Insurance is the only thing we have to pay for that we don’t want to use. You will need insurance in an emergency. These points should help you understand the insurance implications of any real estate venture.
Myths (presented not in a particular order)
1. Insurance is not mutually exclusive to estate, tax and financial planning…
Insurance is interrelated to all of them, and should work in harmony. Your attorney, accountant, financial planner, and insurance advisor should all know the plans of each other to achieve your goals. Excluding one of the other is counterproductive to efficiency and cost-effectiveness. These four people are your trusted advisors and you should encourage them to collaborate as needed.
2. I will be protected if I am named as an “additional insurer” under my existing homeowner policy.
This could cause more damage than good. If you or your company own the property, or have a financial stake in it, you should be the “first insured”. Any potential claim benefit or protection is given to the first named insured. A “supplementary insured” will not be eligible for liability protection. In the event that the property is damaged, the interests of the “loss payer” will be protected. A mortgagee is, inherently, BOTH. Be advised if you decide to keep your “homeowner” policy and name yourself as the additional insured. The insurer will deny coverage if it becomes apparent that the ex-owner (the first-named insured) no longer owns or controls the property. You are not the entity entitled to the proceeds even if you manage the claim. The insurer may question your request to be named as a loss payer if you tried to add yourself. The insurer will have to write a new policy if they discover that you own the property.
3. It’s fine to buy a property under your name without your homeowner’s insurance liability.
There is no reason to expose your personal assets and financial resources to the risks of investing in real estate. This is what your insurance agent suggested. If they don’t recommend it, find another person who is more knowledgeable about real estate investing or spend the time to learn more about you. It is not something I want to do. Asset protection strategization inherently is a combination of insurance, entity creation, and “compartmentalization”.
4. My non-owner occupied rental is covered by the “personal” dwelling insurance policy.
This attitude is often promoted in the insurance industry by people who don’t have access to commercial-type markets or aren’t knowledgeable. The dwelling fire policy requires that liability be extended to your homeowner’s insurance (see #3). Many coverages that are essential to “rental” properties are missing or must be purchased above and beyond. Although the base of a completely new presentation, some highlights of the “commercial preference” policy include rental loss coverage, unit limits, and pollution exclusion issues.
5. I have a personal umbrella (PUL) so I don’t need to insure commercially.
Like most insurance polices, your personal umbrella protection contains much exclusion. The “business pursuit” exclusion is one of the most important for real estate investors. You should consider selling if your real estate investments are not a business pursuit. Your PUL is not designed to cover “personal” exposures. It is possible to have a commercial umbrella that goes beyond the commercial package policy’s liability.
6. An insurance claim that was made before I or my entity owned the property should not affect my rate.
Insurance companies not only cover you, but also rate the property based on the claim history. CLUE (Comprehensive Loss Underwriting Exchange), reports will provide details about the claims that occurred at a specific address, as well as other criteria. Before you make an offer, have your advisor run a CLUE (Comprehensive Loss Underwriting Exchange) report on the next property. Your ROI can be affected by the insurance rate.
7. All-risk insurance covers all I need…
“All-risk” simply refers to the fact that, unless it’s excluded, it’s covered. Named peril” means that a loss must be identified in order to be covered. Even though “all-risk”, is a more extensive form of insurance, it doesn’t mean that everything is covered. Check out your policy exclusions. Although many exclusions cannot be bought back, they can often generate a long list.
8. Self-insurance can be too risky
Technically, a deductible is self-insurance. Consider the minimum claim amount that you would file with your insurance carrier. Then, double that number. This is the minimum amount of deductible I recommend you have. However, there is a point where the return on your investment decreases. You can file a $5,000 claim but if you don’t see any premium savings (as opposed to, say, a $2500deductible), then it is better to go with the lower. The premium savings from having a “higher than normal” deductible usually pay for itself in the long term, according to statistical analysis. It is possible to completely self-insure a certain amount, such a property that has an arguable value or needs reconstruction. Self-insuring unknown amounts such as liability claims may not be the best option.
9. I need “builders risk” coverage for a vacant or rehab project/deal/property…
There are policies that specifically cover rehab properties, except when the rehab is not considered “considerable”. Insurers may differ in their definition. Foremost, AMIG (American Modern), Diamond States and AMIG (American Modern) all offer these contracts in our area. An insurance agent who says they can’t find coverage for your rehab property but offers the Ohio Fair Plan may be lying. They might not have the contracts mentioned with these carriers. The Ohio Fair Plan should not be considered the first option.
10. It’s worth hiring the “handyman”, who will do my rental work.
Do not let the tempting offer to work on your rental property or rehab job from a “fly by night” handyman get you into trouble. They may not have liability insurance, which puts you at risk as the owner. Also, they might not be covered by worker’s comp (WC). To save money, it is not worth taking the chance to hire the “legitimate contractor” for such ventures. Even a tenant who trims the grass to reduce rent could expose you to liability and WC issues. Contractors should always be required to present certificates of insurance (COIs), for both their liability coverage and their WC coverage.
11. (Bonus: Cheaper is Better…
It is true that you get what you pay for. It is important to work with an insurance advisor who understands real estate investing’s complexities. You can choose to be independent or “captive” agents. They can be independent or a “captive” agent, provided they are aware of your investment challenges and have access (or both) to carriers that meet your needs.
