By: Trey Griffy, Community Association Insurance Specialist
The multifamily insurance market in Minnesota has faced significant challenges in recent years, leading to what is known as a "hard market." In this context, a hard market is characterized by increased premiums, stricter underwriting standards, and limited capacity from insurers. Understanding the factors contributing to this tough market, particularly the impact of hail claims, is crucial for property managers and unit owners alike.
The Impact of Hail Claims on the Minnesota Market
Minnesota is no stranger to severe weather, especially hailstorms, which have become a major factor driving up insurance costs for multifamily properties. According to the National Oceanic and Atmospheric Administration (NOAA), Minnesota consistently ranks among the top states for hail related claims. In 2020 alone, there were 821 hail events recorded in Minnesota, causing millions of dollars in damage to properties across the state.
Hailstorms can cause extensive damage to roofs, siding, windows, and other exterior components of buildings. For multifamily properties, this often translates into large-scale claims that insurers must pay out, leading to increased premiums for policyholders. Data from the Insurance Information Institute (III) indicates that between 2000 and 2019, hail-related claims accounted for nearly 40% of all insured losses in Minnesota. As insurers have faced mounting losses from these claims, they have responded by tightening their underwriting criteria and raising rates, contributing to the hard market conditions.
The Broader National Property Insurance Market
The hardening of the insurance market is not confined to Minnesota; it reflects a broader national trend. Across the United States, property insurers have been grappling with a range of challenges that have made the market more difficult for both insurers and insureds. Natural disasters, including hurricanes, wildfires, and flooding, have resulted in substantial insured losses. The year 2020 was particularly severe, with insured losses from natural disasters reaching approximately $74 billion, according to III.
In addition to natural disasters, the cost of building materials and labor has risen significantly, making property repairs and replacements more expensive. The COVID-19 pandemic exacerbated these issues by disrupting supply chains and increasing the cost of materials. Insurers, facing higher claim costs and increased risks, have responded by raising premiums, limiting coverage options, and implementing stricter underwriting standards across the board.
The Role of High Deductibles and the Importance of Loss Assessment Coverage
One of the key strategies insurers have adopted to manage their risks in a hard market is the implementation of higher deductibles. For multifamily property owners, this means that they must pay more out-of-pocket before their insurance coverage kicks in. While higher deductibles can help lower premium costs to some extent, they also shift a significant portion of the financial burden onto property owners.
For individual unit owners living in a multifamily community, this shift has made loss assessment coverage more critical than ever. Loss assessment coverage is a type of insurance that helps cover the cost of assessments levied by a homeowners' association (HOA) to pay for damages to common areas or shared structures that exceed the HOA's insurance coverage. In a scenario where the HOA's policy has a high deductible, unit owners could face substantial assessments to cover the gap.
For instance, if a hailstorm causes $500,000 in damage to the roofs of a multifamily complex and the HOA's insurance policy has a $100,000 deductible, the association may need to levy a special assessment to cover this deductible. Without adequate loss assessment coverage, individual unit owners would have to bear their share of this cost, which could be financially burdensome.
Vigilance Against "Too Good to Be True" Pricing
As the multifamily insurance market hardens, some property managers and unit owners may be tempted by insurance policies that appear to offer substantial savings. However, it is crucial to remain vigilant against pricing that seems too good to be true. Insurers offering significantly lower premiums might be cutting corners in ways that could leave policyholders vulnerable.
For instance, a lower premium might come with higher deductibles, reduced coverage limits, or coverage exclusions that could leave significant gaps in protection. Additionally, some insurers might be less financially stable, raising the risk that they could fail to pay out claims in the event of a disaster. It's essential to thoroughly review policy terms and the financial health of the insurer before committing to a seemingly attractive offer.
One way to ensure that you are getting a fair deal without sacrificing coverage is to work with a knowledgeable insurance agent who specializes in multifamily properties. They can help you navigate the complexities of policy details and ensure that you are adequately covered without overpaying. An experienced agent will also be able to provide insights into the reputation and stability of various insurers, helping you make an informed decision.
Conclusion
The multifamily insurance market in Minnesota is currently experiencing a hard market, driven primarily by the high frequency and severity of hail claims. This situation is compounded by a broader national trend of increasing property insurance costs due to natural disasters, rising repair costs, and higher deductibles. For multifamily property managers and unit owners, understanding these dynamics is crucial for making informed decisions about insurance coverage.
To navigate this challenging environment, it is essential to work closely with an experienced insurance agent who specializes in multifamily properties. Ensuring that both the association's master policy and individual unit owners' policies include adequate coverage, including loss assessment coverage, can help mitigate the financial impact of high deductibles and other out-of-pocket expenses. Additionally, remaining vigilant against seemingly attractive but potentially inadequate insurance offers can protect against unexpected financial burdens.
By staying informed and proactive, property managers and unit owners can better protect their investments and ensure financial stability in the face of a hard insurance market. Taking the time to understand your insurance options, thoroughly reviewing policy details, and seeking professional guidance are all crucial steps in managing the risks associated with multifamily property ownership in today's challenging insurance landscape.
Trey Griffy
Community Association Insurance Specialist
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