Insurance: Is social inflation the next emerging risk? | Opinion

Property management’s main responsibility among many things is to preserve, protect and enhance the properties it services in conjunction with other industry professionals.

Best practices during budgetary planning used by management are to treat a budget as a line-item checklist. The bigger line items such as insurance, payroll, utilities, taxes, etc. naturally garner the most attention. Insurance is generally a top-three expense, and insurance professionals now advise that it is not a matter of if insurance premiums will increase but rather when and by how much. Because an insurance increase is inevitable, mitigating the increase can be substantial and should be seen as a savings.

The term “social inflation” is a phenomenon used to describe rising insurance losses and increasing insurance premiums, much of which are being exacerbated by COVID-19. During an increase in social inflation, society becomes more litigious pushing the envelope on insurance payouts. Policy language may be more broadly interpreted, claim frequency increases and higher jury awards occur. Some insurance is affected by this more than others. Directors and officers liability insurance is just one example now seeing more claims and higher premiums. Viruses such as COVID-19 in most cases are excluded from policy coverage, and this has plaintiffs looking for alternative avenues to successfully get insurance payouts.

The development of a risk management program is key to mitigating risk. Existing programs should be updated regularly as new risks emerge and additional property and assets are impacted. The best risk management programs are proactive rather than reactive. These programs identify and assess risk, while working to eliminate or reduce any negative impacts they might cause. Examples include slip and falls, hazardous employee working conditions, cyber security breaches, theft, water damage and so on. Management works with insurance professionals to mitigate the vulnerabilities enabling these claims, looking at patterns over the last three to five years and future trends.

There are some measures that can have an immediate benefit.

A property that contains surveillance cameras generally sees a decrease in the amount of claims and their severity. Cameras provide a sense of security because they are a deterrent to opportunistic people that would rather go to another property where they are not filmed. People that feel more secure at a property are more likely to remain and provide an added benefit as an income enhancer. There are proactive measures that can be taken to minimize water damage claims such as leak detection technology that is placed in strategic locations. Insurers are looking to their clients to review the mitigation plans that they are using. At a minimum, universal cyber security best practices should be in place from an infrastructure, procedural, and personnel training perspective.

Preventative maintenance to the physical plant extends the life of the asset and decreases life safety issues along with the claims that follow.

Some mitigation efforts are inexpensive, but there are upfront investment costs associated with them. A significant return on investment, though, will be seen in the short- and long-term as it relates to your insurance premiums. Management should be assisting their clients prioritize the order of areas of vulnerability to be mitigated as well as devise a long-term plan to implement the mitigation strategy. Realistically, not all vulnerabilities can be neutralized, and some measures will not be feasible due to financial constraints. Regardless, it is property management’s responsibility to assist their clients demonstrate to insurance carriers that everything possible is being done to minimize these vulnerabilities.

It is critical that property management truly be a partner to their clients, do more due diligence on each budget line item, and be more creative to assist with weathering the storm.

Regan Marock is managing partner of Foxrock Management, a full-service property management firm specializing in commercial, multifamily and association assets in Florida. regan@foxrockmgmt.com.