As an investment property owner in the bay area, you are faced with many challenges in managing your business and keeping a healthy bottom line. With fluctuating market valuations, interest rates, rental rates and expenses a property owner must really consider their long term investment strategy and disaster recovery plan to maintain a healthy business.
One of the most obvious business risks property and business owners worry about in California is a loss or business interruption due to an earthquake. From a risk manager’s perspective, damage to your investment properties as a result of an earthquake is a real possibility. The question is how to manage the risk so you are not as vulnerable to this event or loss.
First, who actually buys earthquake coverage? We see two types’ of scenarios where this coverage is used. Property owners who have a high percentage of equity and have no other means to recover and support their lifestyle are the most common groups who use earthquake insurance to hedge their net worth against a total loss. The other scenario is becoming more popular as California real-estate becomes more attractive to out-of-state investors and lenders. The lender may require this coverage as a condition of the loan or as a fiduciary responsibility to satisfy investors or other 3rd party requirements.
As a risk manager, once a risk is defined, there are five options to consider. Two of the five options we consider in our analysis are to mitigate or finance the risk. With the mandated earthquake retrofitting initiatives here in San Francisco, the city is requiring all property owners to mitigate this risk as a safety measure to our tenants here in the city. By doing so, those that are “tagged’ will incur significant capital improvements to meet the new ordinance and will reduce their exposure to a structural failure. However, this alone does not “neutralize” your overall risk and potential financial loss due to a significant quake, these upgrades should prevent the properties from collapsing and causing a much larger problem regarding safety and fire following earthquakes.
Our other option in managing a risk is to finance or use insurance products to hedge against the unknown. Unlike the mitigation option, insurance provides a recovery mechanism if the event takes place. A properly used earthquake policy will provide the capital needed to bring your business and properties back to operations thereby neutralizing the risk of an earthquake loss to your overall net worth and investment strategy.
Earthquake coverage is expensive when compared to your fire policy. You can expect the premium to be 2-4 times the cost of a basic policy. However there are many carriers and programs with varying rates and appetites based on the property type, locations and overall strategy used when placing a policy. With the proper assessment there are two types of approaches to consider.
- A full limit policy providing coverage for 100% of the replacement cost of the property, loss of income and building ordinance upgrades as a result of a loss.
- A loss limit policy providing partial coverage against all properties including the loss of income and building ordinance upgrades as a result of a loss.
Both strategies will provide you with the means to recover from a disaster, however each has a different limit and cost associated with the benefits included.
At Commercial Coverage Insurance Agency, our AIM Process to risk management begins with an Assessment of your primary goals and investment objectives. We then Implement a risk management strategy to keep you on track and then Monitor our approach with further assessments to meet your dynamic changes in business risk. The complexity of the overall risk management strategies available to property owners is difficult to cover in this brief article. If you would like to have an assessment of your property or portfolio risk management strategy, please call our office to set a meeting with one of our Advisors.
Commercial Coverage Insurance Agency, Risk Management and Advisory Services has been a proud member of the SFAA for over 10 years working with investment property owners, managers and lenders. We are pleased to offer our unique Assessment Process to all members. Please call our office to set up a meeting with one of our Advisors. 415-436-9800