Most of us consider insurance as a “purchase”. That is, we buy it because we “have to have it”. The attitude that getting the lowest insurance rate makes the most sense but 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.
The following items will help you better understand some important aspects of your insurance coverage.
Actual Cash Value (ACV) vs. Replacement Cost:
Make sure that you understand the difference between the two options. Also understand 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.
Liability Limits:
Always carry as much liability protection as you can afford. As a minimum, you should carry $1,000,000 per occurrence. The larger your portfolio, the more liability protection you should have. 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.
Ordinance and Law Coverage:
This provides protection for additional costs you may incur in order to bring your damaged property “back to code” when it is repaired from a loss. As time passes and building codes change, most properties are “grandfathered”. However, the repairs that are inspected by the governing municipality are required to be to current code. 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.
Earthquake, Water Backup and Flood Coverage:
Most policies have exclusions for such losses. You can buy these coverages back through endorsements. Make sure you understand how each coverage may apply, respective of your chosen insurance carrier. This will ensure you can make an educated decision on whether you should have any or all of these coverages.
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.
Basic/Broad/Special (all-risk):
By definition, “all-risk” simply means that unless something is excluded, it is covered. “Named peril,” means just that, in order 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 policy holder in regards to the cause of damage/loss. Special reverses this.
We all like to save money, but you purchase insurance for protection. Make sure you understand how it works before you need it. Basic insurance terminology and issues apply to many types of businesses and scenarios. 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 people 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.
Successful property investors, search for an insurance agent that is familiar with real estate investing and willing to take the time to explain the protection you need for your situation.
Contributing author – Tim Norris, President of National Real Estate Insurance Group. Contributing editor- Shawn Woedl, Vice President of National Real Estate Insurance Group.
ABOUT LONGHORN INVESTMENTS
Longhorn III Investments, LLC is a direct private lender offering short term acquisition and renovation capital to real estate investors for both residential and commercial assets. We operate in major metropolitan areas throughout Texas, Missouri, Indiana, and North Carolina. Highlights of our loan program include:
– Up to 70% of ARV (after repair value)
– Finance up to 100% of cost
– Close in 3 – 5 business days
– No income requirements
– Streamlined, simple approval process
– No pre-payment penalty
Longhorn was formed in 2008 and has funded over 1600 loans since inception. Our complementary businesses include a title company and real estate law practice operating out of our corporate office. Our wealth of experience puts us in the unique position of being able to help investors through all aspects of each transaction.
