How to find insurance coverage gaps in a multifamily portfolio

Wind and hail deductible: per building, per occurrence

A percentage deductible is figured building by building, so a storm that hits several buildings takes a deductible from each. ISO's Windstorm or Hail Percentage Deductible endorsement (CP 03 21, 2012 edition) applies 1%, 2% or 5% to each occurrence, separately to each damaged building and to the personal property at each building. In the form's blanket example, a storm damages two buildings valued at $500,000 each with a 2% deductible: each carries its own $10,000 deductible, so $20,000 of the $60,000 loss is not paid.²

The percentage is taken from each damaged building's limit under specific insurance, or from its value on the latest statement of values under blanket insurance. A newly acquired or constructed building gets the highest percentage shown in the schedule for any premises.²

The deductible comes after any coinsurance reduction. In the form's example, a $60,000 loss on a building insured for $70,000 against an $80,000 coinsurance requirement pays $51,800 after a 1% deductible.²

Coinsurance penalty on a blanket limit

Coinsurance cuts a claim when the limit is too low for the property's value. Under the ISO Building and Personal Property Coverage Form (CP 00 10, 2012 edition), the insurer divides the limit by value at the time of loss times the coinsurance percentage, multiplies the loss by the result, then subtracts the deductible. When one limit covers several buildings, the test uses their total value.¹

Blanket limits and margin clauses

A margin clause takes back part of what a blanket limit promises: each building can draw only a set share over its listed value. ISO's margin clause endorsement (CP 12 32, 2007 edition) caps what a blanket limit pays for each building at a scheduled percentage of its value on the latest statement of values. If the statement does not list each building, the insurer splits the total itself.³

In the form's second example, a building listed at $1,000,000 with a 115% margin clause has a $1,300,000 loss and a $10,000 deductible. The insurer pays $1,150,000, not $1,290,000, though the blanket limit is $4,500,000.³

Ordinance or law coverage: Coverage A, B and C

Older buildings often have to be rebuilt to today's code after a loss, and a standard policy does not pay that extra cost. ISO's Ordinance or Law Coverage endorsement (CP 04 05, 2012 edition) provides each coverage only for buildings entered in its schedule. Coverage A sits inside the building limit; Coverage C is paid only if the building is repaired or rebuilt.⁴

Code work also lengthens repairs. ISO's business income form leaves code-driven delays out of the period of restoration, and endorsement CP 15 31 adds them back.^6,7

In a mapped flood hazard area, a building must meet current floodplain rules when restoring it would cost 50% or more of its pre-damage market value; FEMA's estimator counts wind and other damage as well as flood.⁸

Actual cash value roofs and the cosmetic damage exclusion

ISO endorsement CP 10 36 (2012 edition) is scheduled by premises and building. Paragraph A pays roof surfacing at actual cash value even where replacement cost otherwise applies. Paragraph B excludes cosmetic wind or hail damage: marring, pitting or other superficial damage that leaves the roof keeping out the elements as before.⁹

Loss of rents and business income periods

For an apartment owner, business income coverage is rent loss coverage. ISO's Business Income (and Extra Expense) Coverage Form (CP 00 30, 2012 edition) can cover rental value: net rental income plus continuing normal operating expenses. Business income starts 72 hours after the damage and runs until the property should be repaired with reasonable speed.⁷

After repairs, rental value continues until occupancy recovers or for 60 days, whichever is first; an extended period of indemnity option changes the 60. Optional coverages can cap payment at 120 days of loss, or each 30 days at a fraction of the limit.⁷

Flood is excluded from most commercial property policies

Most commercial property policies do not cover flooding. ISO's Causes of Loss, Special Form (CP 10 30, 2012 edition) excludes flood, surface water and storm surge, whether or not driven by wind, and sewer backup. A new flood policy takes effect after a 30-day wait, so it has to be in place before a storm.^10,11

The National Flood Insurance Program (NFIP) General Property Form covers multifamily buildings: residential buildings for 5 or more families that are not condominiums.^12,13

Vacancy, renovation and newly acquired buildings

A building in lease-up or between tenants can lose coverage it would otherwise have. Under CP 00 10, an owner's building is vacant unless at least 31% of its square footage is rented and used by tenants or used by the owner. Buildings under construction or renovation are not vacant.¹

After more than 60 consecutive days of vacancy, the form pays nothing for vandalism, sprinkler leakage (unless protected against freezing), building glass breakage, water damage, theft or attempted theft, and cuts other losses by 15%.¹

Newly acquired buildings for similar use are covered up to $250,000 each for up to 30 days, and only when the declarations show coinsurance of 80% or more or a value reporting symbol.¹

Lender requirements on Fannie Mae loans

A Fannie Mae multifamily loan sets its own floor under several of these gaps:⁵

• Limit: property coverage of at least 90% of estimated insurable value for a multiple-building property (100% for a single building), with either no coinsurance clause or one offset by an agreed amount provision of at least 100% of insurable value.⁵
• Margin clauses: Fannie Mae says a margin clause should not be used to set compliant limits on its loans.⁵
• Ordinance or law: for a nonconforming property, the Coverage A, B and C minimums in the table above, plus the code-delay coverage it calls Coverage D if any building is 5 stories or more.⁵
• Rent loss: business income, including rental value, for each required coverage (ordinance or law Coverage D, windstorm, flood, earthquake and terrorism), based on 12 months of actual loss sustained or a year of reported income; loans of $35 million or more need a 90-day extended period of indemnity option.⁵
• Flood: in a special flood hazard area, coverage of at least the insurable value of the first 2 floors above grade plus anything below grade, adding excess flood insurance where NFIP limits fall short.⁵

State rules: Texas

In Texas, TDI's form review allows a windstorm, hurricane or hail exclusion in the catastrophe area TDI designates, with the insured's signature or a signed disclosure; outside that area, only as an option with proper rate consideration and the insured's signature. A policy for a business on the Texas coast or in Harris County on Galveston Bay probably does not cover wind and hail, which the Texas Windstorm Insurance Association offers.^11,14

In Texas, TDI's commercial form review says it has allowed actual cash value for roofs when the cause of loss is limited to wind and hail and the form is not used on a blanket or roll-out basis.¹⁴

Questions for your broker

• What date and method support each building's value on the statement of values?
• If one storm damages every building at a property, what is the total wind and hail deductible?
• Does business income include rental value, and does it extend for code-driven delays and an extended period of indemnity?
• Which buildings sit in a special flood hazard area, and what flood limit and rent loss coverage applies to each?
• Which buildings are below the 31% occupancy line or have been vacant for more than 60 days?¹