Choosing between risk and insurance

Choosing between Basic and Special Form Coverages

Basic, Broad and Special coverage forms are the three industry-wide property coverage forms available to you as an investor. Before you choose which coverage form is best for you, make sure you take into consideration more than just the cost of the policy options. There can be up to a 30% difference between these policy forms and it is up to you as the investor to determine if the additional exclusions associated with the cheaper coverage forms is really worth the risk for you.

Basic vs. Special Form Coverages

NREIG offers either a Basic or Special coverage form option. Broad form is not offered nearly as often, but we will cover it as well. As you can probably guess, Special form is the most comprehensive and in turn, the most expensive coverage form you can purchase. It is considered “All-Risk” coverage, meaning that unless there are specific exclusions listed within the policy, then coverage is afforded to you in the event a loss. The burden of proof falls on the insurance company to prove that the peril that caused the loss is specifically excluded. There are standard exclusions that come on every Special form policy (some of which can be purchased as an endorsement or stand-alone policy and others cannot), these are:

  • Mold & Fungus
  • Wear & Tear
  • Sewer & Drain Back-Up
  • Earth Movement (including earthquake and sinkhole)
  • Flood
  • Intentional Tenant Damage

Be sure to review your exclusions and endorsements pages to make sure no other exclusions have been “slipped in” your policy. One common coverage exclusion that is added is theft.

Basic form is the second coverage form most carriers (including NREIG) offers to investors. Basic form coverage can save you approximately 25% – 30% per year (depending on the carrier), but comes with some additional exclusions to those listed above, that you will need to consider. They are as follows:

  • Collapse
  • Falling Objects
  • Theft (keep in mind, this is for things you own such as the air conditioning unit and the copper pipes in the wall, not your tenants belongings)
  • Weight of Ice, Sleet or Snow
  • Water Damage (which is most commonly known as coverage for frozen and burst pipes).

In the event of a loss, the burden of proof falls on you to prove the loss was caused by an included peril.

Broad form is the in-between form not often used. Reason being is, the cost savings provided is not enough to make sense to purchase. It is basically Special form minus theft coverage. It typically saves you 10% from a Special form policy. For the additional 10%, it is a better option to simply purchase Special form.

Things to consider when deciding on a Special or Basic form policy:
  • Is my property in an area where Weight of Ice, Sleet or Snow and Water Damage is high risk to me? If not, then Basic form might be a better option.
  • If my location is a flip, will the property still be in my possession when the temperatures get cold? If not, then Basic form might be a better option.
  • Is theft coverage a concern? If the location is occupied, then that threat should be diminished. As you can probably imagine, theft most often occurs at vacant locations. If the location is a flip or undergoing renovation, will there be enough owned materials and appliances at the location to make sense carrying theft coverage? Keeping in mind that your general contractor’s tools and materials are NOT covered under your policy. 

Please keep in mind, NREIG is willing to provide you with a full policy/coverage comparison of what you currently carry and what NREIG can provide.

About the Author

Shawn Woedl is the President of National Real Estate Insurance Group. He is an industry-recognized speaker and educator with an emphasis on Commercial Property and Premises Liability. He brings over 12 years of professional and personal experience in real estate, business, and insurance to NREIG’s unique, investor-oriented brand.

 

Note: This piece is not to be construed as contractual. Applicable language specific to your policy supersedes it. Information contained in this post is intended to provide you with a brief overview of the coverages provided for reference purposes only. It is not intended to provide you with all policy exclusions, limitations and conditions.

Coverage Options, Insurance Education