Exposure Analysis

Lessors Risk (LRO) Industry Segment
Risk Exposures
Commercial (non-habitational) Real Estate
Commercial Real Estate that is rented and leased to others is known in the industry as Lessors Risk Only
(LRO), meaning that the only exposure being insured is the lessor’s risk (as opposed to the operations of
the building’s tenant). The types of Commercial LRO risk range from commercial condos to small office
buildings to shopping centers to large industrial buildings. As a result, the property exposures and types
of tenants vary widely.
Property Exposures:
Age & Condition
Of primary concern is the age and condition of the building. Newer and well-maintained buildings are
less likely to suffer a loss, and will weather major perils, such as windstorm, better than those that are
older and not updated or maintained well.
Roofs & Electrical Systems
The condition of the roof is very important, as most losses are associated with water damage from rain
infiltrating the building through a worn and aged roof. Roofs should be regularly inspected and updated
at least every 10 years. Tar & gravel roofs need regular maintenance; shingle roofs need to be checked
for granular loss and hail damage; metal roofs need to be checked for tight seals between roof members
and proper sealing around fasteners.
Electrical systems must be up to code with proper amperage and wiring for the expected electrical load.
Over time, the power demands of newer tenants may push the system level beyond its load capacity.
Types of Tenants
The activities of the tenant can also have a major bearing on the underwriting of an LRO risk. In most
cases, the carrier will only write the LRO risk if the tenants are classes of business that the carrier would
also write on a stand-alone basis. In other words, if one of the tenants tattoo parlor and this is an
ineligible class for the carrier, they will be inclined to decline the submission. There is some wiggle room
depending on the number of tenants and how “high” the hazard is for a particular tenant on the
carrier’s ineligible list. Some carriers, for example, limit the % of occupancy by restaurants in a shopping
center submission, in order to limit the risk of fire loss. Tenants who do any form of mechanical servicing
or repair must comply with appropriate fires safety codes, such as the storage of flammables in
approved metal containers or storage lockers. A complete tenant list which includes the tenants
operations (if not obvious from the name) should be included with each submission. Certain types of
occupancy, such as warehouse storage, may require specific sprinkler configurations, such as “rack”
Manufacturing tenants present special property exposures. The electrical and plumbing systems must
be adequate and up to code for the type of processes taking place. Flammable substances must be
properly stored. Use of flammables must be in well ventilated areas with proper fire controls. Painting
operations must take place in approved paint booths which have explosion proof electrical components
and ventilation systems that prevent the accumulation of explosive dust. And the list goes on. In most
instances where a manufacturing risk is the tenant of an LRO submission, the carrier will do a loss
control inspection by a certified loss control specialist to verify that all safety controls are in place and all
applicable code requirements are met.
Most carries also limit the % of vacant space in a building. Buildings that appear to be unoccupied
attract vandalism. Vacancy can also be a sign of financial trouble for the building owner. Also, during
economic downturns, many building owners postpone maintenance and upgrades in order to save
money. This often results in deteriorating loss experience and a hardening in this segment of the
market, which is taking place now early in 2012. Digital photos are very helpful with LRO submissions.
General Liability Exposures:
For shopping centers and office buildings, the premises exposure is high, mainly due to the number of
visitors or occupants. Sufficient lighting, properly marked and unobstructed exits, clean and slip resistant
flooring, well maintained parking lots and sidewalks and overall good housekeeping are essential.
Though the tenants are responsible for their activities, the building owner is often responsible for the
common areas.
Additional Insured Status
To protect themselves from exposures associated with the tenants’ activities, building owners must
have well-crafted lease contracts that require each tenant to carry sufficient limits of General Liability
insurance, and the building owner should be named as an Additional Insured on each of those policies. A
certificate of insurance should be requested each year. (Define AI and COI)
Habitational LRO
Habitational LRO risks include single family dwellings, duplexes & 4-plexes, townhomes & condos, and
Property Exposures
Property exposures for residential LRO risks consist mainly of the age and condition of property. The
exposures are higher with apartments due to their size. Many carriers today shy away for apartments
due to the large loss potential associated with windstorm and hail.
Liability Exposures
Upkeep and maintenance are the primary factors here. The exposures are compounded with
apartments, due to the number of units involved. Personal safety is also a greater exposure with
apartments, due to the number of tenants.