SS249: What are Loss Runs?

SS249: What are Loss Runs?

Loss runs are documents provided by insurance companies that list the claims against a business or rental property. In this episode, Charles discusses what loss runs are and when investors should request them.

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Talking Points:

  • Loss runs are detailed insurance reports that show the claims history of an insured party and outline each time that an insurance policy associated with a business or property has been used. Most loss run reports will list all claims, if any, over the past 3-5 years. They are typically utilized for business insurance policies, which can include commercial properties. Since our show is focused on real estate investing, I will focus my explanation mainly on how loss runs pertain to real estate investors. 
  • Additionally, when I say commercial properties, most people think of large office buildings, but loss runs will be a factor for all sizes of rental properties. Every time I have sold a rental property, the buyer has requested loss runs, even with small 3-unit apartment houses.
  • A loss run report will typically contain specific information such as:
    • The insured’s business name
    • Policy numbers and the dates of coverage
    • If there are no claims, the report will simply say “No Losses Reported.”
    • If there are claims:
      • Date of when the claims occurred
      • The date when the claims were reported to the insurance company
      • A brief description of the claim incident (fire, theft, water damage)
      • The specific insurance policy involved (commercial property, general liability, etc.)
      • The total amount paid to date by the insurance company (settlements, legal, property damage, etc.)
      • The amount of reserves the insurance company has set aside for future costs if the claim is still open.
      • The status of the claim (open or closed)
  • Why are Loss Runs Important in Real Estate?
    • For Buyers:
      • Most importantly, the loss runs will indicate how difficult and expensive it will be for the new owner to insure the property. A property with a claims history of significant payouts will make it much harder and much more expensive to insure. This will most likely dramatically change the insurance premium they estimated in their underwriting.
      • Additionally, the loss runs help identify red flags and will allow buyers to understand the historical risks of the property. For buyers who see claims due to water leaks and plan to re-pipe the property, this will alleviate these potential claim issues. If the buyers did not account for these issues, it might be wise to perform further inspections.
      • If there are several slip-and-falls on the property, it is possible that the property management has not been managing the property correctly during winter storms. Additionally, it could also speak to the tenant profile and what the new owner can expect.
      • Buyers can utilize the loss runs to uncover red flags, which can be leveraged to lower the property’s purchase price.
    • For Insurers:
      • It helps assess future risk. Insurers can review the severity and cost of previous claims to analyze potential future claims, determine whether to offer coverage, and set the price. 
      • Additionally, I feel insurers are also gauging the quality of the property management when reviewing loss runs and pricing policies. If the claims are average for the area, class of property, etc., but exceed the average, it might indicate that the property management is subpar. 
    • For Owners, Sellers, or Property Managers:
      • It helps sellers prepare to sell a property. If they had a large claim 2 years ago, they probably want to wait at least another year before listing the property for sale.
      • For property managers, reviewing the loss run report might expose negative management trends that have been adversely affecting the property. Maybe it’s time to reroof the property, repair the driveway, or the stairs. Management may need to be more proactive about snow and ice removal. Additionally, the drains that pour onto the sidewalk and cause slipperiness should be rerouted.
  • Loss runs are a credit check for your property, where buyers, lenders, and insurers can understand the potential future liabilities by reviewing the property’s claim history over the past few years. Loss runs directly impact the cost of property insurance, making it a crucial factor when underwriting and purchasing a property, since a property with many claims will make it much more difficult and much more expensive for the buyer to insure.

Transcript:

Charles:
This one report can ruin your underwriting dramatically increase your insurance costs, or cause buyers to walk altogether and many investors never even check it. Welcome Strategy Saturday. I’m Charles Carillo and today we’re breaking down loss runs, what they are, why they matter, and how smart investors use them. The spot risk, negotiate price, and avoid insurance nightmares. So let’s get started unpacking the entire report so you can spot potential problems early, negotiate more effectively, and avoid costly surprises down the road. So loss runs are detailed insurance reports that show the claims history of an insured party and outlining each time than an insurance policy associated with a business or property has been used. Now, most loss run reports will list all claims, if any over the past three to five years, and they’re typically utilized for business insurance policies, which can include commercial properties. Since our show is focused on real estate investing, I will focus my explanation mainly on how lost runs pertain to real estate investors.

Charles:
Additionally, when I say commercial properties, most people think of large office buildings, but lost runs will be a factor for all size rental properties. Every time I’ve sold a rental property, the buyer has requested lost runs, even with small three unit like apartment houses. And a lost firm report will typically contain specific information such as the insurer’s business name, policy numbers, and the dates of coverage. If there are no claims, a report will simply say no losses reported. If there are claims, it’s going to list the date of when the claims occurred, the date when the claims were reported to the insurance company, a brief description of the claim incident, fire theft, water damage, the specific insurance policy involved, whether it’s commercial property, general liability, et cetera, and the total amount paid by the insurance company settlements, legal property damages, and the amount of reserves the insurance company has set aside for future costs if the claim is still open and the status of the claim, whether it’s open or close, which is extremely important too.

Charles:
If you’re buying a property or looking at a property with an open claim, the wire loss runs important in real estate. Well, for buyers, most importantly, the loss runs will indicate how difficult and expensive it will be for the new owner to insure the property. Our property with a claims history of significant payouts will make it much harder and much more expensive to insure, and this most likely dramatically changes the insurance premium. They are estimated in their underwriting. Okay, so maybe you’re just using general underwriting and then maybe once you get down really into underwriting, before you put the offer out, you go and get a quote for what the property will actually cost. That’s gonna be one thing they’re gonna ask about. You know, I’m looking at five unit buildings and this was insurance from five unit building on the street, and this is a five unit building, so underwriting over here, so I’ll use the same number.

Charles:
I’ll just plug in over here and think it’s gonna be the same. My underwriting. Well, you put those loss runs in there and now it changes dramatically everything that’s happening at that property in the eyes of the insurer and then in the eyes of what your premium’s actually gonna be. Additionally, the loss runs help identify red flags and will allow buyers to understand the historical risks of the property. Not every problem is gonna have an insurance claim, but if you see someone like someone slipped on the property, well, I’m gonna take a little bit more look around everything when I’m there and saying, where could people slip at this property? Is there an issue? What could be a problem when I buy it? If people are slipping here, maybe one person filed the claim they sued, there might be another nine people that also slipped or nine times that they didn’t sue.

Charles:
So this is a super important thing that buyers need to look at. And for buyers who see claims due to water leaks and plan to re-pipe the property, this will alleviate these potential claim issues. But if the buyers did not account for the issues, it might be wise to perform further inspections. If there are several slip and falls on the property, like we talked about, it’s possibly that the management has not been managing the property correctly during winter storms, which is one way of doing it. And if your management’s better, then it’s something that you’ll probably decrease that or eliminate it. Additionally, it could also speak to the tenant profile and what the new owners can expect. So if you’re getting a lot of slip and falls or you’re getting a lot of, you don’t see any issues per se, and the management was very good, this might just be the class of property and then the tenant profile that’s at that property that’s attracted that property that lives there.

Charles:
And you might expect then, okay, I’m gonna have claims here and this is something that I’m gonna have to get used to if I wanna buy this property. And then also my insurance is gonna be higher than other properties possibly. You know, in the area of the same vintage. Now, buyers can utilize the loss runs to uncover red flags, which can leverage them to lower the property’s purchase price. So with all this due diligence you’re doing that the loss runs are really uncovering for you that you’re kind of going in there and digging deeper. At the end of the day, if you go forward with the property, and maybe it could be a one-off thing that’s possible, right? So if you’re looking at loss run and there was, you know, one claim four and a half years ago, something like this, okay, I got that.

Charles:
You know, that’s a one time thing. If you’re seeing multiple claims, especially if they’re like similar, that might be there’s an issue and maybe it’s because of old management, but you are gonna have to make the decision of was it bad management before, which you can tell by the, you know, even if there’s no snow out there and people were slipping on ice, you can probably tell by how the property is being managed at that point. But if it’s not, then there’s something that might be inherently a problem with the property that it’s just gonna lead you to paying more for insurance. Now, for insurers loss runs, it helps them assess future risk. Insurers can, you know, they review the severity and cost of previous claims to analyze future claims and potential for them and determine whether to offer coverage and set the price for that coverage.

Charles:
Additionally, I feel insurers are always gauging the quality of the property management when reviewing loss runs and pricing policies. If the claims are average for the area and the class of property, et cetera, but maybe they exceed the average, it might indicate that the property manager is subpar and it might not just be the property itself. And this is something too for owner sellers or property managers, the loss runs, it helps sellers prepare to sell a property. If they had a large claim two years ago, they probably wanna wait at least another year before listing the property for sale, right? Because now they can give a clear three years of loss runs, nothing, report it for property managers. Reviewing the lost working report might expose negative management trends that have been adversely affecting the property. Maybe it’s time to reroof the property, repair the driveway or the stairs.

Charles:
You know, management may need to be more proactive about snow and ice removal. And additionally, the drains that pour out into the sidewalks and cause slippery slipperiness that people could, you know, could be re rerouted somewhere else around walking and driving areas. Loss runs are really a credit check for your property, and where buyers, lenders, and insurers can understand the potential future liabilities by reviewing the property’s claim history over the past few years and loss runs directly impact the cost of property insurance, making it a crucial factor when underwriting and purchasing a property. Since a property with many claims will make it much more difficult and more expensive for the buyer to insure. I remember a property I had years back, it had a claim on it for I think it was like $2,200 or something. I changed insurance companies and they’re looking at it and they say they’re gonna gimme a lower premium on the property.

Charles:
And they said, we can, you know, we’ll give you a lower premium. However, your deductible can’t be a thousand, it’s gotta be 2,500, and that was just covering one claim I had on loss run. So it’s important that you understand loss runs and how it affects you as a buyer and a seller. So I hope you enjoyed.

 

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