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What to do when your insurance runs out.

What to do when your insurance runs out

Insurance Solutions

This is the first of a series of columns that will deal with insurance matters of vital interest to every real estate developer, owner, manager, cooperative and condominium board member. Because insurance premiums account for a substantial portion of every building's budget, is imperative that the value of your insurance portfolio be maximized: that the coverage be as broad as possible at the lowest possible cost. These columns will address a variety of insurance coverages: their benefits versus their costs. We hope you will find this series to be both informative and timely. This month's subject is public liability and umbrella coverage.

George Blackstone was already agitated with the problems of his two half-vacant apartment buildings when he spotted a post office notice in his morning mail advising him to pick up a registered letter. He assumed it had to do with "the fire," a term which had come to plague him. Eight months earlier, a two-alarm blaze caused come by a faulty electrical connection had seriously injured a family of four living on the top floor of his building. And George had just learned that the father was going to be re-hospitalized. Not only was George enduring the anguish of seeing the pain and suffering of this young family, but he also confronted the prospect of interminable litigation of a negligence action demanding almost $1 million in damages.

A Second Claim

Later, as George read the letter, he felt his hands begin to tremble. His insurance carrier's law firm was advising him that the attorney for an elderly woman who had slipped in the basement laundry room of George's other building the month before was demanding $500,000 to settle her injuries. This sum, combined with the probable costs of the claim from the earlier fire, would exceed this year's limit of $1 million on his public liability policy. He was on his own for the excess amount and had better retain "independent counsel."

Enough! This, you are thinking, is a rather heavy-handed way to start a monthly column of sound, sensible insurance advice. But let's "get real" right from the start: if your insurance portfolio doesn't provide the peace of mind to conduct your business free of the fear of unexpected, catastrophic losses, then it's just about worthless.

In future columns we will address some of the traditional coverage issues of particular interest to real estate owners and managers, not the least of which is controlling the cost of proper protection. But we hope not to turn this into a dry primer on the ABCs. We want to relate to the real world of protecting the assets and income stream of a real estate enterprise - particularly at a time when so many building operations are being battered by economic and social forces beyond management's control.

Why is 1986

Different from 1973?

Back to our friend, George. At the risk of dismissing too quickly the emotional side of this tragedy, our assignment here is to address the legal and financial problem. It sounds as if George's insurance protection was as faulty as his electrical connection. For many years public liability policies for building operations were written on an occurrence basis. This meant simply that the amount of insurance purchased, say $1 million, would be available for 12th incident, no matter how many. There was no limit to how much the carrier would pay in total for accidents which occurred during the 12-month term of the policy, subject only to a maximum of $1 million for any one claim. In technical language, this arrangement of coverage is known as the "1973 Occurrence Form."

Now flash forward to the 1980's. Insurance carriers are being inundated with unanticipated claims from every quarter. Huge sums are being awarded for damages and injuries caused by products manufactured years ago, medical procedures conducted or drugs prescribed sometimes a generation ago, not to mention pollution and oil spills. How has all this affected George?

Striving to "contain," or at least more accurately predict the future costs of losses, George's carrier, along with many of its sister carriers, has been issuing policies on the new "1986 Form." This revision introduced a "general aggregate" which capped the total obligation of the insurer for all claims during the policy term. In poor George's case, and typically, that aggregate amount is the same $1 million applicable to any one claim: the fire and the laundry room fall happened in the same policy year, and the policy limit is used up. And of course, nothing is left to pay future claims this year!

What this Means for You

The good news for the smart insurance buyer is that George's coverage dilemma could have been avoided in three ways:

1. Use of the 1973 Form:

Insurance buyers today can exploit the benefits of a "soft" market in which carriers, competing for the premium dollar, are willing to make concessions to win or retain business. Good negotiating might have convinced George's carrier to issue his policy on the old 1973 form, which is still permitted.

2. Aggregate per Location:

Even if the carrier had insisted that they must use the 1986 form, they might have been willing to amend the wording of the annual aggregate to apply separately to each location. That way, at least, each of the buildings would have had its own $1 million available.

3. Umbrella Coverage

With either of the above options, George should also have purchased an Umbrella, or Excess Liability, policy. Sold in $1 million increments at a fraction of the premium rate of the primary public liability policy, an Umbrella adds layers of additional protection ($5-million to $20 million is readily available) and, as importantly, layers of comfort.

Get Good Advice

Insurance policies and the circumstances to which buyers expect them to respond have become increasingly complex. Too often the inadequacies of one's protection are not discovered until it's too late. In negotiating an insurance contract, there is no substitute for sound professional guidance. We hope to contribute to that process in the coming months.

We have designed this column - and its subject matter - to address the insurance issues that are of interest to you, the reader. We would be delighted to hear from you. If you have comments - or suggestions for the topics of future columns - please write to me, in care of Real Estate Weekly, One Madison Avenue, New York, New York 10010.

Next month's column will address the question: Do you have enough Fire Insurance?

An account executive with Insurance Solutions Kaye Insurance Associates, Michael Zeldes specializes in the Amwest program, a comprehensive multi-peril insurance program especially designed for residential real estate properties. Kaye Insurance Associate is one of the largest insurance brokerages in the nation.
COPYRIGHT 1992 Hagedorn Publication
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Insurance Solutions
Author:Zeldes, Michael
Publication:Real Estate Weekly
Article Type:Column
Date:Jan 22, 1992
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