When structuring your insurance policy, the coverage form selected plays a significant role in determining which perils are covered for your property should a loss occur. There are three types of coverage forms to choose from, Basic, Broad, and Special. Since each investor has a unique portfolio and circumstance, it’s difficult to know which form to choose.
To help determine this, we brought in Trevor Moss, Director of Program Sales at National Real Estate Insurance Group. Trevor started in the insurance industry three years ago when he found his passion for helping people aligned nicely with the hugely misunderstood topic of insurance. To this day, Trevor works closely with his team, helping new clients find the perfect insurance coverage.
Let’s start with the very basics. What is a peril?
A peril is essentially a circumstance or an event that happens that will cause property damage or damage to any type of thing you would have ownership in, like a vehicle or an investment home.
What are the coverage forms that NREIG offers?
We offer both Basic and Special Form coverage. Basic form is going to be a named peril policy. It’s only going to cover things that are listed in that policy.
Special form is another Form that we offer and it’s a named exclusion policy, where if it’s not a named in the exclusions, it’s likely to be covered.
Can we list off the perils that are covered under Basic Form?
Definitely. Under Basic, you have fire, lightning, explosion, windstorm and hail, smoke, aircraft and vehicle riot, volcanic action, sprinkler leakage, and vandalism.
What perils are covered under Special Form?
With Special, you’re going to get all that Basic covers, plus collapse, falling objects, weight of ice, sleet or snow, water damage, theft, and then risk of direct physical loss.
We get a lot of questions about water damage. Can you dive into that just a little bit?
With water, there are really three different ways to look at it. Our water damage coverage covers water damage originating from inside the home. So, think of a burst pipe that leaked out all over the house and caused damage to the floors, drywall, etc. That’s where our water damage coverage comes in.
A lot of times people will think of water damage being from floodwaters – water from the external sources that get in the home with us. You would need Flood coverage for that to be covered.
And then lastly, the damage from an overflowing toilet, tub, or sink is going to be covered under something we have called our Tenant Protector Plan. That covers items like sewer and drain back–up, which is not a standard offering in Special Form.
You mentioned risk of direct physical loss is covered under Special Form. What is that?
That’s a term that’s all-encompassing. If your property sustains a loss and it’s not a listed exclusion that’s where that coverage will come into play under Special Form. It’s basically saying if it’s not excluded, it’s included.
Another peril that can confuse some investors is falling objects. How do you define that?
You know the commercial you see on TV where there’s space junk falling on top of a home and they say, “We cover that.” That’s where the falling objects coverage comes into play under Special Form.
What about Broad Form coverage?
Broad Form is a named peril policy, like Basic Form, but includes more perils than basic. We don’t offer Broad Form because there’s minimal advantage to that coverage for the price. It makes the most sense for our investor clients to choose Basic or Special Form coverage.
Within coverage forms, there are some exclusions. What are those?
The standard exclusions are mold and fungus, wear and tear, sewer and drain backup, earth movement, flood, and intentional tenant damage.
Can investors buy any of those back?
Yes, there are some options within our program that you can buy some of those coverages back. We have ancillary products that can be added to both Basic and Special Form policies.
What should investors consider when choosing between these forms?
There are quite a few things investors should consider. The NREIG team is good at walking our clients through figuring out what they need so we can best advise them.
- Location of the property – Is the property in the northern part of the United States? If so, there is more of a threat of frozen water pipes and weight of ice and snow. These are only covered under Special Form.
- Lender requirements – If there’s a loan on the property, there are things that we must do to satisfy the lender’s requirements, which may dictate what coverage we can offer to the client.
- Renovations – If they are flipping the property and there are a lot of materials going into the property that haven’t been attached yet, like drywall or roofing, it may make more sense to protect yourself and have Special Form coverage, which includes Theft. That way those materials that are going on the property are covered. It doesn’t cover your contractor’s tools. That’s not what this coverage is for. Your contractor should have their own insurance for that.
- Appetite for risk – Are they somebody who has a lot of cash flow to withstand a loss and wants to make a more economical decision when it comes to insurance? If so, we can look at Basic Form. But typically, we suggest Special Form so our clients are comprehensively covered.
You mentioned theft while talking about renovations. What is the difference between theft and vandalism?
Vandalism is going to be graffiti on the property, not necessarily taking things from it, but destroying the property. Theft is just what you think it is. Someone gets into the property, and they steal a stove, fridge, washer, dryer, and things like that.
What does the cost difference look like for Basic vs Special?
It’s typically 20 to 30% cheaper for Basic than Special. We try to communicate with our clients that the price difference is there because the Burden of Proof changes whether you’re on Basic or Special Form.
On Basic Form, it’s up to the client to prove that the loss is under one of those 11 previously named perils. The insurance carrier would then need to agree with that for the loss to be covered.
On Special Form, though, the Burden of Proof moves to the insurance carrier. So, it’s on them to prove that it’s not covered, rather than that it should be covered, like what the individual has to do with Basic. That’s an added value that we try to make the client aware of. We always want to make sure that the client is prepared for what could happen in a loss event. That’s why we explain to them how the Burden of Proof is important and often worth that price difference.
— Game: Basic or Special Form —
To help investors better understand the difference between these forms, we are going to list some scenarios. You are going to tell me if Basic Form would cover it or if Special Form is needed. We want to note that every investor should select the coverage form based on what their business model looks like and what kind of coverage they want.
Ex 1: High winds caused a tree branch to fall on a house.
Basic – Wind/Hail.
Ex 2: The large amount of snow caused a roof to collapse.
Special – Weight of Snow, Ice, and Sleet.
Ex 3: Freezing temperatures caused a pipe to burst, making water spew all over the bathroom.
Special – Water Damage. Dry it quickly before mold occurs because that may not be covered.
Ex 4: Lava flow burns a house down.
Basic – Volcanic Action.
Ex 5: Someone breaks into the property and spray paints walls, destroys cabinets, and breaks toilets.
Basic – Vandalism. However, if they steal something that is considered theft, which is only covered under Special Form.
Ex 6: A tenant accidentally starts a cooking fire in their apartment.
Basic – Fire and smoke.
Is there anything else we need to know about Basic versus Special Form?
It may seem like Basic Form is the more economical choice early on, but clients find that it’s actually better to have that extra coverage early on. You’re going to pay a little bit more now for a much better, more comprehensive coverage for a possible loss later on.
Watch or listen to the full interview here!
