Small businesses are finding ways to cope with today's property insurance market.
What’s worse than getting a statement in the mail telling you your bank account is overdrawn? How about a notice from your insurance agency that your property insurance premiums on your business have doubled, tripled — or that your policy has been canceled? That scenario has been repeating itself throughout Florida, leaving business owners to look for creative solutions.
Keith D. Kite
After Hurricanes Frances and Jeanne came through the Vero Beach area in 2004, Kite Properties renovated its 30-year-old building, which houses a Bank of America location, including adding a new roof. A year later, the company received notice that its insurance policy was being canceled.
Keith D. Kite, managing partner, says he spent days on the phone, only to learn that to replace the $21,000 policy it would cost them $200,000 — a nearly 900% increase. “That made the building a huge negative cash flow, just on the insurance,” he says.
Kite, a former investment broker, continued to shop and educate himself on risk management. He eventually secured a policy that was double his original premium for less benefit, including a higher deductible on the wind portion.
“For wind, we’re basically in a self- insurance mode,” he says.
To make up for the increase, Kite says he had to do what most other commercial real estate property owners are doing — raise rents.
Commercial office leases have doubled and tripled in the last two years in his part of the state, and selling prices also have increased, he says. “It’s just getting passed all the way back down to the consumer.”
If there’s a positive side, he says it’s that his company and other developers are building smarter — using stronger building materials, such as hurricane-proof windows. Long term, he says the shift is to move development farther inland. After the 2004 hurricanes, he says a number of professional businesses relocated to the mainland. Now the real estate market is booming in the far west (interior) part of Indian River County.
Kite says he believes a viable long-term solution would be to have a national catastrophe fund, like flood has, for the wind portion of insurance. “Everyone would have a minimum coverage.”
Says Kite, “Wind is the only problem — property and casualty are fine. It’s the wind policy that kills you.”
Neal P. Dunn, M.D.
Every single business in this area got a notice of cease of (insurance) coverage some time in the last nine to 10 months,” says Dr. Neal P. Dunn, managing partner of Panama City Urological Center. “Our time rolled around in January. The whole city was frantically looking for insurance.”
After spending several days calling agents, Dunn learned he could get property insurance, but it was going to cost him. “Our windstorm coverage went from $3,700 to $37,000,” that’s a tenfold increase for windstorm alone. And the deductible, 5%, would have been $150,000 for one building.
Unlike other businesses, raising prices wasn’t an option. “We can’t pass it on,” he says. “My prices are set by the government (Medicare), and all private insurance is based on Medicare rates.” Any increase in overhead comes directly out of the bottom line. “The only way I can make it up is to lose money or fire somebody. I have no ability to pass on my increased costs.”
Fortunately, Dunn found another option. “I went to our bank and said, ‘I can’t get windstorm.’ ” After the doctors paid off a significant part of the note on their main building, added storm shutters and better quality windows, the bank allowed the group practice to self-insure for windstorm.
It’s a short-term fix, and Dunn is concerned for the long term, especially for the medical community, which he says is the largest private employer in Bay County.
Dunn says combined with the increased property taxes, the insurance issue signals a challenge for Florida’s business environment. “The politicians and decision-makers can make this an attractive state or not,” Dunn says. “Businesses won’t come (or stick around) unless they have a stable, predictable cost of doing business.”
In a move to alleviate some of those concerns, Citizens Property Insurance Corp., the state-created insurer, approved a move to write more commercial property policies by the start of the 2007 hurricane season in June. The program is designed to lower rates and expand the availability of coverage.
|› Property Insurance Snapshot|
A Florida Chamber of Commerce survey in January 2007 tells the story of how Florida small businesses are struggling with property insurance.
79.9% — said their commercial property insurance premiums had increased.
36.3% — reported that their premiums had increased more than 50%.
55.4% — said they were forced to raise prices because of the increase.
20.0% — said that they might be forced to close their businesses.
25.4% — said they were being forced to decrease the number of employees.
My rate increase hit me last summer, after I returned from vacation,” says Gratia Schroeder, owner of Short Stop Printing. “I got a notice saying I was being canceled by my existing company.” After talking to a number of others that refused to insure her building all together, she says, “I was finally able to get Lloyd’s of London.”
Despite having only one window in the building, a new roof and no claims on the structure in its 50 years of existence, the annual premium more than doubled — from $4,000 to $10,000. “How do you pass that cost on to your customer?” she asks.
Since many of Short Stop Printing’s customers are also small businesses facing the same dilemma, plus increased property taxes (Schroeder’s went up 250%), she says she’s trying to absorb most of the loss.
“I’ve had to cut back wherever I can. I can’t do as much as I would like to for my employees. There were things I wanted to do as far as refurbishing and I can’t,” she says. “As far as donations (to nonprofits) — I just don’t do it. People come in all the time and ask me to donate the printing. I just can’t do it anymore. I’ve had to cut back on advertising, too.”
Schroeder is also concerned about the cost of homeowners insurance, particularly for her employees. She’s been paying close attention to the Florida Legislature’s initiatives for both the residential and commercial property insurance markets, but she’s not waiting for lawmakers to take action. Schroeder’s long-term strategy for her business is to pay off the mortgage on the building and then self-insure. That’s an option that businesses are looking at more than ever before.
|Where to Find Help|
Florida Department of Insurance
Citizens Property Insurance Corporation
A 2007 Special Session of the Florida Legislature moved all commercial, nonresidential policies insured through the Property and Casualty Joint Underwriting Association, which was revived in the fall of 2006 to insure certain commercial properties that were unable to get coverage from private insurers, to Citizens Property Insurance Corp., the state-created insurer. The new law allows Citizens to write commercial property across the state, not just in coastal areas. Also, it allows Citizens to write fire, theft and vandalism coverage in addition to wind.