Do you own the building where your veterinary practice is located? Are you looking to buy a building to start a clinic? If so, recent changes in the commercial property insurance market will affect how you insure the structure and your ability to get coverage at reasonable rates. Or to simply find a policy. Once-stable insurance markets in areas like the Midwest are influencing the entire country due to a surge in severe convective storms. And I’m not talking about wildfires or hurricane-driven flooding.
What do severe convective storms and other extreme weather events have to do with veterinary practice insurance? Quite a lot these days.
The insurance industry defines a severe convective storm as one that produces any of the following:
- Winds greater than 58 mph
- Hail exceeding 1 inch
- A tornado
Munich RE, a provider of reinsurance and risk-management solutions, found that the top five states for severe convective storms were Texas, Colorado, Illinois, Minnesota and Oklahoma. Nationwide, losses totaled $24 billion in 2021 and $49 billion in 2023.
Frequency and Severity
Due to the high cost of severe convective storms, hurricanes and wildfires, U.S. carriers are rethinking their commercial property insurance strategy and reviewing metrics like claims frequency and damage severity. Frequency is how often a claim is likely to occur, and severity is how much the claim or event will cost.
Historically, hurricanes and wildfires get many of the headlines. However, severe convective storms have become a leading cause of property damage in recent years for many insurance carriers, forcing them to respond with significant changes.
Holding Companies
In many cases, a practice owner forms a real estate holding company to own the building and receive rent payments from the business. A special policy — called commercial lessor risk or, simply, lessor risk — covers such an arrangement. The policy allows the commercial landlord to insure the building but not its business operations. The veterinarian then purchases a second policy, commonly called a business owner’s policy, to cover the operations.
What does this mean for building owners? If you have lessor risk coverage, you most likely are paying higher premiums and have noticed changes to the policy’s terms and conditions. I have seen rate increases of up to 30% at most practices that own their buildings.
Be Aware
Here are a few common policy changes related to severe convective storms:
- Exclusions: Damage to soft metals, such as aluminum, isn’t covered.
- Deductibles: A 1% wind-hail deductible means coverage kicks in only when damage from wind or hail exceeds 1% of the insured building’s value. For example, the deductible on a $1.5 million building damaged by wind or hail is $15,000.
- Unmatched property exclusion: When only part of the building is damaged, matching the repair to the undamaged property is not covered.
- Cash-value roof valuations: Age depreciation reduces the coverage, so the owner won’t receive the full amount needed to replace the roof.
On top of steep premium increases, some or all of the coverage changes are being placed on existing lessor risk policies. What does it mean when you are ready to buy, build or expand a veterinary practice? For those owners, access to commercial lessor risk insurance is greatly reduced or, in many cases, unavailable. Similarly, the issue arises for a veterinarian looking to purchase an existing practice when the building is part of the sale.
More than ever, trying to purchase a separate building policy might rest on the structure’s age and condition. For example, one national insurer won’t offer a lessor risk policy on buildings constructed before 1990, and another insures roofs only less than 20 years old.
Transition Period
In the short term, expect pain from premium increases and changes in coverage. However, like most businesses, the insurance market is cyclical and should settle down once carriers adjust their policies and premiums to adapt to our weather’s new normal. And remember that as some carriers reduce coverage or exit the market, others fill the void and offer broad coverage.
Currently, the best move for practice owners with separate policies for the building and practice operations or for a DVM looking to expand or start a practice is to insure everything under one policy.
The holding company that owns the building and the corporate entity that owns and operates the veterinary practice almost always have the same common owner: the veterinarian. Because of this, it is possible to find coverage under a business owner’s policy for the building owned by the holding company and the practice entity. The terms and conditions under most carriers’ business owner’s policies are not as limited as those for commercial lessor risk policies. An experienced commercial insurance agent or agency should be able to cover the building and practice under one policy (and at a cheaper cost) when separate entities exist.
While some changes to weather-related coverage and pricing are here to stay, many good, creative options are available to veterinarians.
VIOLENCE OVERHEAD
According to the National Centers for Environmental Information, the United States experienced 39 tornadoes in November 2024. “Ten of the 30 days in November had at least one reported tornado,” the agency reported, and “three days had five or more tornadoes — Nov. 2, 4, and 17.”