Commercial Real Estate

Today the demand for insurance on warehouse real estate overall, and particularly on logistics services, is becoming more and more prevalent. Indeed, Western investors, who have started showing interest in the Russian warehouse real estate market, also play a significant role in this. At this time there have already been a number of interesting deals that would unlikely have been possible had not logistics projects, including insurance itself, been brought in line with Western standards.

In first place in the rating of insurance services is the insuring of the complex property itself, such as the warehouse building, internal communications, installations, storage racking, etc. “The insuring of property is widespread among both developers and tenants of warehouse real estate,” says Dmitry Gerastovsky, head of the corporate client department of the warehouse, industrial real estate and property division at Knight Frank. “Developers more often take out insurance on the building itself against risks associated with loss during construction and at the operational stage of the facility.” Tenants usually insure their inventories.

The most common form of loss, according to Gerastovsky, is damages to the framework, walls, columns and indoor floors of the premises. Fires happen less often but do cause significantly more damage and could cause serious expenses on the part of both the developer and the tenant of the complex – a risk considered the most hazardous by experts. “Fire not only could cause great loss, but also cause other risks, such as damage to the property caused by water (when extinguishing), smoke and soot. Therefore, special attention must be paid to fire safety when underwriting the property,” says Irina Terekhova, director for the property insurance department at SAK Energogarant.

“A property insurance policy allows the policy holder to receive compensation in the event the warehouse, equipment and/or goods stored in the warehouse are damaged or destroyed. Moreover, the goods could either be the property of the policy holder or those held in safekeeping,” says Mikhael Alekseev, head of the property and liability insurance department at Kapital Strakhovanye insurance company. Next in popularity, according to Alekseev, is the insuring of equipment used by the warehouse employees, such as fork lists and platform trucks.

Furthermore, the warehouse operator carries third-party (owners of the merchandise inventory) liability insurance for property in storage. What is this? Well, property insurance, as afore-said, compensates damages to merchandise inventory only in the event of a force majeure, which, we remind you, could be caused by fire, lightening striking, an explosion, larceny, improper action by a third party, aircraft crashes, natural disasters, etc. However, this form of insurance does not compensate for the cost of merchandise inventory damaged during the professional activity of the warehouse operator, such as regular storage of freight in the warehouse, re-sorting, labeling, loading, taking inventory, registering inventory during warehousing operations and during loading and unloading operations. This coverage is necessary to protect the policy holder from unnecessary risks. According to legislation of the Russian Federation, the damage to property of a third party – the loss of goods, violation of storage conditions, etc. – in this case is considered grounds for a claim for damages by the policy holder.

However, there are exceptions. For example, losses are not covered should the goods have been improperly packed or documents, such as invoices and bills of lading, etc., have been lost. Moreover, damage caused to goods by insects, rodents, or the shortage of goods when outer packing is damaged, etc. is also not covered by insurance.

To date liability insurance is not as popular as property insurance. Indeed, many operators believe that their professional activity will not cause harm to merchandise inventory held in safekeeping, while risks arising from a force majeure are covered by the insurance policy; therefore, it is not necessary to carry liability insurance. “One of the problems is the underdeveloped logistics market,” says Elena Barsheva, head of property and liability insurance management at Zurich-Rus insurance company. “The warehouse operators do not want liability insurance, as the insurance companies will only pay claims when the culprit of the damage remits the monetary sum – and usually there is no one to redress for compensation. Accordingly, in the domestic insurance industry, warehouse operators do not carry liability insurance.” However, experts believe that this assessment applies to a lesser degree to the operators of large logistics terminals.

At the Zurich-Rus insurance company, they are focused on the specifics of insuring merchandise inventory. “Clients often prefer to insure merchandise inventories at warehouses through the insurance program for freight, but not property, thus receiving so-called through-shipment coverage on shipments and warehouse storage with a broader scope of liability. For example, freight is delivered to a distribution center for sale throughout the chain, including the regions; but the freight burnt completely at the warehouse. Consequently, the logistics and distribution chain is interrupted, presenting a loss. In turn there is an interruption in production, which applies to the insurance of the freight,” concludes Barsheva.

Moreover, it is possible to insure against interruption in production (loss of lease payments) resulting from an insurance event. It is worth noting that a new type of insurance service (though well-known in the West) has recently appeared on the Russian market. “For example, operators of large logistics centers are showing an interest in coverage for losses arising when service providers (including electricity, water and other utilities) are unable to meet their obligations because of damage to their own property,” says Alekseev. “It should be noted that by no means can all insurance companies offer this complicated type of insurance.”

We shall take a look at the types of insurance that National Logistics Company (NLC) has in its arsenal for coverage:

• Insurance of buildings and production equipment (including floors, storage racks and equipment)

• Liability insurance for the logistics operator

• Liability insurance for owners of temporary-storage warehouses and customs warehouses

• Employee insurance

• Merchandise inventory insurance

• Transport and shipping insurance

“When assessing logistics services, clients focus first of all on the reliability of the storage and the safety of freight as well as the absence of damage. Therefore, NLC uses all of the afore-said types of insurance to fully indemnify both itself and clients from loss or damage. Insurance is very important also for attracting investors who wish to reduce significantly their risks. The type and cost of insurance depends on the merchandise being stored in the warehouse as well as on the installment of a security system,” concludes Paullina Vinokurova, marketing and public relations expert at National Logistics Company.

Let’s say several words about the tenants of warehouse premises. Usually, as has already been stated, the tenants take out insurance coverage based on their own merchandise inventory being stored in the warehouse. Moreover, according to Alexei Galakhov, deputy general director at OCAO Russia, tenants insure their liability for damages to the lessor, other tenants and third parties. “The tenants are interested in insuring their property. While the freight is stored in the warehouse, there is always the possibility that something could happen to it,” says Barsheva. “Most often property risks are insured. If an insurance event arises, a regress suit is presented to the warehouse operator.”

“Tenants usually take out insurance on freight and equipment located in the warehouse, insomuch as in the event of loss, by law, an insurance company must issue compensation, not the owner of the building,” says Gerastovsky.

According to Alexander Barentsov, deputy general director at SG Mezhregiongarant [СГ «Межрегионгарант»], most often in the logistics sphere, merchandise and material assets are insured. “In this case the owner of the freight himself can be the underwriter. Accordingly, in this case the risk of total or partial loss, spoiling, damaged or shortage of freight (one’s own merchandise inventory) stored on the territory of an insured warehouse/terminal is insured. The value of the average monthly surplus goods at the warehouse is used to calculate the amount covered. When insuring warehouse real estate, underwriters recommend using package insurance, which includes property and merchandise insurance as well as liability for the improper execution of the contract conditions when processing and storing freight at the warehouse/terminal,” concludes Barentsov.

As far as liability insurance for management companies, this type is not widespread. “This could be, however, because estimating a possible insurance event is rather difficult; therefore, underwriters are reluctant to provide liability insurance for management companies,” says Galakhov.

It is worth noting that property insurance is a requirement for receiving bank credit. “Accordingly, all buildings constructed using borrowed funds must be insured against risks, and warehouse complexes are not an exception. Funds are borrowed mostly for the construction of large Class A warehouse complexes that require a large amount of investment. It is not surprising that owners insure these buildings first of all. Moreover, many large tenants, upon signing a contract with the owner of a building, will ask whether it is insured. Indeed, this as an additional guarantee that in the event of unforeseen circumstances, the interests of the tenants will be protected. Additionally, the tenants can count on the continuation of operations under those conditions until the occurrence of loss,” concludes Gerastovsky.

Amount Insured

“The amount paid for property insurance is calculated based on the real value of the property. For buildings this is the replacement cost, while for equipment it is the cost necessary to obtain a fully analogous insured object, minus amortization. The insurance amount for merchandise inventory is calculated based on expenses necessary to repurchase the goods, but not exceeding the original purchase cost,” says Galakhov.

With liability insurance, the insured chooses the limit of liability independently. “When insuring a warehouse complex against liability, the limit is set at an average of $1 million, and depends on many factors: the arrangement structure of the warehouse complex and neighboring buildings, the average value of goods at the warehouse, the type of merchandise, the storage conditions, etc.,” says Alekseev. “When necessary, it is possible to increase the limit of liability.”

There are some nuances in determining the amount of insurance compensation when insuring merchandise inventory. “The volume of goods stored at a warehouse constantly changes; therefore, based on practice, we insure the average monthly surplus,” says Barsheva. “It should be said that recently company clients have been trying to avoid not being insured. A loss could occur at a sales peak, when warehouses are full; therefore, companies buy maximum coverage. We set the average monthly coverage, and then recalculate based on written request.”

As has been noted, the cost of the insurance policy depends a lot on the goods at the warehouse as well as the quality of the security system. “For example, water sprinklers and simple storage racks are enough for secure freight, while the building itself can have regular walls and a roof. For unstable freight, there must be foam sprinklers and special floors and a roof and specially-constructed walls. If one of the systems is lacking, the cost of the insurance increases,” says Vinokurova.

The Future is in the Regions

Experts tie the growth in the insurance market to the development of the logistics sector overall. “Modern warehouse premises conforming to world standards that are being built in Moscow and the near Moscow Region will require corresponding insurance,” states Galakhov.

“It is not surprising,” continues Barsheva, “that today the majority of projects developed to Western standards take into account the demands of insurance companies, such as: the installment of fire-safety systems, smoke-removal systems, smoke detectors, sprinkler systems, etc.”

“The market is developing and new logistics facilities are appearing, such as customs terminals and warehouse premises. Competition, which can only increase, is forcing market players to offer better-quality services related to issues on insurance conforming to Western standards. Indeed, the demands on the insurance companies themselves – the quality of services rendered, premium rates and offering new, innovative programs – will also rise,” concludes Barentsov.

Furthermore, we must not forget about the regions. According to Alekseev, market-development prospects are connected, foremost, to increased interest on the part of developers, retail operators and investment funds for the construction and procurement of logistics facilities in the regions considered to be the transport hubs of Russia – particularly Novosibirsk, Ekaterinberg, Rostov, etc.