How to COPE with Apartment Risks

COPE is generally associated with property underwriting rather than as a risk class-based underwriting acronym. However, the traditional use and definition of COPE can be broadened to highlight the top concerns of underwriters reviewing apartment complexes.

Classically, COPE means: Construction, Occupancy, Protection and Exposure. COPE’s use is expanded by this article to divide the underwriting criteria applied to apartment complexes into four parts. Insurance Journal reviewed the underwriting guidelines of both standard and non-standard carriers. Not surprisingly, the standard carriers are more stringent. Finding standard carriers willing to consider much less write apartment complexes was difficult; only a few have any desire for such risks.

Construction

Almost intuitively, the first piece of information any underwriter (standard or non-standard) asks about is the property’s construction class. The more damageable the construction type (i.e. frame) the less desirable the risk from the underwriting perspective and the greater the importance placed on other relevant aspects of the facility’s risk characteristics (i.e. fire protection and loss control measures).

Beyond the obvious need to know the basic construction type, underwriters require information about other construction aspects including: 1) the age of the buildings; 2) the date of improvements; and 3) the general condition of the property.

Standard carriers seem to have an upper limit on the age of an acceptable apartment complex. The maximum age tends to run between 20 and 25 years for a newly-submitted complex. Existing apartment risks within a standard carrier’s renewal book don’t necessarily face this limitation.

Non-standard carriers surely have an outside age limitation as well, but it’s not as stringently enforced as that of the standard carriers. The general overall condition of the risk is more important than the age.

Information regarding the last updates of the heating, plumbing, roofing and wiring is important to all apartment underwriters, but it appears to be more important to standard market underwriters.

The question of updates leads to a discussion of aluminum wiring. Apartment complexes more than 30 years old may contain aluminum wiring; which does not meet the habitational building codes of today. The few standard carriers that are willing to write apartments generally say “no” to any containing aluminum wiring. Conversely, some non-standard carriers pridefully state that they will write aluminum wiring.

One non-standard broker reported that knowing who is responsible for the maintenance and upkeep of the facility is within its top five underwriting concerns. The carriers want to know if a staff member or a subcontractor is responsible for maintenance and repair. The answer leads to questions of responsiveness, liability and the presence of proper contractual risk transfer provisions.

Standard carriers did not list this as a primary underwriting concern, as discussed in the protection section.

Occupancy

Obviously underwriters expect an apartment complex to be occupied largely for residential purposes, but standard carriers often require a certain percentage of occupancy. One standard market’s guidelines require that the complex must maintain at least an 80 percent occupancy rate on average. The percentage of occupancy was not listed by the non-standard carriers as a “top five” concern.

Who pays the rent also figures heavily into the top underwriter concerns. The presence of subsidized housing is a common concern for both standard and non-standard carriers; the difference is how much subsidized rent is allowed. Standard carriers disqualify a risk from preferred programs is there is any subsidized housing; non-standard carriers simply ask what percentage of residences is occupied as subsidized housing. Subsidized units beyond a certain percentage may disqualify the risk for some non-standard insurers while others have special programs.

Protection

Underwriters concern themselves more with the protection aspect of an apartment risk than any of the other three parts of COPE. Standard and non-standard carriers combined consider six protection-related criteria when reviewing an apartment risk. Three relate to “classic” property underwriting information, two are general protection concerns and one is specific to apartment risks.

Public protection class, the presence of smoke detectors and information regarding the sprinkler system are the three “classic” protection concerns. Standard carriers seem to place more emphasis on these protection factors than do non-standard carriers. One standard carrier’s apartment guidelines state that the complex must be in a public protection class (PPC) 6 or better; while another standard carrier extends coverage to apartment properties located in any PPC other than 9 (1-8 is allowed). For non-standard carriers, this was not a top issue.

Smoke detectors and sprinkler systems were also specifically listed as a standard market underwriting concern. One carrier required that a working smoke detector be located in each unit. Standard carriers also specified that a full sprinkler system exist in any apartment building with more than six floors. of course, many jurisdictions also require this in their building code for newer buildings (remembering that standard carriers have an age limit before they will consider an apartment risk). Non-standard carriers did not list these as top underwriting concerns.

Non-standard carriers listed two protection-related underwriting concerns in their list of top issues: 1) safety procedures; and 2) tenant pre-screening and background checks. A written contingency safety plan is especially important for complexes located in high wind areas, coastal areas, earthquake zones and other areas subject to natural or manmade hazards.

Tenant pre-screening and background checks is one of the top criteria of a non-standard carrier, but standard carriers did not indicate this was a requirement. However, from a protection standpoint, such reviews are useful in protecting a complex from charges of negligence, provided negative reports are acted upon as allowed by law.

Absentee ownership or management is a major concern for standard carriers. Some standard carriers require the complex to be managed and supervised by a full-time resident manager, an on-premises owner or a full-time property management company.

Exposures

Exposure underwriting is two-pronged; the one side revolves around exposures located on or offered by the complex and the second is created by the surrounding community.

Risk-based exposures such as swimming pools, tennis courts, club houses, gyms and other such amenities create concern for underwriters on both sides – standard and non-standard. Underwriters will ask for specifics such as the presence of a diving board or slide if there is a pool; the condition and upkeep of tennis courts and club houses; and the supervision employed for any of these facilities.

External exposures are also considered by all underwriters. What are the characteristics of the neighborhood? Are there nightclubs and bars? Are there other operations nearby that could cause problems (even a school)? Lastly, what is the crime rate? The external exposure component can also encompass high wind, high risk flood and other hazardous areas.