Key Takeaways
- Calculate loss ratio (total losses / total premiums)—ratios above 60% signal problematic properties.
- Pattern analysis reveals root causes: recurring water claims indicate plumbing issues, slip-and-falls indicate maintenance gaps.
- Open liability claims with large reserves may represent ongoing litigation that transfers to the buyer.
- Obtain insurance quotes during due diligence—properties with adverse claims histories may be uninsurable at viable rates.
Loss run reports are the most revealing insurance documents in acquisition due diligence. They tell the story of what has gone wrong at a property—pipe bursts, fires, liability claims, theft—and predict what is likely to go wrong in the future. This lesson teaches you how to read, analyze, and draw actionable conclusions from loss run reports.
Reading and Interpreting Loss Run Reports
Loss run reports are issued by the seller's insurance carrier and list every claim filed over a specified period (typically 5 years). Each entry includes: claim date, loss date, claim type (property, liability, auto), description of loss, amount paid, amount reserved, and claim status (open or closed). Key metrics to calculate: total incurred losses (paid + reserved) over the period, average annual loss rate (total losses / years), loss ratio (total losses / total premiums paid), and claim frequency (number of claims per year). A loss ratio above 60% signals a problematic property that will face premium increases or coverage restrictions. Claim frequency above 3-4 per year per property indicates systematic maintenance or management issues.
Identifying Patterns and Root Causes
Look beyond individual claims to identify patterns. Multiple water damage claims suggest plumbing deterioration—the building may need a full repipe ($3,000-$5,000 per unit). Recurring slip-and-fall claims in the same location indicate a maintenance or design deficiency. Frequent theft or vandalism claims suggest security issues. Fire claims from the same building indicate electrical or tenant behavior problems. Pattern analysis informs both the capital improvement plan and the insurance strategy. A property with a history of water damage claims will face higher premiums and may require a plumbing infrastructure investment to reduce future claims and premiums. Document your pattern analysis and share it with your insurance broker—demonstrating awareness and a mitigation plan can help secure better coverage terms.
Loss Run Red Flags and Deal Impact
Certain loss run findings should trigger immediate concern. Open liability claims with large reserves (reserves indicate the insurer's estimate of the ultimate payout) may represent ongoing litigation that transfers to the buyer. Frequent mold claims suggest chronic moisture issues requiring significant remediation. Multiple fire losses raise arson concerns or indicate severe electrical deficiencies. Claims denied by the carrier suggest coverage gaps or policy violations. Properties with adverse claims histories may be uninsurable at reasonable rates—obtain insurance quotes during due diligence before committing to the acquisition. If the property is only insurable through surplus lines carriers or at significantly elevated premiums, this cost must be factored into the pro forma and may make the deal uneconomical.
Key Takeaways
- ✓Calculate loss ratio (total losses / total premiums)—ratios above 60% signal problematic properties.
- ✓Pattern analysis reveals root causes: recurring water claims indicate plumbing issues, slip-and-falls indicate maintenance gaps.
- ✓Open liability claims with large reserves may represent ongoing litigation that transfers to the buyer.
- ✓Obtain insurance quotes during due diligence—properties with adverse claims histories may be uninsurable at viable rates.
Sources
Common Mistakes to Avoid
Not correlating loss run claims with physical inspection findings
Consequence: Missing the connection between repeated water damage claims and the deteriorated plumbing system identified during inspection
Correction: Cross-reference loss runs with inspection findings to identify root causes and budget for permanent remediation rather than repeated repairs
Assuming claims will not recur after change of ownership
Consequence: Claims driven by building conditions (plumbing, electrical, trip hazards) will continue regardless of ownership change
Correction: Budget for root-cause remediation of conditions driving claims and model higher premium for 2-3 years until the claims history improves
Test Your Knowledge
1.What are loss runs and why are they important?
2.What loss run red flags should concern a buyer?
3.How should loss run analysis inform the acquisition decision?