EisnerAmper Blog

Building Success: An EisnerAmper Real Estate Blog

Insurance, Construction, and the Federal Terrorism Reinsurance Program

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December 22, 2014

By Michael Benison, CPA, MST

This is part two of a two-part series wherein EisnerAmper’s Michael Benison and Philip Glick, Senior Vice President at Conner Strong & Buckelew Companies, discuss current insurance issues and their impact on the real estate and construction industries.  For part one, please click here.

MB: What are some of the trends in construction liability in NYC?

PG: Over the last 4 years, liability insurance premiums for construction work in the 5 counties rose substantially because of a general tightening of the insurance marketplace and, more specifically, the cost of liability claims in NYC. This has been largely impacted by the law in NYC that imposes almost absolute liability on a building owner/developer for claims arising out of injuries to employees on construction sites injured in falls (essentially a type of scaffolding act under sections 240 and 241 of the NY Labor Codes.) These Labor Codes create an extreme liability exposure to a general contractor for claims arising out of falls by the employees of subcontractors on their jobs.  As a result of these factors, liability rates from general contractors continue to run 4 to 5 times higher in NY than those for similar construction work in other cities like Philadelphia, DC and Boston. Liability premiums for developers are running almost twice as high as those in other cities. These premiums remain high and, in fact, actually increased again in the last year.

One possible way to mitigate these high liability premiums is to place the liability insurance on development in NYC under project liability insurance policies.  This can include combining the primary general liability and umbrella liability coverages for the project owner/developer and the general contractor under a combined policy per building, eliminating the second set of policies. This combined coverage can also automatically include a so called “tail” or extended completed operations endorsement for potential late discovered construction defect claims that could arise in the future after the construction work is finished.

A further version of this project-specific liability coverage could be a so-called ‘wrap-up insurance policy’ where the coverage for all parties on a construction project are combined including not just the owner and general contractor, but also all the subcontractors working on the job.

MB: What may happen with the Federal Terrorism Reinsurance Program?

PG: The current Federal Terrorism Reinsurance Program (TRIA) is set to expire on December 31, 2014. This has created some concern to building owners in NYC, but even more so for lenders on their properties.

Although it is likely that Congress may extend this program again (in fact a bill for a temporary extension has just been introduced), the pending expiration should make property owners and lenders consider alternatives if it is not extended.  Even if it is renewed, we also feel that property owners should consider purchasing standalone commercial terrorism insurance. In some cases, the standalone commercial terrorism coverage could be less expensive than TRIA.

The private insurance option has been available for a number of years. Almost a dozen major U.S. and London-based insurers offer this coverage and in excess of a billion dollars of loss coverage is readily available. Under the current TRIA program, coverage is only available if there is a major terrorism loss including damage of at least $5,000,000 to a specific owner’s property, $100,000,000 in total damage to multiple building owners, and the event is specifically declared as a TRIA-covered loss by the federal government.  Accordingly, there could be a terrorist act committed, but where no payment could be available to a property owner for its damage if the three conditions mentioned above are not met.

In contrast, the commercial terrorism insurance market has its own much broader definition of a covered loss, own separate (oftentimes less expensive) premium rates, and can offer lower limits of coverage and lower or no deductibles vs. TRIA, where the deductibles and limits of coverage purchased must be the same as that for the all-risk including fire insurance coverage limits purchased.


Insurance, Superstorm Sandy, and Real Estate

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December 19, 2014

By Michael Benison, CPA, MST

EisnerAmper’s Michael Benison recently caught up with Philip Glick, Senior Vice President at Conner Strong & Buckelew Companies, to get his insight into the real estate insurance industry. This, part one of a two-part series, discusses the lingering effects of Superstorm Sandy on the insurance industry.

Michael Benison: What are some of the lingering issues attributable to Superstorm Sandy?

Philip Glick: More than two years after Superstorm Sandy, there are still some storm-related claims that are not completely settled. This includes flood losses to property that was damaged by the inundation of salt water causing subsequent corrosion of metal surfaces and late developing electrical damage. Losses were also related to some of the following issues: physical damage to structures and facilities, loss of power, and areas deemed uninhabitable by civil authority. The loss of rents/ business income portion of some losses are still pending settlement. Some insurance companies are using external forensic accountants, such as EisnerAmper, to verify the rent/business income loss claims. Each line item of the financial statements is being carefully scrutinized to verify the valuation of the business loss.

Property owners may also need help with the insurance examination process: identifying policy coverages, calculating covered losses and damages, and compiling documents and records to support claims. There also may be work to be done in negotiating with the insurance carrier as to the amount of a covered claim where there may be areas of dispute in coverage calculations, all the way through litigation.

From a historical perspective, flood insurance premiums continue to be very high, particularly for excess limits that are needed to supplement through the commercial property insurance marketplace the maximum $500,000 limit available per building under the National Flood Insurance Program/ FEMA. Coverage for flood damage which caused loss of rents/ business income losses are not available from the NFIP at all.  Many property owners have also seen their NFIP flood rates go up due to recent updates by FEMA of the flood insurance maps and zones for many properties.

MB: How may the most recent election affect the insurance industry?

PG: Recent legislation has postponed significant premium increases to the current flood premiums that were set to go into effect on many high hazard flood locations.  With the recent wins by the Republican Party for additional House and Senate seats, it’s very possible that the new Congress may revisit the flood program early next year with the possibility for reintroduction of legislation to put the flood program on a sound fiscal footing with large premium increases possible.

In addition to these flood problems, windstorm deductibles for claims due to high winds from named storms have remained extremely high -- typically 2% to 5% of total insured values per building for any buildings near the water, including most near the harbor in NYC.  These deductibles were increased substantially to these levels compared to the prior wind deductibles that were the same as those for fire-related losses, typically $25,000 to $50,000 per occurrence for losses at most larger properties; $10,000 per occurrence for losses at smaller property locations.  Windstorm-related property rates also remain fairly high.

MB: How do you minimize the effect of post-Sandy insurance premium increases?

PG: The solution to these premium increases continues to be placing property insurance on existing buildings and builders’ risk coverage on new construction and renovation with agents and brokers with substantial experience and market volume to mitigate the impact of these increases. Similarly, placing coverage under blanket (multi-location) policies including coverage on non-flood-and-windstorm-exposed locations to help minimize the impact of higher flood and windstorm premium loadings for properties in NYC and across other non-catastrophe exposed locations.

Honest Buildings Interviews Kenneth Weissenberg

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Weissenberg_KenHonest Buildings recently spoke to Kenneth Weissenberg, partner and co-chair of the real estate services group at EisnerAmper, involved in over $50 billion of real estate transactions over the last 30 years. The interview discusses his views on the high-end condo market, the impact of technology and New York’s landscape. You can read the full interview here.
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