Myth: A claim that occurred before I owned the property should 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 having 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:

  1. They are canceling your policy because your previous loss history was not disclosed to them.
  2. 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 is to 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 LexisNexis – 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 the 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 takes 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 claims history of 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.” This means 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 claims 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 Hazardhub, which provides us with a risk analysis for a specific location. It provides us with a score using a number of factors such as crime, education, vacancy, etc. Your location score determines what property coverages we can offer you. With more than 71,000 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 claims 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.

 

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What Every Real Estate Investor Should Know About Insurance Claims