Revitalized residential and commercial real estate markets present fresh opportunities to stake out new ground
Any discussion of the state of real estate liability coverage in 2016 inevitably conjures comparisons to the halcyon days of 2006, when new buildings were rising on speculation alone and first-time homebuyers with modest incomes were qualifying for bloated mortgages, with practically no down payment required.
Then the bottom fell out in 2008. For the next several years, residential and commercial buildings were plastered with “For Sale” signs and construction projects halted. The meltdown took a huge toll on any and all industries tied to real estate, from design, engineering and development to construction and sales. It also impacted insurance, the industry that protects the industry.
“Once the economy nosedived and people found themselves in homes they couldn’t afford, they sued the mortgage broker, the title abstractor and title agent. They also sued the appraiser for valuing the home too high. They looked for structural and foundational issues missed during the home inspection,” recalls Nicole Greene, brokerage manager, professional liability, Burns & Wilcox in Detroit/Farmington Hills, MI. They filed suit against parties involved in the purchase of their homes, looking for some way to get out from under their burden.
As all these claims were being defended, professional liability rates began to rise and income in these fields dropped. This prompted some real estate professionals (particularly those working exclusively in the residential market) to contemplate dropping their errors & omissions (E&O) coverage. Still, savvy brokers continued to shop the market in search of solutions to help clients retain their liability coverage.
Real estate professionals rely on professional liability or E&O coverage to protect them should some party claim the work they did — or should have done — caused financial harm. They also rely on general liability to protect them from other types of liability claims, especially slip-and-falls. Ideally, both coverages would be written by the same market to avoid policy gaps or gray areas, although few markets provide both, according to Jarrett Kerr, professional and senior executive liability broker, Burns & Wilcox in Chicago.
As the economy continues to improve and both construction and sales increase, real estate becomes a stronger market for insurance. “It is a fairly competitive professional liability market right now for real estate agents and brokers,” says Kristin Pantelides, professional liability underwriter, Navigators Management Company Inc. in New Jersey. “There are a few new entrants, which has added to the amount of capacity in this space and is creating pressure on rates.”
Resurgence and Resumption
Demand in the residential real estate market is rebounding in many areas, with affordable prices, high rents and soft mortgage rates driving home sales slowly upward. At the end of 2014, the delinquency rate for mortgage loans on one-to-four-unit residential properties reached 5.16 percent, the lowest level since 2007, according to the Mortgage Bankers Association of America. Existing home sales were up a seasonally adjusted 3.2 percent to 573,000 in June of 2015, their highest pace since February 2007 and the ninth consecutive month of year-over-year increase, according to the National Association of Realtors.
The gloom has lifted from commercial real estate and large residential projects as well, and builders are starting to build again. The resurgence of the economy, a strong housing market and low mortgage rates have resulted in a boom in Chicago, where idle projects are suddenly humming along again, according to Ben French, Midwest regional manager of professional liability for Hiscox USA in Chicago.
Project resumption is not without its risks, though. Often, long-dormant projects will resume with a new contractor and/or architect, who must review old site plans and drawings to determine if they will still work under current conditions. Everything must be reviewed carefully, because building codes may have changed, new permits may be needed and the site may now be different. Because problems can complicate a design professional’s sign-off on someone else’s design, that professional needs to carefully delineate his work from that of the previous architect and the contractor.
Moving to Modular
The “Do more with less” business mantra is giving rise to large modular construction that incorporates new techniques and materials, especially in the habitational sector.
For example, in 2014, a six-story story building in the Inwood section of Manhattan was completed in 19 days by building individual apartments, complete with plumbing and electrical elements, at an off-site location, then hauling them on-site into New York City for a Lego-like assembly. Even that schedule was far less aggressive than the 19 days it recently took to erect a 57-story building in China. Other countries have been building to lightning-fast schedules like these for years, but time will tell whether the formula performs here as well as conventional building, and whether designing and constructing them incur special risks.
New Job Niches
The boom in home foreclosures spawned two new real estate industry professions: the mortgage field inspector and the property preservationist, notes Kerr.
Both professions are associated with the property management companies that banks and other owners hire to maintain vacant properties until they can be sold.
The mortgage field inspector reviews the property from the road to ascertain its general condition — that the lawn is mowed and that squatters have not taken up residence, for example. They then provide the owners with photos of the property and a written report. Residential construction contractors often moonlight as mortgage field inspectors to supplement work in their primary field.
The property preservationist, meanwhile, enters the building once it is vacant to change the locks and arrange for the old belongings to be removed, fences repaired and the lawn to be mowed. Real estate agents sometimes move to this role because they understand that keeping up a property discourages vandalism and loss.
The insurance industry has responded, creating professional liability products for both professions.