In the United States, multi-family property owners are facing a growing problem that threatens the health of the housing market: the cost and availability of liability insurance are making it increasingly difficult to operate a building. This burden, which risks hindering the development of urgently needed housing, hits smaller landlords the hardest, eroding cash flow, jeopardising maintenance budgets, and in some cases, endangering loans and transactions.
While property owners contend with rising labour, energy, tax, and financing costs, liability insurance represents the fastest-growing expense. 'Nuclear verdicts' (court judgements exceeding $10 million) are a primary driver of this issue. In 2023, there were 89 such verdicts with total compensation of approximately $14.5 billion. In 2024, the number of these verdicts rose to 135, with compensation amounts soaring into the tens of billions.
In response to what the market calls 'social inflation', insurers are tightening terms, increasing prices, reducing capacity, and increasingly excluding or limiting the scope of certain high-risk coverages. As payouts become larger and more unpredictable, insurers are forced to protect capital by withdrawing or restricting coverage. The impact is most noticeable in lending.
Challenges in Lending and for Owners
Agency guidelines, including those from major mortgage purchasers such as Fannie Mae and Freddie Mac, now expect general liability and umbrella policies, without exclusion or debilitating sub-limits, to cover several serious risks, including assault and battery, firearms, sexual abuse and molestation, and habitability deficiencies. Where these coverages are unavailable, lenders demand substantial escrows or reserves to bridge the gap. Owners have reported that in some cases, lenders are requiring reserves of $250,000 or more for each excluded risk. In combination with higher premiums, these demands erode net operating income and push projected returns into negative territory for many transactions.
Given this reality, owners have implemented stop-gap measures to navigate the current market conditions. Some secure lender waivers through robust loss control programmes that include improved lighting, enhanced security, regular maintenance, and a clear claims history. Others acquire bespoke standalone policies for excluded risks, accept high deductibles, participate in captives, or construct layered liability programmes. While these strategies can work for large institutional owners with appropriate scale, they are costly, administratively complex, and often unavailable to mid-market operators. In short, these are expensive stop-gap solutions that do not address the systemic problem.
Paths to Stable Market Development
Larger jury awards, punitive damages, fragmented state liability regulations, and aggressive litigation finance have all contributed to a volatile and uncertain claims landscape. While comprehensive tort reform is key to addressing the root cause of this issue, there are immediate opportunities to address the cost and availability of liability insurance, support affordable multi-family housing, and improve market functionality. These include the following steps:
- —Lenders must redesign their insurance risk assessment. Insurance should be integrated into credit underwriting as a nuanced risk variable, rather than serving as a mere tick-box exercise. Lenders who consider an owner's documented investments in risk control and their claims history can maintain lending while protecting balance sheets.
- —Insurers and brokers should expand partnership-oriented underwriting. Reward programmes can translate concrete investments in safety, personnel, and building resilience into meaningful underwriting recognition. When insurers see a clear, measurable reduction in risk, this should be reflected in pricing and capacity.
- —Regulators and legislators must restore a degree of predictability to liability judgements. Targeted reforms addressing the most destabilising factors of high compensation include clearer standards for punitive damages, sensible approaches to joint and several liability, and measures to curb abusive litigation finance practices.
- —The industry should invest in common data standards and standardised loss control metrics. If owners, insurers, and lenders speak the same language about building quality, maintenance practices, and risk controls, it will be significantly easier to translate improvements into underwriting outcomes and offer solutions beyond the largest owners.
Finally, the scope and access must not be forgotten. Many of the most vulnerable owners are small operators who lack the legal teams, balance sheets, and broker relationships of institutional players. Whether bundled public-private insurance facilities, scaled specialty markets, or government-backed reinsurance mechanisms, programmes can be designed to provide protection and predictability to this mid-market segment.
While tenants and visitors deserve compensation in the event of legitimate injuries on a property, a system that generates exorbitant judgements, encourages class actions, and makes construction uninsurable ultimately harms the very tenants it purports to protect. This occurs through increased costs, stifling new supply, and overstretching maintenance budgets.
