Lot Lines: A necessary evil in risk management

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I sometimes consider property insurance as a necessary evil. Many real estate investors, as well as homeowners, are asking questions about recent rate increases, which year-to-date are almost 9%. Insurance is an important tool to reduce risk and any change should not be taken lightly.

Real estate investment profit margins have taken a beating due to interest rate increases, and now significant increases in insurance premium rates are pouring salt in the wound. The answer to the insurance dilemma is finding the proper deductible that will maintain adequate risk protection while balancing an affordable premium.

Start your investigation by reviewing your current insurance policy to understand the coverage it provides. Identify areas where you might be over-insured or under-insured. Next, obtain quotes from multiple insurance providers to compare premium rates and coverage options. Different insurers may offer different rates and discounts, so it’s essential to explore your options.

Many insurance providers offer discounts when you bundle multiple policies together. Consider combining your commercial property insurance with other business insurance needs, such as liability or workers’ compensation.

Increasing your deductible (the amount you pay out of pocket before your insurance coverage kicks in) can lead to lower monthly premiums. Just ensure you can comfortably cover the deductible in the event of a claim. Evaluate whether you can absorb a certain level of risk yourself. For instance, you might consider self-insuring for smaller losses to reduce premiums.

Proactively reduce risks in your property by implementing loss prevention measures. This can include implementing security measures, fire safety systems, and disaster preparedness plans as well as regular property inspections, and employee training. Insurance companies may offer lower premiums for well-maintained, low-risk properties.

Your history of insurance claims can also affect your premiums. Try to avoid making small or unnecessary claims and prioritize safety and loss prevention. If you’re leasing your commercial property, thorough tenant screening can help you attract responsible tenants who are less likely to cause damage or pose additional risks.

Ensure that your insurance policy reflects the current value and condition of your property. Periodically update your policy to avoid over-insuring or under-insuring. Remember that while lowering your premium is essential, maintaining adequate protection is equally crucial. I would recommend consulting with an insurance broker who specializes in commercial real estate insurance. They can help you navigate the options and tailor coverage to your specific needs.

J. David Chapman is professor of finance and real estate at the University of Central Oklahoma ([email protected]).