09/21/2026
INSURANCE Q&A SESSION
Eric Paulos answers AACSC members’ questions
Hello apartment owners! First, special thanks to Allan Wood, Nancy Aswelde and Paige Filice for inviting me to speak at the Petroleum Club open member meeting on May 22, 2003. Thanks again to all AACSC members who came to listen.
A number of apartment owners had questions concerning the current condition of the apartment insurance market (do you picture the red light spinning on the top of the quickly moving emergency vehicle?).
Although some questions were answered during the meeting, there were others that time did not allow me to answer. I also received several emails and phone calls from members after the seminar. This month, we will answer a few of those questions:
Q). Have all the insurance companies other than the California Fair Plan stopped writing insurance for buildings over 25 years of age? Where can apartment owners turn for insurance on older buildings?
A). There are still a half a dozen to a dozen insurance companies in California that will cover buildings older than twenty five years. Much as rates go up for individuals buying life insurance, you can expect property insurance rates to go up as your building ages, also. Since wood dries up, roofs leak and start breaking apart during windstorms, pipelines become brittle and prone to break, wiring, insulation and conduit all get brittle over age, so does the likelihood of claims. Let’s also face it, most of the lower cost housing is in older buildings, and low income tenants are more likely to sue their landlords. All of these factors add up to higher costs, including more inspections, reflected by the increased maintenance requirements of older buildings.
Q). Insurance is expensive. I can save the premiums if I don’t spend on insurance. Isn’t that the way big companies operate, by self-insuring?
A). There is a huge difference between self-insurance and “no” insurance. Consider how would you pay for an attorney to defend you if your tenant’s guest claims they were hurt on your premises because of a negligent act on your par, let alone pay for the court judgment if the claimant prevailed? Would you sell your building, your home, your stocks or your belongings or other assets to cover the costs or dissolve your IRA, your pension or savings? If your property is mortgaged, would you really want your bank to provide you with their own property insurance, which is almost always required, and only protects the amount of the loan and costs exorbitant amounts? Are funds readily available to cover several damaged units that are made unusable because of a fire or other claim? Here’s a guideline: Businesses are considered eligible for self-insurance when premiums are expected to exceed $250,000, the business is at least five years old with a current net worth of $5,000,000 and has generated at least $1,000,000 per year in net income for the past three years. Insurance companies use actuarial math experts to calculate statistical probabilities of loss, and carry reserves, which often are only put at risk to a predetermined amount, where there is “reinsurance” to cover losses above those amounts. The reserves are accumulated by thousands of insurance premiums that represent thousands of properties so there is a “spread of risk” instead of all of the wealth concentrated in one apartment building, which is what happens when the owner of a single building decides to “go bare.”
Q). What is an independent insurance agency? How is it different from a one-company insurance agency?
A). With some exceptions, a one-company insurance agency is contractually bound to offer first right of refusal on all business to the one company, tying the agent’s paycheck to one company. Independent insurance agents are able to shop the market to find their clients the best company or combination of companies to fit the client’s needs.
Q. What are the requirements to form an insurance company in California?
A. A prospective company would first publish and file with the Division of Financial Regulation for the California Department of Insurance, a declaration of intent to form an insurance company, along with an affidavit of publication stating its articles of incorporation to comply with the requirements of California law including numbers and residence of the members of the board of directors, and business address. The prospective insurance company then would form a board of directors, issue stock or shares, place the proceeds with the Department of Insurance, file with the CDI’s Property & Casualty Section any premium rates, policy forms or endorsements needed to transact business, submit to DFR a completed Uniform Certificate of Authority Application, and then wait for the DFR to reply with a scheduled date for a pre-license examination This examination would include verifying the statutory deposit, compliance with financial requirements, location of insurance company’s principal place of business, the filing of any necessary policy or endorsement forms, and the competency and integrity of insurance company officers and directors. Based on the results of the pre-licensing examination, the DFR would then complete the formation process, which is formalized when the CDI issues a Certificate of Authority for the company to transact business in this state. In addition to all of the above, the newly formed company must submit quarterly financial statements to the CDI for review and apply with all regulations for filing any new rate or product changes (and you thought getting a permit involved a lot of red tape!).
Q). My insurance company is threatening to cancel my policy unless my handrail openings are 4” or less. My building passed city inspection just the way it is, what gives?
A). Insurance companies operate independently from local regulatory agencies and may have requirements that exceed local code requirements.
Q). I have a wood shake roof on my building. How does that affect my insurance?
A). Wood shake roofs, due to their flammability, are generally considered to be higher risks than buildings with tile, composition, asphalt or slate roof covers. Many localities even prohibit use of wood shake roofs in new construction. Some carriers do not differentiate; other carriers will not insure buildings with a wood shake cover, while other carriers prohibit these in areas that are considered to be an area with a high fire risk, such as areas with brush.
Q). What is coinsurance?
A). Coinsurance is a number used that requires an apartment owner to insure for full building value, instead of a small value. The reason for this is that statistically, 97% of all losses are partial losses, not total losses. The way that companies set rates is to determine what premiums to charge based on its insureds carrying full insurance to value. If all apartment owners only carried ten percent of their building value and were given full payment on losses, then insurance companies would go bankrupt, so the coinsurance factor was designed to prevent that from happening. As a building owner, you are required to carry amounts of coverage to building value which are at least as high as the coinsurance number. For example, if your policy contains a 90% coinsurance clause and the cost to replace your apartment is $1,000,000, you must then insure for at least $900,000 or suffer a penalty for any loss on that building. Say you only carried $450,000 in the last example. You experience a $50,000 covered loss and therefore only would recover $450,000/$900,000 or $25,000 on that claim. Almost all insurance policies have coinsurance examples within the insurance policy’s property section, for policyholders to read.
Q). What is a non-admitted carrier? Should we avoid non-admitted carriers?
A). A non-admitted carrier is an insurance company which does not pay taxes to California or participate in the guarantee programs of California-admitted insurance companies. It is possible that if a non-admitted carrier becomes insolvent, an insured could lose their ability to collect on a claim. For this reason, insurance buyers should be cautious when presented with the option of purchasing insurance from a non-admitted carrier. Stay away from small, poorly rated ones. Non-admitted carriers, far from being all bad, are a very good resource to have, to bridge the gap caused by the present lack of companies offering apartment insurance. A current list of Eligible Surplus Lines Carriers recognized by the California Department of Insurance may be found at this web address: http://www.insurance.ca.gov/docs/FS-Insurer.htm. Your agent should be able to give you information regarding insurance offered by a non-admitted carrier. A.M. Best, Inc., is the most widely used rating service and provides information about insurance companies. (Those owners without web access may contact me if they would like to receive a mailed copy or faxed copy of this list).
Q). When is the apartment insurance market going to improve?
A). I have recently published an article which highlights the fact that the 4th quarter 2002 results for companies have been very positive, signaling the possibility of rates leveling off in the near future. The stock market seems to be moving along with cautious optimism so better times lie ahead for apartment owners, how soon and how much better is still uncertain.
Eric Paulos is a Consumer Advocate, Author, Speaker, licensed California Insurance Agent, Certified Insurance Counselor, and member of National Society of Agents for Consumer Education, an advocacy group to promote awareness and public education regarding insurance. He is owner of Eric Paulos Insurance Services, an independent insurance agency which specializes in insuring apartment owners. He can be reached by phone at 800-974-6787, fax at 800-959-9603, email at [email protected], or on the web at www.apartmentins.com . He will be happy to answer any questions you may have.
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