Tip #1 – Find a reputable, trustworthy agent.
This short three chapter excerpt of the original presentation will help debunk three common myths about personal dwellings’ fire policy sufficiency for non-owner rentals, Umbrella policies and how claims prior to owning a property can affect your insurance rates. It will provide truths regarding coverages you need to best protect your investment properties. Whether you are just getting started or a seasoned investor, DEBUNKING the 13 Insurance Myths for the Real Estate Investor chapters 4, 5 and 6 will give you the knowledge and confidence to know your assets are protected and your business is secure.
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.
As each myth is covered, keep in mind they are just that, myths. These are the most common misconceptions we have come across in dealing with hundreds of new clients across the country. In most cases, we are able to speak to clients prior to a loss which could have put their business in jeopardy. But in other cases, clients come to us after a loss which could have been prevented if proper coverage had been in place.
One quick note before we delve into the subject matter; you will see commercial insurance policies referenced as what coverage you should have. In the insurance world, commercial insurance policies are best utilized to cover anything from single family dwellings to large apartment complexes and all lines of commercial real estate in-between.
PERSONAL DWELLING FIRE POLICY IS SUFFICIENT TO COVER MY NON-OWNER OCCUPIED RENTAL
We had the opportunity to work with a newer investor who recently converted the home he owns and had lived in for years, into an investment property. He now has a tenant who has been living in the home for over a year. Our first question to him was, “Did you let your insurance agent know you were converting this location into an investment property?” He quickly answered, “No.” He didn’t feel the need too. After our conversation, we asked him to contact his agent and to ask them if the policy in force was one that extended coverage to a property being occupied by a tenant, “non-owner.” His agent
eventually replied saying they would need to cancel his existing policy and rewrite a new policy to insure this new exposure.
What would have happened if a loss would have occurred in the last year while he had been renting out the home? For instance, let’s say six months ago, a fire occurred at the property. The assigned claims adjuster would have visited the property to investigate the loss. During this visit, they would have uncovered the home was not “owner occupied.” The policy purchased was for an “owner occupied dwelling.” Therefore, the insurance carrier would have declined the claim due to Material Misrepresentation. The owner would have been left on their own to rebuild their investment property. Don’t give the insurance carrier a reason to deny a claim. If you are reviewing your declaration pages on your policy currently and are unsure if you have the correct type of policy to cover your non-owner occupied dwelling, email your agent and ask them for clarification. We always recommend you use email so you have their response in writing. If something happens in the future, you will have leverage in the event of a declined claim, if needed.
I HAVE A PERSONAL UMBRELLA POLICY SO I DON’T NEED “COMMERCIAL” INSURANCE
We hear this myth on daily basis. Insurance agents collectively do a poor job of explaining to their clients what an umbrella policy is and isn’t. An umbrella policy is NOT a “magic bullet” that covers everything. In fact, it extends zero coverage to your structure – or any property coverage – at all! Umbrella policies are a way to garner additional liability coverage above and beyond what your underlying or primary liability policy provides to you. Meaning, if your underlying liability policy provides you with $1,000,000 per occurrence and you purchase a $5,000,000 umbrella, you have increased the per occurrence limit of coverage to $6,000,000.
Similar to the liability policies we discussed earlier, personal lines umbrella policies are underwritten very differently than a commercial lines umbrella policies. Many personal lines umbrella policies contain a “Total Business Venture Exclusion.” Even if you pay to include your investment properties on your personal lines umbrella policy, it’s possible you have no additional coverage through your umbrella because of this exclusion.
Umbrella polices also do not provide you with “first dollar” coverage. Your underlining liability policy limits would have to be exhausted, in order for your umbrella policy to provide coverage. In addition, do not purchase a liability policy which could have exclusions. Common exclusions that can do more harm than good are Pollution and coverage for dog bites. Your umbrella policy will not save you, if coverage is excluded on your underlying umbrella policy. Your umbrella policy almost always “follows” your underlying liability policy, meaning if it is excluded on your underlying liability policy, your umbrella policy excludes it as well. In over nine years we have only seen one umbrella carrier willing to drop down and provide first dollar coverage for a limited number of excluded coverages on the underlying liability policy. The kickers to this are:
- These options are much more expensive and you are better off just purchasing a more comprehensive underlying policy.
- These also come with a $10,000 – at minimum – Self-Insured Retention for any loss excluded by the underlying liability policy being picked up by the umbrella policy.
Last point on the umbrella policies, the type of underlying liability and umbrella policies you have, will have to be the same type of policy in order for them to work together. Commercial umbrella policy will not go over a personal lines liability policy and vice versa.
A CLAIM THAT OCCURRED BEFORE I OWNED THE PROPERTY SHOULDN’T AFFECT MY INSURANCE RATE
How great would this be? Not having to pay for the “sins” of the past owner(s). Well, believe it or not, up until about 5 years ago, this was the case. Anyone could go and purchase a new investment property without ha
ving to research or provide any details regarding past insurance claims to the new insurance company. Unfortunately, for everyone, insurance carriers are all becoming like “Big Brother” and are sharing information. It is now on you, as the potential buyer, to complete your due diligence and provide accurate loss information to them for the past three to five years, depending on the specific carrier requirements.
Let’s Take a Look
So, you are picking up your first investment property and you call your agent, get a quote and bind coverage prior to closing. You think you are all squared away, until 30 days down the road, you receive a notice from your insurance carrier stating either:
- Cancelling your policy because previous loss history was not disclosed to them.
- They will agree to stay on risk but your annual premium is increasing from $500 to $1,500 due to the increased exposure.
The point of the example being; do your due diligence prior to purchasing any property or location, so you know exactly what you are purchasing.
How do we go about obtaining prior insurance loss history on a location I am considering purchasing?
If you are purchasing the property from the current homeowner, you will need to obtain a C.L.U.E., Comprehensive Loss Underwriting Exchange, report. You can purchase one of these reports from Lexis Nexis – a data collection company – for $10 to $12 per report. This report will provide you with the prior insurance claims filed at the property, the type of claim and approximate total payout.
If you are purchasing the property from another investor, and the property is already being used as an investment property, you need to ask the seller to obtain a Loss Run report from the insurance carrier on risk. The seller will have to get this report from their insurance agent or current insurance carrier. This typically take two to four days to receive. This report shows the same loss information as a C.L.U.E. report does and gives you a great idea of the history at the property and what you can expect moving forward.
Things to look for on C.L.U.E. and Loss Run reports are:
- Both frequency and severity of losses are looked at as the same by most carriers. Several nickel-and-dime type losses or one catastrophic loss could both be looked at as high risk.
- Controllable losses are looked at very differently than “Acts of God.” Meaning fires, specifically tenant caused fires, theft and water damage are looked upon negatively as compared to
a wind or hail loss or even a lightning strike.
- Look carefully at locations that have suffered flood losses. These locations are prone to suffering these types of losses again. And once a flood occurs and a claim is paid, it is both difficult and expensive to obtain this coverage on future properties. It also makes it much more difficult to sell the property in the future if there is a history of flood losses.
- If liability losses are present, look at the cause of loss and consider if the same tenant is living at the property who caused the claim.
These are just a few of the items you need to strongly consider when reviewing the loss history at a location in question. If you are still sold on purchasing a location that has some negative loss history and you are experiencing difficulties with purchasing affordable insurance coverage, consider the following. Requesting a higher deductible for your entire policy or at least for the perils that have been loss issues for the past owner. For example, if frozen and burst pipes have been an issue in the past, request a higher deductible for that specific peril. If the past loss had a payout of $8,000 then request a $10,000 deductible for that peril, if financially it makes sense for you. This will offset the risk and “cover up” the loss altogether. Do not jeopardize your business by taking on a higher deductible than what you can stomach as an owner. You are better off looking for another property to purchase or paying the higher insurance premium.
Just a quick note about our program, we do not require any prior loss history to provide you with coverage. We obviously, strongly urge you to gather this information, as it only benefits you, but we can
offer coverage to you without it. More importantly, we will not come to you 30 to 60 days later and cancel or increase your premium. Our program was built by investors, for investors. We work a bit differently. We utilize a tool called Rentfax, which provides us with a risk analysis for a specific location. It provides us with a score between 1 to 100 against other locations and against a national average, using a number of factors such as, crime, education and vacancy etc. Based on how your location scores, determines what property coverages we can offer you. You will learn more about these property coverage options in the next myth. With close to 60,000 locations spread among all 50 states and priding ourselves on “Ease of Use” for investors, it did not make any sense for us to delay moving forward with coverage for up to a week while waiting on loss history. We have developed what we feel is a fair and stable rate to offset the risk we are taking on. It has worked very well for us as we have not had an “across the board” rate increase in over 10 years. Just something for you to consider when shopping for property insurance.
About the Author
Shawn Woedl is the Senior Vice President of REIGuard and National Real Estate Insurance Group. He is an industry-recognized speaker and educator with an emphasis on Commercial Property and Premises Liability. Over the last nine years, he has studied extensively on these lines of coverage to bring to you DEBUNKING the 13 Insurance Myths for the Real Estate Investor.