As part of this column, we have already discussed the nuances of insurance, such as which forms are in demand on the commercial real estate market, how insurance premiums are calculated, how the amount of an insurance claim is determined, etc. In this issue’s article, CRE has decided to find out what end users think about insurance, or, more precisely, what they think about the quality of insurance services. Indeed, this article also sheds light on which complaints have built up on the part of policy holders toward insurance companies.

Experts quedtionned by CRE confirm that bigger and more wellknown an insurance company is, the less disputable moments arise between parties. Indeed, it is not surprising that policy holders are very thorough in the selection process of their partners, researching the reputation of insurance companies, the history of paying out claims, as well as the comments of other clients. Moreover, appraisal of an insurance company on the part of attracted insurance brokers is also taken into consideration.

“Because of this practice, we are able to avoid a lot of disputable situations,” says Tatiana Krasnova, administrative director at Sawatzky Property Management. “We work with large and well­recommended insurance companies, which we choose only on competitive basis. Thanks to the tender process, we not only determine the best company to meet our needs, but we also analyze the current situation on the insurance services market.”

At the same time, specialists pay attention at the tender stage to the weak points in working with insurance companies. “During the tender process, we often run up against situations when insurance companies do not pay claims on time and fully in accordance with the policy,” confirms Krasnova. “Moreover, an insurance company is not ready in all cases to make concessions to their clients. All of this, in our opinion, does not correspond to the necessary level of qualification of professional companies.”

Tashir also chooses an insurance company based on a tender and from a specific set of companies. “When opening a line of credit, the bank itself offers us a list of companies,” says Irina Kagramanova, press secretary at Tashir. “These are large and wellknown players; however, there are times when our enquiry goes unanswer for a long time, which does not show the best side of an insurance company. Others begin immediately to optimize the insurance contract. The goal of a tender is not to lower the cost of insurance, as this is virtually the same with every company. The goal is to choose the best insurance company in terms of service.”

Do disputes arise between policy holders and insurance companies in connection with the shortfalls of Russian legislation? Experts note that most often these situations are connected with loopholes in the law, allowing insurance companies to use them in their interest, as well as with the nuances in formulating the rules of the insurance policy, which, theoretically, could allow insurance companies to deny paying a claim. “Any disagreements can be avoided, if all legal nuances are carefully worded when drawing up the contract,” says Pavel Kurtashov, director of the legal department at Torgoviy KvartalDevelopment.

According to experts, practically all disputes arise as a result of misunderstandings, not fully working out the agreement or simply not knowing the details of the insurance policy.

Furthermore, a number of specialists note that the level of professionalism of insurance agents is not always as high as it could be. “At this time, the qualification of personnel leaves a lot to be desired,” believes Mikhail Gets, vice president for strategic development at Blackwood. “Situations occur when insurance companies draw up a contract too formally, which ends up being useless in a given situation.”

“Despite the parties’ interest in insurance, the market for these services is not ready to provide a really good product. Indeed, there is not enough detailed information written for all situations,” believes Eduard Apsit, general director at Facilicom. “The standard insurance risks for the operations of a management company are still being developed. This complicates selecting an insurance company and the further collaboration with the company. It is necessary to learn and take into consideration too many nuances characteristic of this or that insurance company, as well as guide and add to contracts.”

Elina Zanina, deputy director of commercial real estate management and development at MielNedvizhimost, believes that all parties must be very attentive when signing a contract, as compensation for lost property is rendered strictly according to the signed document. “Nobody just gives away money, and an insurance company, in its thoroughness, will investigate the reasons for the claim to determine the amount of damage and claim payment. The many types of commercial real estate, make creating a standard tariff scale is very complicated. There is also a lack of experience in Russia in insuring commercial real estate,” says Zanina.

At the same time, many commercial real estate market players speak about the imperfection of the legal framework. “Companies whose main business is connected with managing real estate facilities cannot insure their professional liability,” states Krasnova. “The only possible choice in this situation is to insure third party civil liability as part of a standard insurance policy. This is not the first year that this issue is topical for both us and many other management companies.”

“Insuring professional liability is the most complicated form of insurance,” says Vladimir Yadykin, director at Becar Commercial Property. “When management or operating companies say that they are insured against risks, this is not true. I shall explain: unconditionally, there are those who are willing to insure their liability, for example, the liability of a plumber for the quality of his work. In turn, insurance companies are willing to underwrite this type of agreement, but they have all the grounds for not paying a claim, as there is not a legal framework. There is a clause in the civil code, stating that in terms of third party liability insurance, a special federal law must be passed. However, as of today, this law does not exist. On many occasions we have offered to insure this type of risk on a ‘trust basis.’ Given that there is not a legal basis, this is not business, but rather, conjecture.”

“Another large complication arises with liability insurance for consulting services offered at the design and construction stages of real estate facilities,” states Krasnova. “As demonstrated by practice, there is practically no demonstrative basis for these types of insurance events, and insurance companies either honestly state that receiving a claim payment is very unlikely or the insurance premium will be so high that rendering the insurance is completely unfeasible. I would like to state that as of today, we do not know and insurance companies do not know the state of the legislation in the Russian Federation, including the departmental instructions, according to which the consulting services quality criteria are stipulated.”

Additionally, Zanina brings our attention to disputes associated with the specific cost of insured property, which, ultimately, in her opinion, affects the cost of an insurance policy. “The stumbling block in establishing the value of a facility and the corresponding insurance amount is the lack of a single version of contract terms and conditions and the terminology used,” says Zanina. “It is necessary to evaluate preliminarily a commercial real estate facility’s market value, to insure it in reality. The misstep occurs when including the land plot in the evaluation of the market value of a property, given that in the event of a claim, the land is damaged least of all. However, this situation significantly increases the cost of insurance. It is better to evaluate only the value of the building, excluding the value of the land plot, which is the least profitable for an insurance company. Indeed, a policy holder does not known this nuance, thus insurance companies use this to their advantage and do not itemize the value of the land plot. Therefore, when insuring commercial real estate, one must attentively review the insurance contract, using the services of appraisers and lawyers. In fact, the terminology used in the contract could seriously affect the size of the insurance payment in the event of an insurance event.”

“Disputes are possible, for example, when an insurance event happens prior to the signing of the main lease contract, when there is only a preliminary agreement on signing,” believes Kurtashov. “Here we can talk about a loss of profits on the part of the owner.”

Evaluating the Price

Opinions vary on the subject of evaluating the cost of insurance. Indeed, some believe that the rates are acceptable, while others are certain that the cost of insurance, which is high today, should decrease in time. However, it is worth taking into consideration that in speaking about the cost of insurance services, experts define varying types of insurance. “If we are talking about insuring a building, this is a developed type of insurance service with fully understandable tariffs, at a bit less of a percentage,” says Yadykin. “Insurance companies issue a service of acceptable quality, which, is not always needed by owners, although this is not very expensive. The level of insurance held by the owners of real estate facilities still leaves a lot to be desired.”

“The cost of insurance services depends a lot on the guarantees offered by a specific insurance company,” says Krasnova. “Of course, it is desirable to work with reliable partners whose services are of average cost, or, even better, lower than the price range of the market. However, in practice, it costs nearly double to receive reliability and quality. We find that international insurance companies are the most reliable at this time, and the cost of their services is high. Naturally, the more professional companies on the domestic insurance market, the more competition there will be. Accordingly, there is a possibility that the cost of insurance services, while maintaining the necessary guarantees, will reduce.”

“Another type of insurance service we meet is the insuring of the interior layout and the technical equipment,” says Yadykin. “The cost of insurance in this area differs substantially with various companies. However, this occurs for understandable reasons, as there are not enough specialists familiar with the specifics. Therefore, not many can insure, for example, a building’s ventilation system at adequate prices, and those who can, are large players on the market, such as Ingosstrakh, Rosgosstrakh, AlfaStrakhovanie, UralSib Insurance Group and others. At the same time, many companies’ insurance rates are very inflated, up to 15%, but these are ‘refusal tariffs.’”

At the same time, Yadykin says that there are negative examples in terms of paying out insurance claims on this type of insurance. “When the interior layout has been damaged as a result of an insurance event, we had to overcome the objections of the insurance company not wanting to pay the claim. All of this demonstrates that insurance companies do not have a developed means for assessing risks. Namely, there are not enough professionals who could actually assess the possibility of an insurance event happening, and, when necessary, to reinsure the risks. Moreover, the volume of insurance is not great, namely, there are not enough financial reserves for paying claims, and this renders the business unprofitable. Thus far, the volume of insurance funds are not growing, and an increasing number of players do not use the services of an insurance company, thus the problems with claims payments will continue. And only the powerful market players, those who have the financial reserves, will be insured against this pitfall,” says Yadykin.

“In terms of payments on insurance claims (our company has had insurance events only a few times), and in each case, the insurance company has been professional. Following the standard procedure of assessing the situation, we have received remuneration according to the insurance contract,” says Krasnova.

“Do insurance companies use loopholes in a contract and the law to avoid paying on a claim? I think so. Indeed, there are times when an insurance company refuses to compensate in part, based on the fact that specifically this event was not stipulated in the contract. It is more profitable for an insurance company to have regular large clients than one time to refuse making a claim payment to them, basing the refusal on not entirely objective reasons,” believes Apsit.

Construction and Installation Risks

“Today the majority of owners want to have civilized relations with their partners. Collaborating with a contractor is regulated by legislation as well as inhouse documentation, for example, ‘policies for completing construction, finishing and technical work.’ Indeed, taking out an insurance policy on one or several risks has become an essential term of such a document. We meet the following types of insurance: professional liability, material loss during construction and installation work, as well as third party liability,” says Artem Panteleev, commercial director at GintM

In this case, Panteleev brings our attention to several legal missteps, such as the need to secure an insurance policy from the very moment the general contractor enters the construction site. “The paradox is that we begin construction on the basis of a letter of intent, where the timeframe and deadlines, the amount of work and fines are stipulated, yet, there still is not a contract. Inasmuch as a letter of intent is not a legal document, there is no basis for taking out an insurance policy. It is a vicious circle: without a contract, there is no insurance policy, without which construction cannot begin,” says Panteleev.

“The standard insurance policy is valid for one project,” continues Panteleev. “Accordingly, a contractor working at various sites must sign a separate contract for each case, which is very irksome. This procedure requires more time and resources. The ideal situation would be taking out one insurance policy which would cover all risks at every construction site. For example, the area of insurance would be Moscow, and we could complete several projects by using one insurance policy.”

Another stumbling block is the duration of the insurance contract. The standard insurance policy is issued for a specific period of time, usually for the duration of the construction. “In many instances, this does not suit the general contractor, for whom it would be more convenient to have an insurance policy for one year, not for the duration of working on one project (finishing work in an office center does not take very long. Unfortunately, not very many insurance companies underwrite insurance policies with a 12month period and the area of insurance as being the Russian Federation, naturally with a definitive limit to the insurance remuneration. This would considerably assist contracting construction organizations, allowing us to leave behind today’s accepted insurance system of on construction project, one insurance policy,” concludes Panteleev.

Insurance Forecast

All of those specialists queried have underscored the importance of insurance. “The large management and service provider players on the real estate market already understand the necessity and advantage of having civil liability insurance. On one hand, this allows the owner of a building to rest easy with entrusting a management company with operations of a property. On the other hand, the management company can clearly set and stick to the budget for operations at each facility,” believes Apsit. “And all disputes arising during the insurance process could be resolved successfully. The only thing this requires is a more attentive and responsible attitude toward the issue of insurance on the part of all participants.”

According to Gets, the market must become wellknown and formalized, and it is necessary that its participants clearly recognize which risks are better to insure in each specific situation. Indeed, knowledge would be strengthened by an expanded practical basis, thus the number of disputes and misunderstandings often seen today, when everyone interprets insurance on his/her own terms, would decrease.

“All of the shortcomings of Russian insurance legislation will gradually be resolved, and the insuring of commercial real estate will work at full strength, given the level of interest in insurance services is great on the part of real estate market participants,” concludes Zanina.