Market Know-how: No Need to be Scared

At the beginning of the 18th century in London there was a large fire. This incident set proprietors of expensive buildings in the city center to thinking about how to minimize damage in similar situations. The decision to organize a general fund generated from payments of partners was accepted. This fund was meant to recover at least some part of the lost property for its members if there was a fire. So the first insurance company was born.

In the last several years in Moscow the buildings of the Ministry of Transport of the Russian Federation and the Manezh were completely destroyed as a result of fires. These premises were not insured. Therefore it was necessary to restore them partially with funds from the state budget and to involve private investors.

According to experts, at the moment in Moscow about 50 percent of offices are insured. And the types of insurance for office premises have actively developed in the last few years. However, experts specify, for quite clear reasons tenants are not inclined to insure rented premises. But as the renting culture grows, more often the cost of insurance is already included in the cost of rent.

What do we insure?

On the website of any large insurance company there is a "Legal Entities” section. In this section is described in detail what insurance is offered to owners and tenants of commercial real estate. For example, RESO-Garantia has a program called RESO-Office. At Rosno it is possible to insure real estate and property against fire and other dangers, and also to insure whole property complexes and different kinds of property. Ingosstrakh and Rosgosstrakh also offer such policies.

In February 2006, a fire practically completely destroyed the building of publishing house Press, which was insured by Rosno. In the investigation of the circumstances of the event the insurance company involved Cunningham Lindsay Rush independent expert organization. After the investigation had been completed, the insurance company carried out its obligations of the contract and made payments to the company, said Artyom Iskra, director of the property insurance department in the Moscow Region at Rosno, adding that not the whole building was insured by Rosno. The internal furnishings and movable property were insured by another company.

Sergei Sokolov, head of the department of activization of management of non-industrial insurance company Ingosstrakh, thinks that the insurance culture is still not popular in the Russian business community. As a rule, he argues, representatives of foreign firms or those organizations that are forced by proprietors of premises are those who insure their offices. There are not many organizations that take out insurance of their own free will. Those tenants who conclude insurance contracts "by compulsion," usually choose only to insure the property against the sole risk of fire.

At the same time, says Igor Ivanov, assistant to the general director of RESO-Garantia," it is possible to not only insure a property against damage from standard risks (fire, leaks, illegal acts by third parties and falling devices), but also against unusual incidents. It is also possible to insure movable property that is in the office but in this case it is obligatory that the company owns it.

"A professional proprietor of real estate without fail will have a clause in the rental contract concerning insurance," says Andrei Postnikov, head of the department on work with corporate clients at Jones Lang LaSalle. "For example, it can be the tenant's duty to insure not only the property, but also improvements inside the office, the responsibility to third parties and the responsibility to the proprietor of the building." The owner of a building can specify in the contract the minimal cover of risks in money terms. But proprietors should also insure the responsibility to third parties and the building.

For example, the tenant could put something so heavy on the floor of the office that the overlappings will fall and those who rent premises on the floor below will suffer. This will be covered in an insurance policy that covers the responsibility to third parties. However the proprietor of the premises tries to shift the cost of the insurance policy to the tenant, the expert tells. Usually the owner includes it in the rental contract under "operational charges." As an example Postnikov gives international developers AIG/Lincoln & Hines. Besides payment for using the premises these companies when concluding rental contracts oblige the tenant to pay operational charges for the maintenance of the building the amount of which they establish at the end. Charges for the cost of insurance that the proprietor pays are also included. This is international practice.

In class A business centers insuring the property and the civil liability of the tenant is standard practice, Marina Mityushnikova, head of the legal department at CB Richard Ellis/Noble Gibbons says. She notes that unsigned insurance contracts are frequently the cause for a rental contract to be cancelled. As a rule, Moscow representatives of western tenants are insured within the limits of global insurance programs.

Other informants of Vedomosti agree. They say that in the West insuring office premises is standard. As a rule, experts say, foreign companies renting space in Moscow are already insured through international companies from all possible risks. In this case there is no need to conclude a new contract, it is enough to sign an extra agreement to the first.

What are we paying for?

When choosing which insurance the insurant should adequately evaluate the possible risks in relation to the premises. The price of the policy will depend on this.

The price is defined individually depending on the value of the insured property. However Vladimir Zhuravlyov, director of the department of commercial real estate at NAI Russia says that each policy has its own coefficients from which the sum of insurance is considered. For example, in title insurance, he continues, such a factor makes up about 0.7 percent. The value of the factor depends on the policy of the insurance company.

Alla Fokina, deputy director of the department of property insurance of legal entities at Rosgosstrakh, says that the rate can vary from 0.12 percent to 1 percent if, for example, it involves a monument of architecture in which there might be wooden overlappings. Iskra thinks that the activity of the company and the building's location are important when factors when forming the tariff rate. If it is a good office in the elite center the rate can be from 0.06 percent to 0.1 percent. And for a warehouse, 0.11 percent. Iskra specifies that there are factors that lower and increase this rate. For example, if offices are located on the second floor of a building, and on the first floor there is a restaurant. In such a situation the rate will increase. This is because the risk of a fire is greater than if it was purely an office center, explains Iskra.

Sokolov says that the price of the policy is influenced by many factors: the general condition of the building and its age, the presence of systems (signal systems, fire sensors, video surveillance, etc.), the condition of engineering systems, the presence/absence of personnel servicing the given systems, presence of security in the building, etc. Also, specifies Sokolov, the history of events at the building, in particular previous cases of material damage above 100,000 rubles will be important for the insurance company.

Irina Dzyuba, sales manager of MR Group, thinks that it is necessary to pay attention to presence in the contract of the term "excess" (insignificant damage which is covered by the client). If such a term is present in the contract, the insurant will not receive compensation in all cases but only when the damage will be above a certain sum. It is a so-called conditional excess. Such a measure is enforced to avoid red tape in the case of small damages.

The unconditional excess is the sum or the percent which is subject to deduction from the insurance compensation, taking into account that part of the damage remains the responsibility of the insurance company. Payment in this case is made only if the loss exceeds the excess, and the whole sum is not paid, but is minus the excess. Any excess makes insurance cheaper, concludes Dzyuba.

Iskra points out that two kinds of cost of insured property exist. Insurance by new reconstruction costs and insurance by actual (residual) costs. For example, he explains, there was a fire. The building has partially burned down, but can be restored. In this case the insurant can employ the contractor to repair the building. After the building has been renovated it is enough to give the corresponding documents to the insurance company, which will then pay for it. This would be cover by reconstruction costs. But under actual cost cover the insurance sum is equal to the market value of the property. In which case the insurer would compensate expenses for the restoration of the property in view of its deterioration.

Ivanov adds that often the insurant is mistaken when defining the amount of the sum of insurance. For example, the insurant may try to include in the value not only the private residence, but also the ground under it. Ivanov upholds that often in such cases there are disputes. He gives the following example. The proprietor of a building has decided to insure it and in the contract is specified for $5 million. However he doesn't take into account that the building is worth $3 million, and the ground under it - $2 million. In this case he seriously overpays. And at the stage of payment of damage there will be problems. Because the victim will receive not the specified $5 million, but $3 million (i.е. the value of the private residence).

But it is not worth going from one extreme to another and underestimating the insurance sum, Ivanov warns. Because in this case payment of damage by the insurer will be based on what is written in the contract. "Under insuring" should be avoided, he concludes.

There is a kind of insurance called "first risk." This is where the insurant states a certain sum in the contract, usually below the real value of the property. The insurer covers any damage in full, but no more than the specified sum. Usually this type of insurance is used if the proprietor takes out credit from a bank using the given real estate as security. In this case the security is usually equal to the insurance. For example, the real value of a premises is $1 million. The borrower insures it for $500,000. Payments for damage in this case are made proportionally. Namely, for 1 ruble of damage, 50 kopecks is paid, Iskra explains.

Be Vigilant

Employees of insurance companies advise to read the contract closely and to the end before signing it. In the event of an insurance claim payment is possible only when the given claim is registered within the contract (i.е. It is considered insured), and also only if the insured property is used correctly.

If the insurance policy of a premises has expired, and the insurant has made no claims, then the insurant should expect a discount provided that it renews the contract with the same company. However, the discount is also calculated on an individual basis. Insurers name different figures - from 3 percent to 50 percent - and specify that it is necessary to consider inflation and a rise in prices in real estate.

Also, on receiving a discount "reinsurance" will be considered. For example, the insurance company of a large class A office center will more than likely reinsure it. That is it will "share" the risk with another company. Such an office center may be worth $100 million, and the insurer can take up only $50 million or $70 million. The remainder it puts on the reinsurance market, where other companies state how much of the risk they will redeem. With the low rates of reinsurance (approximately 0.3-0.7 percent), discounts are simply not possible.

In April on Gasheka Street, a fire started at the Ducat Place III business center. Of the total area (54,000 sq.m) almost 200 sq.m were alight. Companies such as Goldman Sachs, ConocoPhillips, Jones Day, De Beers, Zara, Clifford Chance, etc., rent offices in the center and the owner of the building is Hines. The building was insured by AIG.

The Goldman Sachs office, located on the top floor of the building suffered the most. However, the damage was caused not so much by the fire, but by the amount of water from hydrants used to extinguish the fire. Water spoiled and destroyed the documents of some tenants (both paper and electronic). It was necessary to get references from the corresponding government authorities, that the papers had been lost. And certificates from the police were necessary for companies to make insurance claims.

A representative of the Ministry of Emergency Measures, making comments on the situation, said that the building was absolutely new but did not comment on the fire-prevention safety of the building.

Cushman & Wakefield/Stiles & Riabokobylko returned to their office located on the sixth floor on May 8. In answering a question of a Vedomosti correspondent, Sergei Riabokobylko, the senior executive director of the company, said that the office was insured, but refused to comment on the situation in more detail.