Hindsight is 2020
Looking Back on Last Year’s Top REI Insurance Claims
by Shawn Woedl
With 2020 in the rearview mirror, we can look back on the year and see what we learned. Last year proved that you cannot prepare for everything, but some of the most common insurance losses that happen across the real estate investment industry, year after year, can be mitigated or avoided completely with some planning and commitment. Let’s look at the most common claims submitted last year and some practices an investment property owner can follow to protect their valuable assets.
Cause of Loss #1: Wind/Hail
With a record-setting 30 named storms (more than two and a half times the annual average), it is no surprise that Wind claims increased 21% compared to 2019. Last year broke 2005’s record of 28 named storms, blowing through the assigned alphabetical names and moving into the Greek alphabet. While these storms certainly caused significant damage (especially those late in the season), they luckily didn’t reach the damage estimates of 2017’s Maria, Irma, and Harvey (more than $90 billion combined).
Prepare Your Properties for the Storm
If you own properties in the Southeast or along the Eastern Seaboard, you can take steps to prepare for impending storms and limit the damage your property may endure. Well before a storm hits, ensure you have fans, water pumps, cleaning supplies, and a portable generator on hand. You may consider installing permanent storm shutters, but a second option is to use 5/8″ marine plywood cut ahead of time to fit over windows. Tape does not prevent windows from breaking.
A well-maintained property can help mitigate damage. Be sure gutters and downspouts are secure and clear of debris. Keep trees and shrubs well-trimmed so they are more wind resistant. Be sure the battery backup for your sump pump is working to prevent drain backups.
When it’s safe to visit the property, you may find broken windows, holes in the roof, or standing water. Use tarps to cover openings in case of additional rain, or secure with plywood to discourage thieves from accessing the property. Water can cause mold to form quickly. Act swiftly to dry out wet items. Put furniture on blocks, remove area rugs, and bring in a water pump and fans.
Now is a great time to be sure your insurance policy covers Named Storms (a storm or weather condition identified by name by the National Weather Service). Some standard property policies exclude this cause of loss and require that it be purchased separately. Don’t be caught flat footed after the fact—review your policies now, before hurricane season.
Cause of Loss #2: Fire
Fire is one of the most avoidable causes of loss for investors but remains one of the most common.
Preventable Fire Losses
The COVID-19 pandemic meant more people were staying at home, which increased opportunities for negligent fire losses. Cooking is the leading cause of home fires, starting from either a grease fire that gets out of control or from unattended cooking.
It is critical (and often required by your insurer) that your properties, whether tenant-occupied or vacant, have working and well-maintained smoke detectors. They should be inside every bedroom, outside each sleeping area, and on every level of the home, including the basement. Have a plan to inspect them monthly and change the batteries twice per year.
Place fire extinguishers at readily accessible locations in the kitchen and other main areas. Fire extinguishers can help put out small fires before they become uncontrollable. Research the various types available and educate your tenants on their use, as well.
During colder months, heat sources can also lead to fire losses. Have all fireplaces and chimneys professionally inspected, and fixed if needed, before the cold season hits.
Space heaters should not be used as the primary heating source. If allowed, they should be equipped with safety features such as auto-shut-off, be plugged directly into an outlet, and never be left unattended or allowed to run overnight.
Cold weather and increased homelessness can also mean that vacant and renovation properties are more susceptible to squatters who need shelter. It is not uncommon to see a property burn because someone taking refuge there lit a fire to stay warm. Be sure the home is properly secured to keep them out.
Wildfire Losses
2020 was also a record-setting year for wildfires with more than 52,000 recorded fires from California to Colorado. Last year nearly 9 million acres went up in flames, almost double from 2019 and 2.3 million more than the 10-year average.
If you invest on the West Coast or within a mountain zone, there are regular maintenance practices that can create a “defensible space” around your properties.
Keep the area around the home clear of dead vegetation, dried leaves, pine needles, ground debris, and anything that will burn. Remove tree limbs that overhang the roof, and keep the roof and gutters clear of branches and debris.
Do not store combustible materials in or near the house and make sure vents are covered with 1/8″ mesh screen. Be sure the property has garden hoses long enough to reach any area of the home.
Cause of Loss #3: Theft and Vandalism
Vacant and renovation homes are always more at risk for theft, but the pandemic has heightened this risk. Many theft losses can be avoided by taking simple security measures.
Make thieves and vandals believe the house is being lived in. Set exterior lights on a timer or install motion-activated lights. A well-lit exterior may discourage thieves from approaching your property at night. Keep the yard cut and clean, and trim back trees and shrubs that may block views of the house and provide places for thieves to hide.
Make sure the property is properly secured—lock doors and windows and reinforce them with sturdy hardware. Use an alarm system with monitoring. If someone does break in, they may leave just as quickly if the alarm goes off. Lastly, monitor the property frequently, check the mailbox, and establish a good relationship with the neighbors.
Cause of Loss #4: Skip Rent
This is new on our list of top claims. National Real Estate Insurance Group offers a product called Tenant Protector Plan that (among other things) offers $1,000 to the landlord for rent lost due to a tenant who leaves mid-lease or is evicted. This is not a policy that offers coverage when tenants simply stop paying rent, as has been common this past year.
Between March and September of 2020, the majority of states issued some level of moratorium on evictions. In September, the CDC issued a federal order halting eviction for nonpayment of rent through at least January. It has been difficult to complete eviction judgments to vacate the property, and this reimbursement payment requires that the tenant no longer resides in the home.
It is thought that up to 40 million Americans (40% of renters in the US) could be at risk of eviction when the moratorium is lifted, more than ten times the annual average of 3.6 million filed evictions (less than half result in an eviction judgment). So, while we hope these numbers decrease, we do expect these claims to continue to rise through 2021.
Loss of Rents
Early in the pandemic, many clients submitted Loss of Rents claims as a result of tenants unable to pay rent. However, it is important to keep in mind that for most policies, Loss of Rents requires that the property sustained damage from a covered loss that renders the home uninhabitable. Many policies also contain a bacteria and virus exclusion and some are now even adding a specific COVID-19 exclusion.
Cause of Loss #5: Water
Water Damage claims for investors are most often the result of burst pipes during winter freezes and can often be completely preventable.
Insulate pipes on exterior walls, in crawl spaces, and the attic. Open cabinet doors to allow heat to circulate to un-insulated pipes under sinks and appliances, and let warm water drip overnight, especially for faucets on outside walls.
If the property is vacant, the heat should be maintained to at least 55 degrees and have someone check the property daily during cold snaps to make sure the house is maintaining heat. Prior to the first freeze, shut off the water at the street and drain the plumbing system.
Honorable Mention: Premises Liability
While liability claims are not as common, they can be expensive. The most frequent liability losses are slip-and-fall accidents with injuries that range from broken bones to paralysis, and even death. Slip-and-falls can be caused by uneven sidewalks, steps in need of repair, or absent handrails.
Be Proactive
To avoid liability and many of the property losses listed above, implement a scheduled maintenance plan for every property. Perform annual inspections. Communicate regularly with your tenants about your expectations of them and to understand the condition of the property, and promptly address unsafe or problematic conditions.
You want insurance to be there to help when the unexpected happens. But with years of catastrophic losses, rates are increasing across the industry. Investment properties that carry more risk are becoming more difficult for which to find affordable coverage. Keeping your claims history as clean as possible from preventable losses can help you stabilize your rates and keep your coverage intact in 2021 and beyond.
