Insurance myths for the real estate investor
Insurance is the one thing we pay for that we never want to use. However, should you need it, you will surely want to be properly protected. Hopefully, the points presented here should enable you to understand some of the insurance issues relevant to whatever your real estate business is.
Myths (presented in no particular order):
1. Insurance is mutually exclusive from estate, tax and financial planning…
In reality, insurance is interrelated with each of these, as they must work in harmony with each other. Your attorney, accountant, financial planner AND insurance advisor should certainly know what each has specifically planned for your goals. As such, excluding one of the others is contradictory to efficiency and profitability. Consider these four people your “Trusted Advisor Team” and encourage them to consult with each other as needed.
2. Being named as an “additional insured” on the existing homeowner’s policy will protect my interests in a settlement subject to settlement…
This could do far more harm than good, in fact, if you (or your entity) own or have a financial “interest” in the property, be the “first named insured.” The first named insured is the primary recipient of any potential claim benefit or liability protection. An “additional insured” will get liability protection only. A “loss payee” will have their interests protected in the event the property itself is damaged. (A mortgagee is inherently BOTH.) If you decide to keep the “homeowners” policy in force and be named as an additional insured, please note. If the former owner, the first named insured in this case, is found to no longer own the property, expect the insurer to deny based on the fact that the policyholder no longer owns the property. Even if you manage the claim to be paid, you are not the entity receiving the product, since you are not the insured in the first place. If you also tried to be added as a paid loss, the insurer will likely question the need for you to name it as such. When the insurer finds out that you now own the property, they will need to write a new policy.
3. It’s okay to buy property in your personal name and use the owner’s liability policy…
I can’t think of any reason that exposing your personal assets to the risk of investing in real estate makes sense. If this is the only option your current insurer suggested, find one that is smarter at real estate investing or take the time to help them understand more about what it does. The last thing I want to do is associate “my stuff” with my real estate investment exposures. The asset protection strategy is inherently a combination of insurance, entity creation, and “compartmentalization.”
4. The “personal” home fire policy is sufficient (“economy”) to cover my non-owner-occupied rental…
Those who usually promulgate this attitude in the insurance industry, or do not have operators / markets of commercial type and / or adequate knowledge. Not only does homeowners fire policy require homeowners policy liability to be extended (see #3), but many coverages that are vital to a true “rental” property are either missing or must be purchased for on. Although the basis of a completely different presentation, some of the highlights of the “commercial policy preference” are the inclusion of rental loss coverage, unit limitations, and pollution exclusion issues.
5. I have a Personal General Policy (PUL), so I don’t need commercial insurance…
Like most insurance policies, your general personal protection contains many exclusions. One of the most noticeable to the real estate investor is the “commercial activity” exclusion. If your real estate investment(s) is not a “commercial activity”, then you should consider divesting! In other words, your PUL is designed for “personal” exposures. A commercial umbrella above liability is appropriate in your commercial package policy.
6. A claim that occurred before I (or my entity) owned the property should not affect MY insurance rate…
The insurance industry not only insures “you” but also insures and rates based on the claims history of the property itself. A CLUE (Comprehensive Loss Underwriting Exchange) report will detail the claims that have occurred at a certain address (as well as other criteria). Ask your insurance advisor to give you a HINT about your next property BEFORE you make an offer. The insurance rate can certainly affect your ROI…
7. The “all risk” insurance covers everything I need…
By definition, “all risk” simply means that unless something is excluded, it is covered. “Designated peril” simply means that for a loss to be covered, its cause must be named in the policy. So while “all risks” is a more comprehensive form, it doesn’t mean “everything” is covered. Take a look at the exclusions of your policy. It’s not that many of these exclusions can’t be bought back, but they usually make for a pretty long list.
8. Self-insurance is too risky…
A deductible is technically self-insurance. As a general rule of thumb, take the lowest claim amount you would file with the insurance company, then double that. This is the minimum deductible that I suggest you carry. However, there is a point of diminishing returns. In other words, even if you don’t file a $5,000 claim, if the premium you save (vs., say, a $2,500 deductible) is negligible, then you may as well go for the lower. In the long run, statistically, the premium savings from carrying “higher than usual” deductibles generally pay for themselves. Also remember that fully self-insured for a known amount may be considered, such as property with questionable repair or rebuild value. However, unknown amounts of self-insurance, such as liability claims, may not be the best idea.
9. I need “builders risk” coverage for a vacant or rehab project/deal/property…
Unless the rehabilitation is “substantial” (the definition varies by insurer), there are policies designed specifically for rehabilitation property. In our area, Diamond States, AMIG (American Modern), and Foremost offer these types of contracts. If an insurance agent reports that he cannot find coverage for your rehab property and offers the Ohio Fair Plan, it is likely that he simply does not have contracts with the listed companies. The Ohio Fair Plan should be the last option for the property, not the first.
10. It pays to hire the “handyman” to work on my rentals…
Don’t get sucked into the great offer of “flying” handyman help working on your rental property or rehab project. Chances are, not only do they not have liability insurance (which puts the risk back on you as the owner), but they probably don’t have workers’ compensation (WC) protection either. It’s not worth the risk of saving a few bucks by not hiring the “legitimate” contractor for such tasks. Even the tenant who mows for a reduced rent potentially exposes you to toilet and liability issues. Always ask contractors to provide Certificates of Insurance (COI) for both your Liability and WC coverage.
11. (Bonus) Cheaper is better…
The cliché rings true: you get what you pay for. Work with an insurance advisor who understands the ins and outs of real estate investing. They may be an independent agent or “captive.” As long as they have an appreciation of the challenges facing your investing efforts, and have access to a carrier (or carriers) who meet your needs (along with the strategies discussed here), challenge them to get the best VALUE for your insurance, not the fee. cheaper.
Insurance is a gamble. The insurer is betting that you won’t need it, while you are betting that you will. With the help of a professional insurance advisor, gain enough knowledge to make informed decisions about your specific needs. As part of an asset protection plan, it’s critical that you feel comfortable with your coverage and protection BEFORE you need it. I sincerely hope all your premium dollars go to waste!