Insurance is the one thing we pay for that we never want to use. However, if you do need one, you’ll want it to be well protected. The points presented here should hopefully enable you to understand some of the insurance related issues for whatever your real estate venture is.
Myths (presented in no particular order):
1. Insurance does not include property, taxes and financial planning at all…
Actually, insurance is related to each other, because they have to work in harmony with each other. Your attorney, accountant, financial planner, AND insurance advisor will know what each plan specifically for your purposes. Thus, excluding one over the other is against efficiency and cost-effectiveness. Consider these four people your “team of trusted advisors” and encourage them to consult each other as necessary.
2. Being called “additionally insured” on an existing homeowner’s policy will protect my interest in the subject matter deal…
This can do more harm than good, in fact, if you (or your entity) owns, or has a financial “share” in the property, be the “first named insured”. The first named insured is the primary beneficiary of the potential claim benefit or liability protection. The “additional insured” will only get liability protection. The “loss payee” will have his interests protected if the property itself is damaged. (Pawn shops are basically BOTH). If you decide to maintain your “homeowner” policy and are named as an additional insured, please be advised. If it is discovered that the former owner, the first named insured in this case, no longer owns the property, expect the insurer to deny based on the fact that the policyholder no longer owns the property. Even if you manage claims to be paid, you are not the entity receiving the proceeds, because you are not the first name of the insured. If you also try to be added as a loss payee, chances are the insurance company will question whether you need to be named. When the insurance company finds out that you now own the property, they will need to write a new policy.
3. Buying property in your personal name and using your homeowner’s liability policy is fine…
I can’t think of any reason that exposing your personal assets to real estate investment risk would make sense. If these are the only options your current insurer is suggesting, find one who is more knowledgeable about real estate investing, or spend some time helping them understand more about what you are doing. The last thing I want to do is relate “my stuff” to my real estate investment exposure. An asset protection strategy is inherently a combination of insurance, entity creation, and “separation”.
4. A “private” residential fire policy is sufficient (“cheap”) to cover non-owner-occupied rent…
Those who usually propagate this attitude in the insurance industry do not have a commercial type operator/market and/or sufficient knowledge. Not only does a residential fire policy require liability to be extended from your homeowner’s policy (see #3), much coverage that is important for “rental” property is actually lost or needs to be purchased again and again. Although the basis of the presentation is completely different, some of the highlights of “commercial policy preference” are the inclusion of loss-rent coverage, unit limits, and pollution exclusion issues.
5. I have a personal umbrella policy (PUL), so I don’t need commercial insurance…
Like most insurance policies, your personal umbrella coverage contains many exceptions. One of the most glaring to real estate investors is the “pursuit of business” exclusion. If your real estate investment is not a “business pursuit” then you need to consider divesting! In other words, your PUL is designed for “private” exposure. Commercial umbrellas over and above the responsibilities in your commercial package policy are appropriate.
6. Claims made before I (or my entity) owned the property should not affect MY insurance rates…
The insurance industry doesn’t just cover “you”, they also cover and judge based on the claim history of the property itself. A CLUE (Comprehensive Loss Underwriting Exchange) report will detail claims that occurred at specific addresses (as well as other criteria). Have your insurance advisor run the INSTRUCTIONS on your next property BEFORE you bid. Insurance rates can definitely affect your ROI…
7. “All-risk” insurance covers everything I need…
By definition, “all risk” means that unless something is excluded, it is covered. “Named a hazard,” meaning, in order for the loss to be covered, the cause must be stated in the policy. So, even though “all-risk” is a more comprehensive form, it does not mean that “everything” is covered. View your policy exceptions. Not that many of these exceptions can’t be bought back, but they usually make for a pretty long list.
8. Self-insurance is too risky…
A deduction is technically self-insurance. As a rule of thumb, consider the lowest claim amount you will file with the insurance provider, then double it. This is the minimum deduction I suggest you take with you. However, there is a point of diminishing returns. In other words, even though you may not be filing a $5,000 claim, if the saving premium (versus, say, a $2,500 deductible) is negligible, then you should go for the lesser option. In the long run, statistically speaking, the premium savings by carrying a “higher-than-usual” deductible usually pays for itself. Remember, too, that fully insuring yourself for a known amount, such as a property with a debatable repair or reconstruction value, can be a consideration. However, insuring yourself an unknown amount, such as a liability claim, may not be the best idea.
9. I need “builder’s risk” coverage for a vacant or rehabilitated project/deal/property…
Unless the rehab is “large enough” (definition varies by insurance company), there are policies designed specifically for rehab properties. In our area, Diamond States, AMIG (American Modern), and Foremost all offer such contracts. If an insurance agent tells you they can’t find coverage for your rehab property and offers an Ohio Fair Plan, they likely don’t have a contract with the carrier mentioned. The Ohio Fair Plan should be the last choice for the property, not the first.
10. It’s worth hiring a “handyman” to do my rental…
Don’t fall for big offers to do work on/on your rental property or rehab project from “fly-by-night” handyman type assistance. Chances are, they not only don’t carry liability insurance (putting the risk back on you as the owner), they probably don’t carry workers’ compensation (WC) coverage either. It’s not worth the risk to save a few dollars to not hire a “legitimate” contractor for such an undertaking. Even tenants who mow the lawn to reduce rent can potentially get you into WC and liability problems. Always require contractors to provide a certificate of insurance (COI) for their liability and WC coverage.
11. (Bonus) Cheaper is better…
The cliché is true: you get what you pay for. Work with insurance advisors who understand the uniqueness of real estate investing. They can be independent agents or “prisoners”. As long as they know the challenges facing your investment endeavor, and have access to an operator (or carriers) that meets your needs (along with the strategies discussed here), challenge them to provide you with the best VALUE for your business. insurance, not the cheapest rate.
Insurance is a gamble. The insurance company is betting you won’t need it, while you’re betting that you will. With the help of a professional insurance advisor, gain enough knowledge to make an informed decision about your particular needs. As part of an asset protection plan, you should be comfortable with your coverage and protection BEFORE you need it. I really hope all your premium dollars go down the drain!
