Insurance underwriting challenges in the commercial real estate (CRE) market can cause an underwriter to decline your risk. Here are three high-risk characteristics of commercial building infrastructure that you may want to avoid purchasing or retrofit. Documentation that you have addressed these risks can help you avoid red flags in the underwriting of your commercial buildings.
Exterior Insulation and Finish Systems
During the construction booms of the 1980s and ‘90s, exterior insulation and finish systems (EIFS) caused many problems in both residential and commercial construction. The EIFS building system wraps around buildings with a continuous layer of insulation. Normally, manufacturers constructed EIFS with several components. These are an exterior finish, a reinforcing mesh, insulation usually of polystyrene and an adhesive that bound the insulator to the building. Older EIFS systems lacked adequate drainage. This caused moisture buildup and many other issues.
You may hear EIFS referred to as artificial or fake stucco. Marketed by many different manufacturers and European developers, American builders began to use EIFS in the 1960s. Builders first utilized EIFS to retrofit masonry buildings. However, they turned to EIFS for frame construction in the 1990s.
In the late 1980s, water leakage issues began to surface in buildings clad with EIFS. Building owners filed lawsuits and insurers found themselves mired in construction defect claims. Construction experts discovered issues with poor construction standards. One recurring problem was improper window installation that created water intrusion. EIFS-related litigation increased in the US In the late 1980s and 90s. As a result of the litigation, EIFS manufacturers and installers improved the quality of their materials, including insulation. Contractors properly trained in EIFS methods and who use high quality products can help ease underwriters’ concerns when they review your commercial real estate portfolio.
Today, some insurers may issue exclusions for EIFS-related claims. If your buildings use EIFS, it’s vital that you document your construction process or retrofitting of EIFS-clad buildings. Here are some of the questions your underwriter may ask, according to the International Risk Management Institute.
- Did your contractor receive proper training in EIFS installation?
- Do all employees receive adequate training to pinpoint potential problems?
- Do your contractors sole-source their product acquisition of EIFS materials?
- Does the EIFS manufacturer review the contractors’ plans?
To avoid commercial insurance underwriting challenges, provide documentation that confirms your EIFS-clad buildings are in excellent condition. Then your underwriter can feel confident when insuring your property portfolio.
Electrical Systems Including Panels
The Federal Emergency Management Agency (FEMA) found that non-residential building fires caused losses of $2.7 billion in 2017. FEMA also reported fire data from 2008 to 2017. That time range saw a 20% fire increase and a 16% increase in deaths from non-residential fires.
Underwriters face fire concerns when underwriting commercial buildings. The Ghost Ship warehouse fire killed 36 people in Oakland in 2016. The origin of the fire wasn’t conclusive. However, ungrounded electrical subpanel problems dated back to 2014.
Commercial construction managers faced electrical panel issues for many years. Electrical panels, called distribution boards, supply electricity to secondary circuits. Electrical panels store fuses or breakers. If too much electrify flows, the fuses or breakers will shut off power. This shut-off process prevents wires from overheating, possibly causing a fire.
Several panel manufacturers have faced significant litigation for their panel products. These include Federal Pacific Electric Company panels used widely from the 1950s to the 1980s, as well as Zinsco panels. The Zinsco brand no longer exists.
An outdated electrical panel can cause a fire. It may not be able to handle your building’s electrical needs. Underwriters may want you to prove your panels are up-to-date. Your underwriter may send a commercial insurance inspector to ensure your property managers have addressed issues that could cause a fire or other injuries.
Aluminum Wiring Can Cause Insurance Underwriting Challenges
Whether you manage a portfolio of residential properties or commercial buildings, aluminum wiring is an underwriting red flag. According to home inspectors Carson Dunlop, aluminum wiring became an alternative in the mid-1960s when copper prices were high. Copper conducts electricity more efficiently than aluminum. When copper prices skyrocketed, electricians used aluminum wire in its place. According to home inspectors Carson Dunlop, electricians used the same installation methods for the aluminum wire as they used for copper.
Problems with the aluminum wiring appeared soon after installation, caused by the softness of aluminum versus copper. The softer aluminum wiring expanded, causing wire creep from under terminal placeholder screws. In addition, aluminum wire rusts. Manufacturers improved their product in the 1970s, making it better for use in electrical work. Damage to the aluminum wiring brand, however, was certain. After the late 1970s, builders began to abandon its use except in large appliances and service entrances.
Your home or office portfolio may include aluminum wiring. If so, you may need a licensed electrician to audit and certify the safety of your electrical system.
Today’s commercial underwriters rely on building inspection to help them choose the safest commercial buildings with the lowest chances of losses. Properly managing risks while documenting retrofitting and repairs can help turn your commercial property portfolio into a risk an underwriter wants to write.
Our team has expertise in residential and commercial portfolio property and liability insurance exposures. For more information on how ReShield can assist you and help you avoid commercial underwriting challenges, contact us at this link.