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Simply Multifamily Episode 10: Securing the Best Insurance Policy for Your Multifamily Property

Updated: Dec 28, 2022

With multifamily insurance rates increasing, it is more important than ever that owners understand their policies and what they are purchasing. Hear from Paul Diaz, president of Paul Diaz Insurance Agency, on the status of the insurance industry regarding multifamily units, the risks of changing carriers, and what to expect in the coming year.


Topics covered include:

  • Why have multifamily insurance rates increased so sharply, and will they continue to go up?

  • How to properly assess whether changing your insurance carrier is a good idea when your rates go up

  • What to look for in a strong insurance policy for your property and pitfalls to avoid




Kiran Dhillon, SIG Commercial:

Hi everyone, welcome to our series called Simply Multifamily. My name is Kiran Dhillon, and I am a Broker-Associate with Keller Williams Commercial in Pasadena, and I specialize in multifamily and apartment sales. I work with buyers and sellers of those properties all throughout the greater Los Angeles and Inland Empire areas. The purpose of this series is to highlight issues and introduce strategies that affect and benefit owners of multifamily properties. Today we're going to be speaking with Paul Diaz, President of Paul Diaz Insurance Agency. Paul specializes in working with multifamily owners to address their insurance needs. Welcome, Paul. It's great to have you.


Paul Diaz, Paul Diaz Insurance Agency:

Thank you so much, Kiran. It's great to be here. And thank you so much for having me on. I look forward to talking a little about multifamily and insurance.


Kiran Dhillon, SIG Commercial:

Great! So why don't you start off by telling us about the services that you provide for owners of multifamily properties?


Paul Diaz, Paul Diaz Insurance Agency:

So, we're a full insurance brokerage. We offer commercial insurance, which would include multifamily, and we also offer life insurance, employee benefits, auto and home, workers' comp. But we're probably about 60% commercial, 40% the rest. So we really focus on insurance. And a big part of that is habitational or multifamily properties, which has been super challenging I'd say in the last year or so. A lot of carriers are getting out of the state of California or just in general, anywhere nationwide, they're really clamping down on writing habitational risk. There are less and less companies writing, so there's still that demand, so the price goes up.


Kiran Dhillon, SIG Commercial:

Got it. So that's a perfect segue to my next question, which was going to be, like you mentioned there have been a lot of changes in the insurance industry over the past couple of years. Can you give a recap of those changes and then if you have insight into why this is happening?


Paul Diaz, Paul Diaz Insurance Agency:

Yeah, absolutely. In fact, right before I jumped on with you, I had a meeting with GUARD Insurance, which writes a lot of habitational insurance and they were just talking about how they've been unprofitable. So I think that's what's happening nationwide. The carriers are unprofitable in the habitational area, and so they're basically like, "Hey, we'll take a retail clothing store but we don't want apartment buildings anymore. No more apartment buildings." Or, "We don't want buildings that are 40 years or older." The reason is, obviously, as the infrastructure gets older, you tend to have more problems, pipes bursting, fires, things of that nature. So, it hasn't been profitable and therefore if it's not profitable, insurance companies are in it to make money, they're pulling out. So when they pull out, then you got to go to other carriers like, "Yeah, we'll do it, but it's going to cost you triple the price."


So that's why you're seeing rate increases and you're going to continue seeing rate increases for, I guarantee, at least through 2023, especially with interest rates rising, that's another factor. So you're really going to see rates jump up on your renewals for at least another year based on all my meetings I've had with the marketing reps of multiple carriers.


And people always ask, well, what are the claims? Well, I can tell you the most common claim, and it's hard to fight, is slip and fall. So you got to make sure that your property is well lit, because that's one of the first things. "I was coming down the stairs in the hallway and there's no light." So make sure the property is well lit and make sure you have handrails. And obviously, use your fist, the four inches. Handrails can't be more than four inches, or the railings can't be more than four inches apart. That's a big thing the carriers are looking for.

So the number one thing is slip and fall and then you have people sue for wrongful eviction or invasion of privacy or being harassed by the manager on site, things like that. So those are things that keep an eye out for, but that's why carriers are pulling out. It's just unprofitable, especially in California.


Kiran Dhillon, SIG Commercial:

It seems like that unprofitability has really sped up over the past couple of years, is that what you're saying?


Paul Diaz, Paul Diaz Insurance Agency:

I think so. And I think whether you think we're in a recession or not, a lot of people think as the economy slows down, I think people get more desperate. And we're getting severe weather, too. I mean it's a lot of factors. Some of these companies are taking billion dollar hits like during Hurricane Ian, and if you're with Travelers in California, it's the same Travelers that insures in Florida. And there's a lot of freezing going on in Texas. So there's all these severe weather things that affect insurance, and it's been recent. I mean, just look at California, we've had I think seven of our largest fires in the history of our state in the last three or four years.


Kiran Dhillon, SIG Commercial:

That's a great point, that it's not just what's happening in California that's affecting California property owners’ insurance. You have got to look across the board.


Paul Diaz, Paul Diaz Insurance Agency:

I mean, it's practically worldwide. A lot of these companies are global insurers and they look at profitability as a whole, not just like, "And in this state we're doing good but then the other ones we're not." So you're pooled together and it's been really, really challenging when it comes to apartment buildings and we'll discuss some other things. But you got to make sure you understand what you're purchasing. If it's too cheap, there's usually a reason why.


Kiran Dhillon, SIG Commercial:

Absolutely. You have got to do your due diligence. So, specifically to multifamily owners, what are some of the challenges that you're seeing when they're trying to obtain or renew their insurance?


Paul Diaz, Paul Diaz Insurance Agency:

So we get a lot of calls right now because people are upset, "My rate doubled or my rate went up." And a lot of times being honest, I just tell them, "You know what, you're with a good carrier. I do understand that it went up, it doubled, but so has everyone else's rate. And the most important thing is, you are going to have to go through another inspection at that property." So let's say that your renewal went from $3,500 to $5,000, which is a big jump. You get upset, you call another agent. I always say to call your agent first. Talk to them if they're a good agent and they've been responsive, call them and say, "Hey, I'm frustrated, my rate really went up," and see if they'll shop it for you. Or they may tell you, "You know what, this is going to be your best option." But I would call there first.


We get a lot of phone calls and people are upset and I explain to them, "Look, I can get you, let's say Mercury. I can get you a much better quote, but I need full proof of updates." So electrical, plumbing and roof, the driveway better be immaculate, no cracks and no chipped paint. It better look perfect. If not, what's going to happen is, I'm going to place you with Mercury. They're going to come out and do an inspection. They're going to say, "Hey, Kiran, you need to redo the entire driveway."


So there goes your savings. That two grand or grand you might save on your insurance, forget about it. Now you have got to redo the whole driveway. Or they might say, "You know what? You have Zinsco or Federal Pacific Electrical Panels, sorry, we're going to cancel you." And then you can't go back to Travelers. Now you're going to have to go to another market and instead of paying $5,000, you might pay $10,000 for worse insurance. So be very, very careful if you're switching because you might get basically caught with your pants down and then it's going to be a huge problem. So I always tell people, hold on here.


Another thing is, unfortunately, a lot of insurance brokers are not competent, so they'll switch the insured to a policy with let's say GUARD. So, if you write up GUARD policy-new business, it doesn't cover personal and advertising injury. So they give you a great price. Instead of $5,000, they're at what you paid before, $3,500. This is a great quote. Well if you read the fine print, they'll say "personal and advertising injury excluded." Most people don't know what that covers. That covers invasion of privacy and wrongful eviction. I would think that's pretty important if you're a multifamily owner to have those two coverages.


So, be very careful if you're switching. If it's something that's super cheap, there's usually a reason why it's super cheap. So just make sure that you're providing accurate information, especially when it comes to updates and stuff. And another thing is loss of rent. Rents have gone up, so has the cost of reconstruction. So I'm noticing with a lot of buildings, the rents are not correct. So if the building burns down and you have loss of rents coverage, and you don't have the right amount stated, you might lose out on a ton of money and also new reconstruction costs. If you think you can rebuild a building in LA County for $125,000 or $125 a square foot or $150 a square foot, you're going to be very surprised if you have a loss.

Especially over the last year, construction costs have skyrocketed. So I would make sure to increase the building coverage to a number you feel comfortable with and increase the deductible to offset the increase maybe.


Those have been probably the biggest mistakes I see: too low on the building coverage, too low on the rental coverage, and even the liability, a lot of times it doesn't have personal and advertising injury or they have a huge building with 30 units and they only have one million in liability. I mean, oftentimes you can add another million dollars for really cheap. So I always recommend at least $2-4 million in liability.


Kiran Dhillon, SIG Commercial:

Got it. And that's why it's so great when somebody like you explains all of that. Whereas for a lot of people, I think when they're looking for insurance for their building, like you said, they're just comparing which one is the cheapest one and don't really want to get into the details. It's not fun to read all that paperwork. So it's great to have an advisor like you who can say, "Hey, wait a minute, you're going to regret this later."


Paul Diaz, Paul Diaz Insurance Agency:

And sometimes we flat out, we lose business because I've been doing this for 21 years, I'm a second generation insurance broker. I have seen what happens when you take a shortcut. When the loss happens, the first thing they do is, they want the best insurance. “What happened? How come my insurance is not...” It's like, “we went over this, remember you didn't want to add this coverage or you didn't want to increase it.” So just like if your building is more than 30% vacant (60 days is the norm on a standard insurance policy), you should let your broker know because you might not have coverage. And we've had that where, "The building's for sale and it's vacant." And someone breaks in and steals all the copper wiring or something. "Well, how long has it been vacant for?" "For three months." I don't know if they're going to cover that.


So if there are major changes, if there's a major remodel where you're going to vacate half the building, you have got to be in contact with your broker. Just say, "Hey, off the record, this is what I'm doing, what do you think?" And they should be able to give you some good advice, but you don't want to take shortcuts and you don't want to be cheap with insurance. If something happens, you're going to be in a panic.


Kiran Dhillon, SIG Commercial:

That's really great advice because I see that all the time. Properties listed that are vacant and I didn't know that insurance might not cover it.


Paul Diaz, Paul Diaz Insurance Agency:

And in California where I'm based, there's been a lot of issues with homelessness and vacancy. So it gets cold at night, they start lighting a fire. The next thing you know, the whole building's on fire. Vacant buildings tend to have a lot of problems. That's why it's so expensive to insure them. And that's why people don't want to tell you they're vacant because they know it's a lot more expensive. But the reason is, things tend to happen.


Kiran Dhillon, SIG Commercial:

You're absolutely right. So, I think we did discuss this, but just in case there's anything else, what are the top things that you think multifamily owners should look for in their policy? Or if you have any other tips that they can use to get good policies maybe at a lower rate, but still get the full coverage that they need?


Paul Diaz, Paul Diaz Insurance Agency:

Let's say you're buying a building, and I'm also speaking to you as a realtor, if you're buying a building, the first thing I'm looking for are what updates have been done to the building, especially the electrical, because if there's a Zinsco or Federal Pacific Panel, no one's going to want you. Maybe one carrier, a Lloyd's of London or a surplus lines carrier. So you're going to pay a much higher rate for the insurance. “Well, the prior owner is only paying $2,000.” Well, they may have been grandfathered in, they may have had that policy for 20 years and never even looked at it and it just got grandfathered in. But if you're buying a building, you're going to go through an inspection with the insurance carrier and the inspections are good. People look at them as a negative. I look at an inspection as good because it protects you, the owner, the insurance company, and me, the broker that all the information we provided was accurate. They went out, you looked at the building, you gave the thumbs up, the insurance is in force, everything's good. If they don't inspect the building and something happens, which I've had happen, then it becomes a problem.


We had a building that was completely vacant that caught fire, but the insured told me that it was occupied. And no inspection was done. Six months later it burned to the ground and he is like, "Yeah, the property was vacant." I'm like, "What do you mean it's vacant? You told me it was occupied." So now we record all our phone calls. We're recording our calls just in case something like that happens, and we've already had that happen three times. If you're buying a building, make sure you're looking for the updates, especially the electrical. If you already have a building and you want to switch carriers, make sure that the building trees aren't touching the roof. There are no cracks in the sidewalk or the driveway. Make sure everything is on the up and up, because carriers right now are extremely picky and you could really open a can of worms by switching to save a few bucks. So just make sure you understand your policy.


Kiran Dhillon, SIG Commercial:

Got it. So what's your outlook on the insurance industry in California?


Paul Diaz, Paul Diaz Insurance Agency:

I think it's going to be a rough year. I think you're going to see rate increases. You're going to continue to see carriers pull out of the market. KBIC, I think it stands for Kookmin Best Insurance Company. It's a Korea based company. They recently announced that they're no longer writing business in the United States and they used to write a lot of apartment buildings. They pulled out last year, Crusader Insurance pulled out. Unifax, they also wrote a lot of B standard buildings, they pulled out. Nationwide announced that they are not writing convenience stores and gas stations. And they used to write a lot of those. Same with KBIC. So a lot of companies are either leaving the state of California or the United States as a whole or just certain markets like habitational. So it's really become tough. So going to a broker that has the markets, it's important.


So that's why you want to go with a reputable firm and make sure that they're shopping all the carriers and giving you the heads up like, "Hey, what kind of electrical panel do you have?" Letting you know what to expect when you're purchasing insurance. And don't lie on the application because then later on if something happens, they'll point to the application and you could have an issue. So if you have student housing, that's important to let your broker know. If you're mainly Section 8 housing, let your broker know, because the carriers do ask those questions. Are the majority of your tenants elderly or Section 8 housing or subsidized in some way? You have got to let them know.


Kiran Dhillon, SIG Commercial:

Got it. That's not a very fun picture.


Paul Diaz, Paul Diaz Insurance Agency:

No, it's not a good picture. But on the flip side, and I own some units, we haven't done any rent increases in a long time, but this year we increased rent, I think it was like 8% or whatever the law permitted in the city we're in. So I look at it that way. Yeah, my insurance rates went up, but I also increased my rent to offset that cost. But people get too caught up in the price. They don't look at the big picture like, "Hey, you're getting appreciation. You're getting rent." So yeah, your insurance did go up. So did everything else. I mean, gas has gone up, everything. So you have got to say, "Hey, if this building burned down, am I going to care that I got $1,000 in savings," or that, "Hey, I'm properly insured and I'm going to get the money I'm supposed to get to rebuild the property." That's the most important thing. You don't want to be short $300,000 - $400,000 because you saved $1,000 bucks.


Kiran Dhillon, SIG Commercial:

And you bring up a great point because with apartments obviously it's an income asset and for the most part you have the opportunity to increase that income when your expenses are increasing. And that's one of the biggest things that I see with a lot of apartment owners, especially when they've had the property for a long time, is that their rents are so under market. And we have so much legislation regarding rents that if you don't keep up with it, you can really get trapped in this scenario where you're 40% - 50% below market. But now you can't raise the rent in big enough increments for you to break even with all your other costs going up. So, even if you're just doing a little bit every year, every couple of years, just so that you're not so below market, you can keep yourself from getting stuck on that hole.


Paul Diaz, Paul Diaz Insurance Agency:

No, that's a great point. And I'm guilty of that myself. We haven't had any problems at our location. Actually, one time we had a high speed chase where the car drove in through one of the units and insurance covered it and everything was fine. But this past year we had about $40,000 worth of plumbing issues and it wasn't plumbing issues that were covered. It was like a tree root that went through the plumbing and there were old pipes. So remember, insurance is not a maintenance program. It's "sudden and accidental" - those are the key words in an insurance policy. I knew tree roots weren't going to be covered. I knew the pipes were really, really old and needed to be updated anyway, so we ended up having to fork out that money and it's a small four unit building and we're getting rents of like $800 - $900 for a legitimate one bedroom with a garage, that's really cheap in LA County. I started looking around and the average rent for like $1,400 for that.


So by not increasing the rents over time, now I took a big chunk out of the net profit and I mean, we basically didn't profit this year. So you're right. You have got to really stay on top of the rents and making sure just be fair. For a lot of people, it's tough. So I try to be really fair. They're good tenants, they don't bug me. They even knew like, "Wow, we got a great deal man. You are spending money. That plumber's been here for three weeks fixing this." So they expected it.


Kiran Dhillon, SIG Commercial:

Absolutely. Paul, thank you so much. This was a lot of information and I'm sure it will be very useful to our listeners and I would highly recommend anyone who has questions about insuring their property to reach out to Paul. As you can tell, he's very knowledgeable and he can really walk you through all the steps that you do not want to skip. Paul, what's the best way for people to reach out to you?


Paul Diaz, Paul Diaz Insurance Agency:

They could find us online at www.pauldiazins.com or just Google, "Paul Diaz Insurance Agency" or "Paul Diaz Insurance." And thank you so much for having me on Kiran, you're one of the best realtors that we work with. You're very thorough and we appreciate when you send us stuff and let us take a look at it. And it's great working with you and thank you so much. And yeah, anytime we can help, even if you're not our client, we're just here to help and if we can get a policy out of it, great. If not, it's no problem. I look at stuff all the time and say, "Hey, stay where you're at. You're good." Or make these changes and stuff like that.


Kiran Dhillon, SIG Commercial:

Absolutely, thank you so much!


Paul Diaz, Paul Diaz Insurance Agency:

Thank you.

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