The Evolving Commercial Real Estate and What It Means for Insurance

The pandemic has seen many industries take a hit, while others found new opportunities. The realm of commercial real estate experienced that as well. In the USA, large sections of the population are working from home, even now. But this move has put pressure on commercial real estate – specifically those focused on offices.

Vacancies have surged and thousands of U.S. restaurants, gyms, stores, and more have had to down their shutters. Office workers are at home and hotel rooms are empty. Due to all this, many property owners holding debt will be forced to make some tough choices about increasing their investment. Otherwise, they’ll have to sell at distressed prices, or hand the keys back to the bank. An estimates $430 billion in commercial and multifamily real estate debt is set to mature over this year.

What Does This Mean for Insurers?

Commercial insurers will need to consider the industry impact as they evaluate the current and future opportunities. Retention, growth, and profitability levers must be prioritized. According to a Deloitte report, these will impact five functional areas:

  • Servicing
  • Claims
  • Product
  • Distribution
  • Underwriting

During COVID-19 times, the insurance industry responded to the pandemic with pre-emptive statements that property insurance policies wouldn’t cover any related claims. This may have been a knee-jerk reaction, one that resulted in many initial claims being rejected outright. But with the pandemic stretching on for more than two years, insurers have had to change.

Commercial property policies differ in their terms, definitions, and structures. They usually include specialized or ‘manuscripted’ provisions. Their underlying situations are also usually unusually fluid. Policyholders should study their policies carefully in light of their circumstances.  Some of the policies have strict time limits on coverage too. Policyholders must assess these and focus on the ‘property damage’ trigger, the existence and terms of any extra coverage extensions, and the terms and structure of any exclusions that the insurers may seek to apply. It’s possible that whether the coverage exists or not will involve legal disputes beyond the expertise of brokers.

This being said, there are certain positives here. eCommerce is being driven like never before, probably thanks to the masses of employees working and shopping from home. This is pushing entire online retailers to occupy more warehouses across the country. eCommerce outlets are hoping to provide fulfillment options closer to where their customers are. That may create opportunities for certain commercial spaces to stay in business, and others could use this to support their ventures if needed.

Let’s discuss some features of commercial real estate insurance and its potential coverage now.

Physical Loss or Damage to Property

Commercial property insurance normally covers physical loss or damage to property. There’s also a certain time element or business interruption loss. It’s usually dependent on finding a physical loss or damage. In many cases, specifically, those involving business closures or disruptions resulting from a pandemic, this coverage may be more important than the cost of repairing the physical property.

Another aspect is that this insurance shouldn’t be just confined to physical property destruction, such as that which happens during an earthquake or a fire. In some circumstances, it could also relate to the presence of a contaminant, whether a chemical constituent or a virus such as COVID-19. Evidence suggests that COVID-19 can survive on surfaces such as doorknobs, faucets, and other hard surfaces for days. Could that be considered physical loss or damage to the property owner? In the past, on occasion contamination has been considered a form of physical loss or damage if it hampers the use of that property. Definitions are still evolving as insurance companies grapple with the ramifications.

Civil Authority Coverage

Most property policies don’t limit coverage to financial losses arising only from physical losses. They also cover losses resulting from impacts to other properties. That results in business interruptions for the insured. The most common form of this is civil authority coverage, which covers the general losses incurred when governmental or military authorities limit or prohibit access to insured property. This can be used by offices spaces, hotels, restaurants, and other spaces where people work or gather at.

The Pandemic Risk Insurance Act

In the US, a legislative proposal has been introduced in Congress to create a federal pandemic risk reinsurance program. This is named the Pandemic Risk Insurance Act of 2020. It suggests creating a federal backstop for business interruption. It even includes cancellation losses incurred by participating insurers. Under this draft, the private sector would take on a portion of future pandemic risk. 95% of the losses above an individual participating insurers’ deductible once an industry loss threshold of USD 250 million was achieved – would be covered by the federal reinsurance. That would have an annual limit of USD 750 billion in yearly payouts.

There’s also a coalition of US businesses that have been established. These would advocate for insurance coverage for future pandemic-related losses. The BCC is recommending that a pandemic risk insurance program be established to support the availability of non-damage business interruption coverage. This would also have to respond to insurance coverage gaps in other lines of business. That includes event cancellation, workers compensation, and general and employment practices liability.

This insurance coverage would be distributed by the insurance sector. It would be available to businesses of all sizes, with subsidized premium rates. Payments would be made on a parametric basis. That would be triggered by national health declarations and business closure orders made at the state level. This program would encourage others to assume a portion of the risk. They would also be able to use international reinsurance and capital markets to assume some of the risks taken by the government.

The landscape of commercial real estate insurance will continue to keep changing as there are more developments in the pandemic and onwards. As insurers, we have to stay abreast of these developments and serve our clients as best as we can in dynamic times.