Don’t Mess with Coverage: A Guide to Commercial Property Insurance in Texas

While the Lone Star State continues to attract businesses and investors alike, leading to a surge in commercial real estate activity, property owners are simultaneously grappling with an ever-tightening insurance landscape. Inflation and recent severe natural catastrophes have led to escalating insurance costs. Meanwhile, increasing borrowing costs are putting pressure on property owners to protect cash flow as much as possible. And to make matters worse, insurance carriers are pulling out of some states entirely, such as California, due to mounting losses.

In order to navigate these evolving concerns, it’s crucial that Texas commercial property owners take a close look at their insurance coverage. What should a buyer understand when considering the insurability of a new or current property? What can a property owner do to improve their insurability or, if already insured, do to vet their current coverage? This article provides a thorough (though not comprehensive) review of tools and tactics to help owners navigate Texas's evolving commercial property insurance landscape.

In for a Penny, In for a Pound

To understand the state of the commercial property insurance market, it’s important to understand what is happening with property insurance costs: They are going up. But why? According to the CRC Group’s 2023 State of the Market report, a confluence of factors is pushing up rates. Property values and construction costs have increased. Both lead to higher insurance requirements and higher premiums. Recent natural disasters have also triggered big payouts by insurance companies. These big payouts are forcing carriers to tap into their reinsurance policies (the insurers to the insurance companies). Reinsurers are raising rates to offset their losses, and commercial carriers are passing those higher costs down to insureds. More recently, inflation is putting stress on margins and investment income for insurance carriers. 

Putting all this together, the carriers have been forced to closely scrutinize the risks on their books and adjust their rates. 

Key Considerations to Improve Insurability When Buying Property 

When purchasing commercial property, consider not only the property itself but also the associated insurance costs. Margins are tight on a property investment as-is. A high insurance premium or an improperly covered loss can push your investment into the red. As they say, preparation is the key to success, so below are a few key property features that can significantly impact insurability and insurance premiums, which prospective buyers should thoroughly review before deciding to buy:

1. Roof: Assess the age, material, and condition of the roof, as it heavily influences premiums and coverage, especially in North Texas.
2. Electrical: Investigate when the electrical wiring and panels were last updated or inspected. Copper wiring and certain panels are less prone to fire risk and are preferred by carriers.
3. Proximity to the Coast: Any property within 100 miles of a coastline could be pricier and/or more challenging to insure due to the increased frequency of catastrophic weather events.
4. Flood Risk: Check the building’s flood zone and confirm any flood damage history, as these factors can impact insurance rates. Flood zone information can be found on FEMA’s website: https://msc.fema.gov/portal/search
5. Type of Construction: A structure will be categorized into one of six construction types. These categories indicate the building’s susceptibility to damage from fire. The more fire-resistant the construction, the easier and cheaper it will be to insure a building. More information about each classification can be found here: https://www.irmi.com/term/insurance-definitions/building-construction-categories-(iso)
6. Protective Safeguards: These are measures to protect the building and surrounding property. Examples include (but are not limited to) gates, security guards, central station alarm systems, sprinkler systems, and motion-activated lights. Does the property have any protective safeguards in place? Are they in a dependable working condition?
7. Prior Claims: Due diligence today averts problems tomorrow, so it’s critical to understand the claim history of the building and any prior losses submitted, as those can impact coverage.  If you’re insuring a schedule of properties, be prepared to speak to any claims you or your company have filed in the past and steps taken to prevent similar situations.

It's Renewal Time – Now What?: Assessing Your Policy

If you already own commercial property in Texas, you have probably encountered one of these scenarios:

1. Increasing Premiums: Property premiums are rising, but so are requirements from carriers. Owners need to gather more detailed information about a property and invest in building upgrades to secure coverage and the best possible premium.
2. Unchanged Premiums: While less common, static premiums may indicate changes in coverage or sublimits that could leave you exposed to risks. Note that carriers are required to disclose material changes to a policy at least 30 days prior to renewal so, as noted below, be sure to read the fine print.
3. Non-Renewal: Many Texas commercial property owners are receiving notices of non-renewal from their carriers. It's vital to work with an insurance broker to understand why the property was non-renewed and what can be done to improve the property's insurability.

Safeguarding Your Investment

Staying proactive and well-informed is essential for property owners and buyers. Whether you're a seasoned investor or a newcomer, there are a few things you should always do to ensure the insurability of a property and protect your investment:

1. Read the Fine Print: Thoroughly review your insurance policy, particularly when renewal is approaching, to identify safeguards and any sublimits, changes, or exclusions to address potential coverage gaps.
2. Ask Questions: Engage with your insurance provider or broker – we are here to be your resource. Understanding the intricacies of your policy ensures that you can make well-informed decisions that align with your risk management strategy.
3. Prepare: Ensure that your property inspections and paperwork are readily accessible and up to date. Proactive preparation can position your property more favorably during inspections, potentially influencing insurance premiums.
4. Assess Your Risk Appetite: Understanding your comfort level with risk is integral to finding the correct coverage. For example, if you would like to maintain your premium costs and are willing to take on more risk, you can adjust your deductible to maintain overall coverage limits and premiums.

Final Thoughts

Your commercial property is more than an asset; it's a cornerstone of your business and financial success.  Therefore, while this guide provides useful recommendations, it’s imperative to consult with a trusted insurance advisor consistently along your property journey, particularly as the landscape continues to shift in historical ways. A good advisor will provide guidance on proper loss controls, contractual requirements of property managers, preventative care, and select upgrades that can have an outsized impact on your property’s insurability and premium. By making informed decisions and taking steps to adequately protect your investment, you will be better equipped to navigate the evolving landscape of commercial property in Texas.