, Agreed Amount, No Coinsurance, Blanket Limit per Location, Building Ordinance or Law Coverage A, B & C included, Extended Period of Indemnity for Loss of Rents, General Liability Limits of $1M/$2M, Non-Owned and Hired Auto Liability, Excess Liability limit of $10M, Boiler and Machinery and Terrorism Included, Real Property Including Fences, without excluding Carports, Signs, Storage, and Pools.
Directors and Officers Insurance
Directors and Officers (D&O) insurance policies typically cover the board members of a condominium’s Homeowners Association (HOA). Coverage can extend to cover HOA employees, committee members, and volunteers. However, exclusions are possible. For example, a D&O policy can expressly exclude non-owners. And it can also be written to exclude legal claims against former members who are no longer serving on the board. D&O policies typically pay the legal costs and fees to defend HOA board members against legal claims brought against them, including paying judgments assessed. D&O policy provisions can differ. For instance, they may or may not cover legal costs in the event of a settlement.
Coastal Properties
A commercial rental property’s distance to the shoreline affects the coverages offered through habitational insurance programs. Agents seeking to write insurance on commercial rental properties near the shore need to understand the unique risks associated with coastal properties. Or better yet, they can work with a specialized program business provider. That is one that has the markets and extensive experience and expertise in insuring coastal properties, which will help them to quote competitively and thoroughly.
For their peace of mind, clients need to understand their coverage options. They want to know if they have enough coverage. Is the coverage they have adequate for their coastal properties? What options are available? How much will this cost? Should they have additional coverage? Answering such questions gives clients the confidence they are purchasing coverage that will protect their investment in the event of a coastal disaster.
Timing is critical regarding insuring coastal properties. Coastal habitational insurance must be in force before the advent of a hurricane. Clients who wait until a hurricane or other impending natural disaster is announced may find their properties are excluded from current conditions. This also applies to renewing lapsed policies.
General & Excess Liability Policies
Commercial rental property owners need general liability insurance. Also known as commercial general liability (CGL) insurance, it protects a business against lawsuits over claims of property damage or bodily injury. A CGL can either be a standalone policy or come as part of a bundle of coverages included in a Business Owner’s Policy (BOP).
Besides property damage and bodily harm coverage, a CGL policy pays legal costs in instances of reputational harm. Which is when a business is sued for libel or slander. It also covers the costs to resolve claims of advertising injury. That happens when another business claims the insured’s advertising resembles theirs too closely and is hurting their business as a result.
Commercial general liability insurance helps to cover costs for:
● Legal teams to represent the business
● Witness fees
● Evidence costs
- Judgments or settlements
Excess liability is additional coverage that applies in instances when the limits of the underlying liability policy reach its limits. While excess liability will cover losses included in the underlying policy, it excludes any claims not covered in the underlying policy.
Habitational Insurance Costs
The spread and variety of risks that fall under habitational insurance coverage are too great to pinpoint actual costs. That said, there is no doubt markets are turning hard with carriers limiting capacity or, in some cases leaving the market altogether. In the past two years, there have been large scale losses due to costly hurricanes and wildfires along with significant hail claims. These experiences are pushing rates higher now, substantially.
The Reshield blog indicates three steps insurers are taking now to limit risk in habitational exposures:
- Carriers will decline to write coverage for the property, the liability, or both.
- Carriers may exclude certain types of coverage, for example, removing endorsements for replacement cost coverage and replacing coverage with a more restricted form.
- Carriers will limit their exposure by offering reduced limits of property and/or liability coverage.
Best Habitational Insurance Programs
Agents seeking to provide their clients with the best habitational insurance programs should partner with experienced underwriters. Listed in the Program Business market directory, Apartment Insurance Consultants (AIC) is a top choice.
In 1992, AIC formed the first group property program in Texas. With over 30 years of underwriting experience, AIC has seen changes in the insurance industry and grown to meet those changes. Its concentration is in the gulf coast states and the southwest.
AIC uses traditional risk strategies to provide competitive packages and rates and to maintain its leadership in the habitational insurance industry. It also uses alternative risk strategies to develop and implement niche programs designed to meet the needs of its clients.