The market for real estate casualty coverage is tightening significantly both for primary and excess with fewer standard markets willing to provide coverage. Rates, retentions and deductibles are all heading higher as claims costs and jury verdicts rise, particularly for habitability claims in California and action-over claims in New York City. To avoid those kinds of claims, underwriters are putting much greater scrutiny on submissions, particularly in litigation-prone areas. In such a fluid market, communication ahead of renewals is critical to manage client expectations. As placements become more challenging, working with experienced wholesale brokers is the key to finding the best coverage options.
A HARDENING MARKET
Real estate, particularly habitational coverage, has been hardening more rapidly than the rest of the market. Rising losses have brought on an overcorrection after years of underpricing by carriers in the soft market. Some standard markets have pulled back or stopped writing coverage for housing rentals, including single-family homes, multi-family apartments as well as student, senior and government-subsidized housing. Carriers are also much more conscientious of the coverage they provide for construction activity within habitational risks, such as maintenance and remodeling at apartment buildings, particularly in New York.
The pullback by standard markets has forced more insureds to turn to the wholesale market, where excess and surplus carriers are taking a firmer stance on habitational coverage. In the wholesale market, however, some carriers had stopped writing new policies toward the end of 2020 or raised prices and restricted terms. As prices rise, some additional markets are beginning to look at real estate casualty, but at prices they deem would compensate them for the risk.
While the market had been firming in the last two years, the trend has accelerated. Past underpricing and “social inflation” – the propensity for rising verdicts tend to lead to increased expectations for settlements – have both played a role. Claims and verdicts have been on the rise, particularly in jurisdictions where courts tend to be more favorable to plaintiffs.
Among the states, California remains particularly difficult due to the escalating verdicts in cases where tenants allege their rental housing does not meet state habitability standards. A New York law allowing action-over claims has made New York City particularly challenging. Insurers have grown wary about Georgia and south Florida due to the overall legal climate in those states, as well. In the Miami-Dade area, insurers have seen significant increases in claims, and some carriers are exiting south Florida. Areas of south Texas also have become more difficult. Outside the East and West Coasts, habitational coverage may be more readily available, particularly for small, one-location schedules as large portfolios held by institutional investors are seen as a more tempting target for litigation.
On the West Coast, markets are watching the escalation in jury verdicts in a rising number of habitability lawsuits, particularly in urban areas. Such lawsuits involve allegations that building owners are not keeping buildings habitable, whether that be due to insects, vermin, lack of hot water or heat, or poor maintenance. Law firms specializing in these claims often seek to put together class action lawsuits in large complexes. Habitability claims that in the past would be settled for less than $5,000 per tenant, now often bring demands above $25,000 per occupant. While California is currently the focus for habitability claims, carriers are concerned that the lawsuits and claims could spread to more states.
Among large California verdicts, a jury awarded $1.6 million in April 2018 to a single family in a Los Angeles County habitability case alleging bedbug infestation in the largest U.S. bedbug award to that date.1 A 2015 Los Angeles County habitability suit involving nearly 100 tenants was settled for $2.18 million in a case involving allegations of cockroach infestations as well as heating, plumbing and electrical problems.2
In New York City, insurers are concerned about the risks posed by construction work within rental apartment buildings and are imposing stricter contractor requirements along with restrictions and penalties. The major risk is a state law permitting action-over claims that allows an injured party to file claims on both workers’ compensation and general liability policy. New York’s so-called “Scaffold Law,” or Labor Law Section 240, imposes absolute liability on property owners, construction companies and contractors for accidents involving falls at construction sites. For claims involving falls in New York City, high six-figure payouts on both worker’s compensation and general liability policies are not uncommon.
The risks of such claims have created a limited marketplace for Labor Law and action-over coverage and have led to significantly higher pricing. To manage potential losses, insurers are mandating that apartment owners require contractors to have higher limits on their policies and cleaner coverage forms. Insurers have become much stricter on these requirements. In the past, insurers might assess a rate or deductible penalty if a loss was due to a subcontractor with insufficient coverage. Now, more carriers are moving to a “hammer” clause to deny coverage if contractors fail to meet their requirements.
RATES, RENEWALS, RESTRICTIONS
Better in class risks are seeing renewals with single- to double-digit increases, and 20 percent increases are not uncommon for E&S coverage. Accounts that have been non-renewed by standard markets or have had their submissions rejected are seeing steeper increases. Large accounts that have been non-renewed by standard markets may expect a doubling in rates when they move to the E&S market. To manage their insurance costs, some insureds are opting for lower limits if their lenders do not require them to maintain the same level of coverage.
In addition to higher prices, more stringent coverage restrictions have become common. Insurers are adding exclusions for habitability and assault and battery. Exclusions for abuse and molestation have become very common. The exclusions often depend on the crime scores for a particular property. Locations with better crime scores may still be able to obtain assault and battery coverage but those with worse scores will find it more difficult.
Carriers are also seeking to put sub-limits on coverage for those perils. Those sub-limits, however, limit excess coverage as the excess and umbrella layers will not drop down over a sub-limit. That leaves clients with just the sub-limit in the primary policy. Carriers are also reducing aggregate coverages, offering just one limit for all properties rather than full coverage and individual aggregates for each property. Carriers may also put a cap on the overall policy, which would allow full coverage for each property only up until the overall cap.
Insureds that used to purchase first-dollar coverage are finding that far more expensive or simply unavailable. Higher deductibles generally provide more coverage options as many carriers push for higher retentions. More markets will be willing to look at a $25,000 to $50,000 retention than a $5,000 deductible. Some carriers in the E&S market will not consider a risk with anything less than $100,000 self-insured retention (SIR).
E&S markets are showing greater reluctance in the lead $5 million of excess coverage due to escalating claims. That makes it more difficult to fill out the first $10 million of excess coverage and requires more carriers to participate. This reluctance reflects the impact of social inflation as claims greater than $1 million have become more common, making it more likely that a carrier in the lead excess position will experience claims.
Underwriting has become far more painstaking. Underwriters are looking at properties in much greater detail, often scrutinizing every location in a schedule along with their crimes scores and COPE information (construction occupancy protection exposure). For instance, underwriters are assessing information on egress, fire alarms, pool fencing and crime scores for every property. The risks of loss posed by neighboring properties and the surrounding area are also a factor. Buildings higher than four stories are drawing particular scrutiny.
In addition, underwriters are more thoroughly reviewing Section 8 and Section 42 housing as well as the extent of care provided by senior housing, that is, whether the properties are simply restricted to owners 55 or older or if there are more extensive health and meal services. Most carriers are reviewing student housing more thoroughly and putting caps on coverage amid concerns about claims involving parties and alcohol.
Insureds should expect the hardening trend in the real estate market to continue for at least another six to nine months if not through all of 2021. More standard markets may pull out, putting more renewals in jeopardy. Retail brokers should closely evaluate where the market is heading on every risk as more schedules are likely to have to turn to the E&S market. Clients should be prepared for the market reality, which includes substantial price increases and stricter terms. Submissions need to be very thorough. Underwriters are more likely to consider submissions that provide greater detail on all properties within a schedule.
In a hardening market, communication with insureds is a must to manage expectations ahead of renewals. To get the best coverage, retail brokers should keep well ahead of real estate accounts and start the renewal process at least 90 days out. In a rapidly changing and often-challenging market, it’s crucial to work with experienced wholesale brokers that have relationships with a wide range of markets as appetites may change on a daily basis. Contact your CRC Group producer for more information.
- Jeff Coles is a Broker and Team Leader of LA Casualty Team 1, located in Los Angeles and is a member of the Casualty Practice Advisory Committee.
- Michael McCall is a Broker and Team Leader of LA Casualty Team 1, located in Los Angeles and is an active member of the Casualty Practice Group.
- Austin Printz is a Casualty Broker in CRC’s Los Angeles, California office and member of the Casualty Practice Group.
- SoCal family awarded $1.6 million in bedbug lawsuit, NBC, April 3, 2018, https://www.nbclosangeles.com/news/local/SoCal-Family-Awarded-16-Million-in-Bedbug-Lawsuit-478709533.html
- Tenants win $2M midtrial settlement with landlord over condition of apartment building, ABA Journal, May 4, 2015. http://www.abajournal.com/news/article/tenants_win_2.18m_mid_trial_settlement_with_la_landlord_over_condition_of_a