Problem 2: Our Insurance

Our insurance -- one single expense item -- is over 54% of total revenues (that’s more than ten times the national average for marinas).

When I first saw this on the financial statements I just assumed it was a typo. Certainly there was no possible way we could be paying $119,482 for insurance premiums for a single year!

That’s $1,076.41 for each slip! Some of you own multiple slips. I own seven, so my marina insurance tab is $7,535 this year! That’s not just too high... That’s unbelievably high. It’s unacceptably high. And it has to change. But you’re probably thinking, “Well at least we have a ‘Cadillac’ policy, right?” Wrong. Not even close.

Our deductible is 5% with a $100,000 minimum. That means that if we have a loss this year we’ll pay a minimum of the first $219,482 (that’s our paid premiums plus our deductible). So how protected are we with our current coverage? Well, based on the amounts our previous claims, if we had another “Isabel” with our current coverage, we’d pay the first 44% of the entire loss. If we had another “Florence” we’d pay the first two-thirds and the insurance company would only pay the last third.

But it’s actually worse than that because the insurance company would first deduct any damages remaining from the previous insurance claim that remain unrepaired, like the sea wall on A-dock. Or they would tell us we were “underinsured” and reduce their settlement accordingly like last time, when they arbitrarily decided that our marina was worth $2.3 million even though our reserve study put the 40-year replacement value at under $2.2 million and based on the current real estate market prices our value was actually more like $1.6 million.

Let’s face it, insurance companies are going to do their best to minimize the claims they pay. So based on the quote we were just presented on the seawall repair, if we had another “Florence” under our current policy, we’d probably end up paying the entire repair bill ourselves and they’d still probably raise our rates again.

Aside from the argument of how much, if any, of a loss would be covered, there is simply no excuse for spending 54% of our total revenues for insurance when the entire marina industry buys coverage for a fraction of that amount. And even though our insurance expense has always been high (around 20%), there still should have been a “red flag” when it went to 36% and then to 54% over the last two years!

Let’s look at the graph. It shows our insurance expense for the last six years in red. Revenues are in blue. The yellow area along the bottom represents the industry average insurance expense of 5.2% of revenues. (Source: Association of Marine Industries)

So what’s driving the astronomical premiums, anyway? Actually, several things. First, most insurance companies have sustained large hurricane losses over the last few years. They’ve paid out many claims so premiums are up across the board, not just at our marina.

Second, unlike many traditional marinas, our “dockominium” ownership structure doesn’t give us multiple lines of business like a retail ship store, a fuel dock, a service department, a boat yard, and so on. All of our “risk” eggs are in one basket, so to speak, and more risk for the insurance company means higher premiums.

Finally, we’ve had two previous insurance claims making us a “bad risk” to the insurance company, much like if your teenager had two fender-benders. We’re seeing what's known as a “get lost” premium. It’s an insurance company’s way of saying, “We really don’t want to cover you, but if you’re willing to pay this ridiculous premium, we’ll be happy to reconsider.”

I believe we need to seriously consider self-insurance for our dock owners coverage. Right now, with our large deductible and even larger premiums, we’re already self-insuring the first two hundred and twenty thousand dollars of any potential loss, only now we’re throwing those premium dollars away every year that we don’t have a claim.

You’re probably thinking, “But our bylaws say we have to buy insurance.” Well, not exactly. The bylaws (Section 9.1) makes a clear distinction between insuring the property and buying liability coverage. In the first sentence it says that the Board “shall keep all improvements insured”, speaking of the property, and then in the next sentence it says that the Board “shall purchase insurance” for other risks like liability insurance. The language is intentionally different so as to allow for self-insurance.

We wouldn’t be the first, either. Several other marinas in the area are self-insured. They still buy liability coverage but they have a cash reserve to cover property damage. And as premiums continue to rise, more and more marinas are looking at self-insurance as an option. Here is a simple way for us to do it:

With our assets we could obtain a credit line for the difference between our cash on hand and the replacement cost required by the bylaws. That credit line could be used only in the event of a large loss, to supplement the cash reserves on hand. Having a credit line and not using it costs us nothing. And those premium dollars that we don’t spend every year could fund our cash reserves. In a short time we wouldn’t need the credit line at all.

If the Board is still unconvinced that self-insurance meets the requirements of the bylaws, we could always amend the bylaws to specifically allow for self-insurance. The fact is we simply cannot keep wasting over half our revenues buying poor coverage that still leaves us holding most of the bag in the event of a loss.

By self-insuring, we’ll not only bring our costs down and our reserves up, but we’ll bring our owner fees back in line with the other marinas in the area. And that brings me to our next problem…

Go to Problem 3 >>>