Zack’s Sales Corner Episode- Two Property Predicaments: Navigating the Labyrinth of Lessor’s Risk

Our Speakers

About Zack Sutika

Zack Sutika was born into the insurance industry, starting his career at his father's State Farm agency at just 16 years old. After spending eight years in Commercial Brokerage, he joined Pathpoint in 2024. Zack now serves as the Account Manager for Florida agents and hosts Pathpoint's podcast, creating educational and informative material on current market trends, news, and tips.

About Johnston Stakely

After graduating from the University of Alabama, Johnston started his insurance career as a producer at Alfa Insurance in 2015. He then moved to South Shore Insurance Underwriters, focusing on property insurance as an Excess and Surplus Underwriter. In 2023, Johnston joined Pathpoint, serving as the underwriter for the Midsouth, Gulf State, and Florida/Georgia regions. Currently, Johnston is responsible for leading the Underwriting Operations team at Pathpoint and oversees new and renewal business operations.

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Zack: Insurance agents all over the country are facing a hard property market, especially on Lessor's Risk (LRO). What are some common declinations you see for property accounts here at Pathpoint?

Johnston: I can relate to the struggles agents experience every day. As an E&S underwriter I have definitely seen my fair share of interesting and alarming submissions that I have to decline. The most common declinations are those tenants engaged in rather higher risk operations. For instance, I received a rental duplex with a backyard used as a junk yard for automobiles. The carriers would hunt me down if I bound that, so needless to say I had to decline the risk!

Another common declination reason I see is a lack of pride when it comes to ownership. By this I mean properties that are run down, poor roof condition, existing damage, debris in the yard- very unattractive properties.

Accounts with prior claims with unrepaired damage are also common declinations. For example, a roof loss with a high payout, but only a portion of the roof was repaired and not fully replaced, that's a decline. Same goes for plumbing loss and plumbing not being replaced, that's a decline usually as well. In general, lack of updates to wiring, plumbing, HVAC, and roof systems within the last 25-30 years are other unattractive to your underwriters.

It's also always a fun situation when a named storm develops in the Atlantic and is tracked to enter the Gulf of Mexico, and all of a sudden, property owners want wind coverage they hadn't carried in the past. Those accounts looking for last-minute coverage with an impending storm approaching will lead to a decline.

For LRO in particular, if you have a tenant that doesn't have their own separate general liability (GL) and property insurance in place, that's another common declination. We want all landlords to require tenants to obtain their own insurance policy, and we want to see there is a lease agreement, especially for residential.

Zack: Speaking of residential, Airbnbs and VRBOs are everywhere. Many states are cracking down on these short-term rentals popping up, imposing changes to the local and state laws. How can agents successfully write these short-term rentals like Airbnbs?

Johnston: Ah yes, the Airbnb rentals cause agents a lot of headaches while trying to find a market. It's been a pain point for agents for quite some time.

Most carriers tend to avoid short-term/vacation rentals reason being they see it as more of a business, which is excluded on homeowner's policy forms if the home is owned in a personal name, or LLC.

Short-term rentals tend to be a higher risk due to many different tenants using the risk throughout the year, and they may not take care of the property or report any issues they see, etc.

Additionally, some of those Airbnbs offer golf carts, bikes, and kayaks for tenants, and some markets won't consider that type of risk.

Unlike long-term rentals, it's hard for the insured to implement some type of risk transfer agreement where the tenant/renter carries their own insurance - which most carriers require.

Zack: What is Pathpoint's stance on Airbnbs and VRBOs?

Johnston: Luckily for us, the lack of available markets gives Pathpoint a unique opportunity to help place that business. Two of our markets will write these short-term rental accounts. Agents can use mix and match quoting to find GL coverage with Nautilus and property coverage with Vave. Keep in mind that there are some guidelines. The risk needs to be a true Airbnb/vacation rental and the insured or LLC members cannot occupy the risk at any point during the year as a secondary or vacation home.

Zack: So, landlords can’t rent out a spare bedroom on occasion?

Johnston: Correct, the risk needs to be used strictly as an investment property. Also, for the risk transfer issue - our carriers require each renter to sign a rental agreement containing the following:

• Security/Damage Deposit
• Cancellations/Termination Agreement
• House rules
• Number of guests
• Terms and conditions of the property

Zack: That's great information. In Florida and the coast, we see a ton of short-term vacation rentals. It's great agents can easily find coverage for their LRO rentals with us. In your experience, how has the LRO landscape changed over the years?

Johnston: Along with general pricing increases, the biggest and most recent changes have been to underwriting guidelines becoming more strict and overall appetite becoming more narrow. As carriers evaluate their books and try to avoid attritional losses, they have tightened up their guidelines, making the higher-risk exposures hard to place.

Carrier appetites have changed, with some risks they used to take they are now trying to avoid entirely. For example, specific tenant exposures being considered higher risk. One that comes to mind are LROs with a tenant operating as a bicycle store. Those with e-bike sales are now ineligible - lithium batteries have the tendency to spontaneously combust, so we need to avoid the fire risk.

We, meaning Pathpoint, can take some of those unique mixed-exposure LROs that others may shy away from. Apartments with commercial tenants, mercantile/retail exposure, plus residential are fine with us. Or those LROs with a restaurant on the bottom floor and residential units on other stories are accepted, too. Underwriters may be more strict, but ultimately, that's the case so we can ensure we have capacity and carriers for agents to continue placing business with.

" We want to help you write business, and we want to grow, but we also want to write good, profitable business, so the more information provided, the better."

Zack: It's wild how the marketplace has changed for LRO accounts these past couple of years. As an underwriter, what are the biggest challenges you face handling Lessor's Risk accounts, and what are some red flags you come across?

Johnston: Some common questions I deal with include: "What is the true exposure of all tenants?" or "How can I understand what the tenants are truly doing and how they are operating?" Agents may not always know, which can make things difficult, but good thorough submissions are more likely to turn into quotes, and quicker. Just because the tenant occupancy is listed as "contractor's storage," - I'd be questioning what is really going on at the location, like any welding?

I also ask is the risk information accurate on the submission like the roof or construction. If not, my red flag goes up as I'm already suspicious that something is wrong with the risk. Sloppy or incorrect submissions get looked at much closer than accurate and complete submissions. Taking the time to do some front-line underwriting before sending the risk to an underwriter can save a lot of time and also earn the underwriter's trust when the submissions are accurate. We want to help you write business, and we want to grow, but we also want to write good, profitable business, so the more information provided, the better.

Zack: What are the biggest rating factors that an agent may not think have a big effect on the cost and quote?

Johnston: With carriers such as Canopius and their Vave product, risks are modeled during the quoting stage for profitability through rating algorithms. So, every detail of the risk is taken into account when calculating the final rate.

For example, in addition to frame, masonry construction, exterior construction is rated separately- stucco, brick veneer, hardie board. Roof shape, gable is rated higher than hip. For roof type, metal receives a credit while normal/three-tab shingle is rated higher than architectural. Update years to wiring, plumbing, HVAC, and roof is so important. Plumbing type, plastic receives more of a credit than copper or galvanized. Window protection and roof anchorage too (nails, hurricane straps, single wraps, double wraps, etc.). Knowing all the details of the risk is important, as going with default answers may lead to a higher premium. Also, on LRO knowing the true exposures of the tenant is important because typically the rate is based off the highest risk exposure.

Zack: What are the largest hurdles you think agents will have to navigate in the LRO space in the coming years?

Johnston: Appetite will continue to shrink, carriers avoiding certain risk attributes or including more limitations/exclusions. You will continue to see stricter guidelines for roof age, updates, years, etc. Carriers are trying harder than ever to lower their book's PML, so guidelines will continue to become more strict. As a result, underwriters will also take a closer look at each account, but that's ultimately to ensure we have carrier support and give agents plenty of markets to place business with. Agents need to partner with an MGA that will always have capacity and plenty of markets available at all times - like Pathpoint.

Zack: Thank you for this informative chat, Johnston, and thank you all for attending. To quote your LROs, visit Pathpoint.com.

Download the transcript and our Lessor's Risk Appetite.