Understanding Insurance by Tim Norris

I heard yet another horror story this week about an investor who lost a house to a fire, then found out that his insurance didn’t actually cover the loss. Why? Because it was a homeowner policy, in the name of the former owner, who’d sold the property to this investor subject to the existing loan. Since the property was neither owner-occupied nor in the name of the actual owner, the insurance company just said, “Tough luck” despite the fact that all the premiums were up to date.

I meet so many people who have no idea what their insurance covers or even whether it’s the appropriate type in the appropriate name. And I meet even more who are paying $50-$60 more per MONTH than the average investor in their area.

If you own rentals, I suggest you take out your policy and see how it compares to what Tim recommends in this article. I did that, and saved over $1,600 in insurance premiums last year.

Tim Norris is the owner of www.NREInsurance.com , a company that specializes in working with investors and writes policies in 17 states. To find out if yours is one, contact Tim at (888) 741-8454

If one of your single-families caught fire last night, are you certain it is insured properly? If a spring storm blew the roof off of your 12-unit apartment building, would you have coverage for your loss-of-rents? Is your subject-to exposure protected? When it comes to insuring your investment properties, it is best to know what protection you have, or don’t have, before a claim! It is always nice to save a few dollars to add to your net income, but make sure you are aware, and more importantly, comfortable with your coverage levels and options.

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. Surprisingly, there is a minimal premium charge in most cases to double your protection. 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.

Other Structures and Personal Property Coverages
Don’t forget to protect against loss of detached structures, such as garages, sheds, and outbuildings. Some policies automatically include limits for these. Also remember to protect items in the units such as refrigerators, stoves, and window air conditioning units. Again, some policies may automatically provide built-in protection for these items.

Ordinance and Law Coverage
This provides protection for additional costs you may occur in order to bring your damaged property “back to code”, as it is repaired from a loss. As time passes and building code changes, most properties are “grand-fathered”. However, the repairs that are inspected by the governing municipality are required to be to current code. Hard-wired smoke detectors and handicapped accessibility are two such examples. Without the Ordinance and Law endorsement, such work is typically not covered under your policy. Older properties and multi-unit properties are more at risk for this situation.

Loss-of-rents/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.

Deductibles
Simply stated, the higher your deductible, the lower your premium. If you are a multi-property owner, and your units are insured under separate policies, your deductible will apply, per location, if you are on what is typically referred to as a “package” or “blanket” policy, your deductible usually applies per occurrence. This could be a big difference, out-of-pocket, in the event of a local catastrophe such as a tornado.

Earthquake, Water Backup and Flood Coverage
Most policies have exclusions for such losses. You can buy these coverages back through separate 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 these coverages.

Insuring the Proper Entity
If you have purchased a property subject to someone else’s loan, 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.

Choosing an Agent
Always work with an Agent you can trust and who truly understands the needs of the real estate investor, regardless if they are “captive”, or “independent”. An Agent that is familiar with our business and willing to take the time and explain your protection needs for your situation, even if they can’t offer the policy themselves. We all like to save money, but you purchase insurance for protection, so it’s crucial that your agent gets the right insurance for your unique needs as an investor. Make sure you understand how it works, before you need it!

10 Reasons Why You Might Want to Consider a COMMERCIAL Policy
Commercial insurance policies, as opposed to personal policies, add a lot of flexibility to your insurance needs as an investor. In most cases, I recommend that anyone who owns rentals and other investment properties get a commercial policy instead of the more typical personal policies, and here’s why.

1. Many commercial forms will automatically include coverages that you need such as rental loss and additions and alterations coverage.

2. To increase liability on a commercial form from the typical $300,000 to even $2,000,000 is minimal (around $50 per year for the entire contract---regardless of number of units) with most carriers.

3. The generic pollution exclusion found on most personal type contracts is addressed by some commercial policies to consider/cover pollution that emanates from a heating source (i.e. carbon monoxide), thus covering you for risks if a furnace or water heater leaks carbon monoxide into a property.

4. On a master (AKA “blanket”) policy, as you grow and add properties, the rate drops proportionately. Personal policies only insure one property per policy, and so do not get less expensive as properties are added.

5. Related to #4, in the event of a catastrophe, such as a tornado, the deductible in a commercial policy applies once for the occurrence, not per location. If you have multiple losses from a single disaster, you don’t have to pay multiple deductibles with a commercial policy.

6. The deviations to carry higher deductibles are cost-effective under a commercial policy much more so than most personal contracts. In other words, carrying a $2500 deductible on the commercial policy may save 15% of premium versus a $1,000 deductible. On a personal policy, the same change my only generate half the savings…gives some food for thought on consideration of catastrophic deductibles such as a $5000 or more, especially as you add more units.

7. Many insurers limit the number of units they will insure under personal contracts, and as you’ve discovered, will not consider non-personally owned properties for coverage. Since most educated investors hold their properties in LLCs, corporations, and so on, this makes the personal policies impossible to get—and I don’t like the idea of the insurance company limiting my asset protection options in this manner.

8. The “fire and hazard” policy you have may be a named-peril policy only. In other words, the policy will pay out only for the losses specifically named in the policy. A commercial policy can and should be written on an “all-risk” form. “All-risk” simply means that unless a peril is specifically excluded, it is covered.

9. With our commercial policy, you have the ability to add newly acquired properties up to $250,000 automatically for 90 days. You have 90 days to call us and add the location to the policy.

I hope that this article has helped you to understand some of the details of the insurance that you need as an investor. Feel free to contact my office at (888) 741-8454 if you have any other questions!