If one of your single-family properties caught fire last night, are you certain it’s insured properly? If a spring storm blew the roof off of your 12-unit apartment building, would you have coverage for your loss of rent? Is your subject-to exposure protected? When it comes to insuring your investment properties, it’s best to know what protection you have, or don’t have, before you need to file a claim!
As consumers, let alone real estate investors, we tend to flinch when the insurance bill arrives. Many times, for good reason, rates are higher, the coverage seems to diminish, and for what? We never even filed a claim! However, if we stop thinking of our insurance policies as just another drain on our cash-flow, and more as a legitimate part of our business plan, that premium notice may be a little easier to open.
Most of us consider insurance as a “necessary evil.” The attitude that getting the lowest insurance rate makes the most sense has hurt more real estate investors than it has helped. That’s because the agenda for the agent may not fit the needs of the investor. Protecting our assets is more complex than simply finding the cheapest insurance rate.
Inadequate coverage, whether relating to your property or liability, may be just as damaging to your business as no coverage at all. It is always nice to save a few dollars to add to your net income, but make sure you are aware and comfortable with your coverage levels and options. The following gives an overview of what you need to know when insuring your investment properties.
Actual Cash Value vs. Replacement Cost
Make sure you understand the difference between actual cash value and replacement cost. Also know what a coinsurance penalty is, and how it may apply to your units. Every property, and property owner, for that matter, is different. Your comfort with how these options affect your coverage is vital for you to make an educated decision on which option to carry per property. ACV may be cheaper but could cost you when depreciation is applied to a claim.
Always carry as much liability protection as you can afford when insuring your investment properties. As a minimum, you should carry $1,000,000 per occurrence. The larger your portfolio, the more liability protection you should have. Surprisingly, there is a minimal premium charge in most cases to double your protection. An umbrella policy is a method to provide liability coverage beyond the standard $1,000,000 or $2,000,000 limits. An umbrella is usually more cost-effective when you have more than one type of liability exposure.
Other Structures and Personal Property Coverages
Don’t forget to protect against the loss of detached structures, such as garages, sheds, and outbuildings. Some policies automatically include limits for these. Also remember to protect items in the units such as refrigerators, stoves, and window air conditioning units. Again, some policies may automatically provide built-in protection for these items.
Ordinance and Law Coverage
This protects against additional costs you may occur to bring your damaged property back to code after a loss. As time passes and building code changes, most properties are grandfathered. However, the repairs that are inspected by the governing municipality are required to be to the current code. Hard-wired smoke detectors and handicapped accessibility are two such examples. Without the Ordinance and Law endorsement, such work is typically not covered under your policy. Older properties and multi-unit properties are more at risk for this situation.
Loss-of-rents or Business Income Coverage
This provides coverage for your lack of rental income if your tenants are forced out of your property due to a covered loss. Some policies have built-in coverage to a certain time limit, such as 12 months. Other policies may have an endorsement you must purchase at specific levels of coverage. Either way, this is protection all property owners should have.
Simply stated, the higher your deductible, the lower your premium. If you are a multi-property owner, and your units are insured under separate policies, your deductible will apply, per location, if you are on what is typically referred to as a “package” or “blanket” policy, your deductible usually applies per occurrence. This could be a big difference, out-of-pocket, in the event of a local catastrophe such as a tornado.
Earthquake, Water Backup, and Flood Coverage
Most policies have exclusions for losses such as earthquake, water and sewer backup, and flood coverage. You can buy these coverages back through endorsements. Make sure you understand how each coverage may apply, respective to your chosen insurance carrier. This will ensure you can make an educated decision when insuring your investment properties.
Insuring the Proper Entity
Make sure you protect your (or your entity’s) interests. It is not worth sacrificing the proper protection to avoid the dreaded due-on-sale clause. The entity that owns the property should be the first-named insured. The first-named insured is the primary recipient of policy benefits. Additional insured and loss-payee endorsements may suffice in certain situations. However, as a general rule always aim to be the first-named on the insurance contract.
All-risk – Basic, Broad, or Special
By definition, all-risk simply means that unless something is excluded, it is covered. Named peril, means just that, for a loss to be covered, its cause must be named in the policy. So, even though all-risk is a more comprehensive form, it does not mean that everything is covered. Take a look at your policy exclusions. Not that many of these exclusions can’t be purchased back, but they usually generate a pretty long list. Basic and Broad forms put the burden of proof on the policyholder regarding the cause of damage or loss. Special reverses this. Learn more about the differences between these and what to consider when selecting which level of coverage you need here.
Using the “Best” Insurance Company
The insurance company (or companies) you use should be one with the financial strength to deliver on their contractual obligation when a claim occurs. AM Best and other company rating services are good places to investigate insurance carriers. That said, some of the best companies available are ones you may never have heard about.
Always work with an Agent you trust, regardless if they are “captive”, or “independent”. Find an Agent that is familiar with our business and willing to take the time to explain the protection you need for your situation, even if they can’t offer the policy themselves. We all like to save money, but you purchase insurance for protection. Make sure you understand how it works, before you need it!
These basic insurance terminologies and issues apply to many types of businesses and scenarios and should be kept in mind when insuring investment properties. A deductible is a deductible, for instance. However, in the world of real estate investing, some of the creativity that is required to make a deal happen can throw many insurance agents and companies into a spin. Lease options, land contracts, and other acquisition strategies are common for us as real estate professionals, but not so common are the people we look to for proper advice and policy structure.