Multifamily Tenant Insurance Programs –
An Unusual Place to Generate New NOI

Interview With

Doug MacGinnitie

Chief Executive Officer
Multifamily Tenant Insurance Programs – <Br>An Unusual Place to Generate New NOI

As an expert in insurance, what is the biggest challenge that multifamily owners and property managers are facing at the moment?
Through our daily discussions with multifamily owners, operators and property managers, the rising cost of insurance has really surprised them, especially over the last 4-6 months. Many owners, who have had proforma financials with just 3% insurance increases have seen them jump by 20-25%, and sometimes even higher. The magnitude of the increase, and the fact that there even was an increase, came without warning.

What options do landlords have in this instance?
There are a couple of things landlords can do to offset the insurance premium increases. First, they can look at taking higher deductibles on their policies. However, a landlord’s ability to take on more risk in this way is often limited by their loan covenants and equity agreements.

A second option is for landlords to generate significant additional profit by taking control of their tenant liability insurance programs. Instead of making money for insurance companies, a properly constructed tenant liability program allows landlords to capture profits and offset higher insurance costs.

In fact, we were just hired by a landlord with 8,500 units that was hit with an insurance premium increase of over $500,000. Our Tenant Liability Program will more than offset that increase.

What is a Tenant Liability Program and how does it work?
In a traditional set up, the landlord’s lease requires the tenant to purchase an insurance policy from a commercial insurance carrier. Money and profit flows from the tenant to the insurance company. In a tenant liability program, the landlord collects the money and pays it into a captive insurance company, which it owns. The captive pays claims, and the money left over is profit for the landlord. Tenant-caused damage to a landlord’s property is generally very low, and is usually capped at $100,000 per occurrence in a normal lease, making this a very low-risk proposition. The program works for any landlord with more than 1,000 units.

How much can a landlord profit from the Tenant Liability Program?

On average, a landlord can expect to generate $100 per unit per year in profit off a well-run tenant liability program. We have a client with 10,000 units that generated $2.5 million in profit in the first 24 months.

I should also mention that we run similar captive programs that are producing substantial new revenue for our clients in the student housing and self-storage markets.

What other benefits besides increased revenue does the tenant liability program have for landlords?
There are three. They are:
1.) The landlord gains operational efficiencies, with leasing agents no longer collecting and verifying certificates of insurance.
2.) The landlord no longer has to worry about gaps in coverage for tenant-caused losses to the property.
3.) The program includes a captive insurance company that the landlord can use to take on more risk, purchase less commercial insurance, and lower their total insurance costs.

Historically, this last benefit has been a bit of the icing on the cake, but with insurance costs increasing so quickly, it‘s becoming an important tool for every multifamily owner and property manager.

Have you seen an increase in demand for these types of programs?

Most definitely.

Landlords are realizing that traditional insurance companies have been making substantial money off their assets, and the landlord has been doing nearly all the work.

And multifamily owners are vigorously looking to offset the rising cost of premiums.

How long have you been involved in the industry?
We’ve been involved in the captive space for over 30 years and have set up, managed and reviewed over 100 captives of all types and sizes. In that timeframe, we’ve insured hundreds of millions of dollars of risk and have managed thousands of claims.

River Oak Risk, LLC
3300 Cumberland Boulevard, Suite 325
Atlanta, Georgia 30339

(404) 902-5738