Insurers that provide coverage for the growing number of retailers seeking bankruptcy protection are focusing more clearly on risks including vandalism and flooding in insuring the companies’ closed stores.
The higher rates this means could at least partly offset the advantage they may have because the lower stock of goods they hold in their stores means less property exposure, some experts say.
Recent bankruptcies include Plano, Texas-based J.C. Penney Co. Inc., New York-based J. Crew Group Inc.; and Dallas-based Neiman Marcus Group Inc. More are expected in the months ahead, experts say, as retailers, many of whom were already struggling with e-commerce competition, cope with COVID-19 shutdowns (see related story).
Some retailers, including J. Crew and Neiman Marcus, have filed for bankruptcy under Chapter 11, which means they intend to restructure and continue operations, rather than liquidating under Chapter 7 of the bankruptcy code.
Failure to maintain appropriate insurance under the bankruptcy code can result in a mandatory conversion or dismissal of a Chapter 11 case, while U.S. trustee operating guidelines “have similar provisions that are generally understood to require existing insurance policies be maintained in that context,” said Louise M. McCabe, a partner with Troutman Sanders LLP in San Diego, who represents insurers.
Gary Marchitello, chairperson of Willis Towers Watson PLC’s North American property team, said, “Assuming the business will be run in a prudent way, protection measures will be maintained, and they’ll be motivated to protect their assets.”
“It’s even more important when you’re in reorganization or Chapter 11 to have insurance,” he said. “With impaired liquidity and an impaired balance sheet it is more important to a company in that position than it would be otherwise.”
Sarah McGowan, a senior vice president in Marsh LLC’s U.S. property practice in New York, said, “In general, they’re still responsible for maintaining the insurance on the property. What you have seen in some cases is scrutiny on the insurance company’s part of how they are managing the facility,” such as heating it to a certain level.
And insurers are still willing to write the business, Ms. McGowan said, noting she had just renewed the program of a retailer that is in bankruptcy.
Al Tobin, New York-based executive vice president at Alliant Insurance Services Inc., said that while retailers “still need to insure the store generally,” even in bankruptcy, inventory may be removed, which means exposure base values will go down.
The view from the insurer’s perspective is “there’s going to be less risk, because of the reductions in value, but there could be more risk from a security perspective on a vacant property,” he said.
Underwriters are concerned about vandalism, said Alexandra Glickman, senior managing director, global practice leader-real estate & hospitality at Arthur J. Gallagher & Co. in Studio City, California. “If you have a vacancy, that may financially distress the asset, and therefore there may not be capital available for repair and maintenance,” she said.
“They may look to cut corners relative to security. You see increases in terms of vagrancy and illegal dumping. There’s just less sense of ongoing maintenance, and vandalism is a much bigger exposure.”
When underwriters talk with clients with such properties, Ms. Glickman said, “they want to know first and foremost what type of security is in place and what is being done to make sure that if there is a vacancy, how can they be certain there won’t be water damage or other related claims that tend to occur when there are vacant conditions.”
Mr. Tobin said that depending on where a property is located, it could be more susceptible to vandalism. A closed store in a mall is “probably not that susceptible to vandalism because other stores will be open at the mall, and you will have foot traffic and security,” he said.
In general, prices are higher to insure vacant properties, Mr. Tobin said. “Historically, you would go to the excess and surplus lines market for that coverage,” he said.
In some cases, bankrupt retailers may be able to obtain return premiums, Mr. Tobin said. It is a case-by-case situation, he said, depending on issues such as the number of months left on the program.
Experts say the recent retail bankruptcies have not had a material impact on the overall property market.
“The retail industry is still a drop in the bucket in terms of premium volume in the industry,” Mr. Marchitello said.
