Suddenly, everyone cares about insurance

The wild fires currently raging all over California have me (and some of my investors!) thinking about insurance.

In general, the insurance premia Adaptive pays on our buildings can appear high, relative to premia paid by owners.


Most owners do the following: Buy an insurance policy when they first buy their building. Then, each year, renew the policy, eating premium increases which are small in percentage terms. At best, maybe they have their broker re-quote the same policy, to see if she can find a slightly better price.

Sounds fine, right? Wrong.

Say you bought a building in 2010. You paid $1,000,000 for a 4,000 sq ft 4plex. At that time, construction prices might have been $175 / sq ft. So, you bought an insurance policy with a limit of $175 x 4,000 = $700,000. Over time, your insurer slowly raised the premium for that same $700,000 policy and you renewed, because it wasn’t worth the hassle of finding a new policy.

Now it’s 2018, and construction costs are $300 / sq ft, but you still have your $700,000 policy.

What happens if your building burns down? The answer is: You’re in very big trouble, because rebuilding your building will cost ~$1,200,000.

The solution is to review all of your insurance policies annually, and sense-check the limits versus what it would actually cost to rebuild your building, using up-to-date construction costs.

It’s true that your insurance costs will increase quickly (because construction pricing has been rising at a rate faster than inflation). But, particularly in a disaster-prone region like Southern California, somewhat lower NOI is a small price to pay to protect your valuable assets.