5 Hidden Insurance Gaps That Could Impact Real Estate Profitability

Years of substantial claims from natural disasters have led to tighter underwriting policies, upward pressure on premiums and a shortage of capacity in select insurance markets. As a result, many real estate owners and operators are encountering gaps in their coverage they don’t know they have. The good news is there are strategies to better understand these emerging trends and to navigate the policies that new projects require.

Pursuing comprehensive coverage today often drives property owners to rely on multiple insurers to meet their needs. The challenge is this “tower coverage” approach introduces inconsistencies in policy terms, exclusions and deductibles. Without a thorough understanding of these nuances, policyholders risk severe financial losses due to uncovered claims.

Here are five key areas where real estate insurance gaps can emerge and strategies to help you reduce them.

1. Vacant vs. Unoccupied Properties

Insurers vary their restrictions on coverage for vacant properties. If a building remains unoccupied for an extended period, typically 30 to 60 days, some policies automatically scale back or even eliminate certain types of coverage. The challenge arises when policyholders are unaware of these changes and assume their properties remain fully insured, so it is vital to seek clarification.

Additionally, policies often contain protective safeguard endorsements, which require property owners to uphold specific security measures, such as maintaining fire suppression systems, alarms, or security lighting. If these requirements known as warranties are not met, a claim could be denied, leaving the property owner financially exposed.

To prevent coverage gaps, property owners should take proactive steps such as:

• Notifying insurance brokers in advance if a building will be unoccupied for an extended period
• Regularly visiting and inspecting vacant properties
• Retaining minimal operational activity for “unoccupied” status rather than “vacant”
• Ensuring compliance with all protective safeguard endorsements

2. Percentage-based Deductibles

Many property insurance policies, particularly those covering catastrophic events, calculate deductibles as a percentage of the building’s total insured value rather than a fixed dollar amount. This can lead to significantly higher out-of-pocket costs for property owners in the event of a claim.

For instance, if a commercial property is valued at $20 million and the policy has a 10% deductible for hurricane damage, the property owner would be responsible for the first $2 million of the loss. The percentage is calculated against the value at the time of loss.

To manage this risk, real estate owners should:

• Carefully review deductible structures in their policies
• Work with insurers to negotiate lower percentage deductibles where possible
• Consider securing additional coverage, such as deductible buy-down insurance, to offset high out-of-pocket expenses

3. Layered Insurance Policies

Traditionally, real estate owners and operators could secure their desired coverage limits with a single insurer. Today, obtaining adequate protection often requires layering policies across multiple carriers.

Even when using a common policy form among insurers participating, each insurance provider may define coverage differently or set unique limitations. For example, one insurer may exclude coverage for flood, while another may limit coverage for certain weather-related events. If these nuances are not carefully analyzed, property owners may assume they are fully protected when they have significant blind spots in their coverage.

To mitigate this risk, real estate professionals should work closely with an experienced insurance broker who can scrutinize policy language and ensure there are no contradictions or missing protections. Conducting a thorough policy comparison before finalizing coverage is critical to maintaining comprehensive protection.

4. Executive Liability Exposures in LLC-owned Properties

Limited liability companies (LLCs) are a popular structure for real estate ownership, particularly among investors and family-run operations. However, many LLC owners do not realize that they may have additional liability exposures that require specialized coverage.

Directors and Officers (D&O) insurance and Employment Practices Liability Insurance (EPLI) can protect LLC members from claims related to mismanagement, discrimination, wrongful termination, and other business-related disputes. A critical oversight in this area is failing to secure retroactive coverage for prior actions. Many policies exclude claims that arise from incidents that occurred before the policy’s effective date unless specifically negotiated.

To safeguard against this exposure, LLC owners should:

• Assess whether D&O and EPLI coverage are necessary for their business structure
• Disclose any known potential claims to new insurers upfront to ensure they are covered
• Work with an insurance professional to obtain retroactive coverage when switching policies

5. Actual Cash Value (ACV) Endorsements on Roof Coverage

In states prone to catastrophic weather events, such as Florida and Texas, insurers have increasingly implemented actual cash value (ACV) endorsements on roof coverage. This means that if a roof is older than 15 years, insurers may not cover full replacement costs. Instead, they will only reimburse for the depreciated value, significantly reducing the payout in the event of a loss.

For property owners unaware of this policy clause, a storm or hurricane could lead to unexpected out-of-pocket expenses, disrupting financial stability. The best way to avoid this problem is to:

• Review current insurance policies to confirm whether roofs are covered under ACV or replacement cost value (RCV)
• Invest in roof maintenance and upgrades before reaching the 15-year threshold

Closing the Gaps to Ensure Protection

As the real estate insurance market continues to evolve, property owners and operators must be proactive in identifying and addressing coverage gaps. Relying on outdated assumptions about insurance policies can lead to devastating financial consequences.

By closely reviewing layered policies, monitoring occupancy status, understanding deductible structures, ensuring adequate roof coverage and addressing executive liability exposures, real estate owners and operators can mitigate risks and protect their bottom line. Taking these steps now can help prevent costly surprises in the future, ensuring that your real estate investments remain secure and profitable.