18 Apr Landlord Insurance
Insuring Investment Properties is critical to making sure your hard work is protected fully as well as safe. Foregoing proper insurance, while saving money in the short-term, could ruin everything you worked to complete.
Working with a trusted agent who understands the nuances property and liability, is a big step to making sure that you feel comfortable with your coverage, which is extremely important. Inadequate coverage could do just as much damage as having none at all.
Contents
What Type of Insurance Is Right For Me?
Typical homeowners insurance is not generally applicable to investment properties. Homeowners policies will often not include coverage for business ventures and have lower limits of liability.
You should have both Dwelling and Premises Liability coverage for Investment properties.
- Dwelling covers direct physical damage to property
- Premises Liability covers accidents or injuries on your property
Commercial Property policies and Commercial General liability policies are the recommended direction for those with investment properties. This covers certain exclusions or limits in coverage that are included in personal policies, which could end up hurting you as an investor.
How To Choose The Right Policy
Basic vs Special form coverage:
These are the 2 most common coverage levels. They determine causes of loss that are covered.
- Basic, or “named peril”, coverage means that for a loss to be covered, it must be specified in the policy
- Special form means that causes of loss are instead listed as exclusions, and therefore covered unless specifically listed as an exclusion.
When choosing which form of coverage you prefer, consider the amount of risk you’re willing to incur, occupancy of your properties, or any insurance requirements that may already be in place. For example, basic coverage doesn’t include policies for water damage, which in Colorado’s cold climate is more prone to happening. Same with theft, which is far more common in vacant properties.
Actual cash value vs replacement cost:
In the event of a loss, these two options dictate the payout settlement. These methods’ availability is predicated on the insured value per square foot, and each carrier’s threshold is different for the availability of these options.
Actual Cash Value:
While the property has a lower value per insured square foot, ACV factors depreciation into the loss, and wouldn’t be recoverable.
The downside is that if there is significant, structural damage, there likely wouldn’t be enough payout to cover the cost of the damage, instead maybe only enough to pay the loan.
Either way, ACV is still better than being uninsured, but will only be enough for small losses. If you are doing the work yourself, or are prepared to pay a higher deductible, ACV may be the coverage for you.
Replacement cost:
The preferred option for investors, Replacement cost policy minimizes risk and is often required by lenders. With RC, you are first given the actual cash value settlement based on the report done by the adjustor, then once repairs are finished, receipts are submitted for costs higher than the payout until you reach the insured value.
For most insurance providers, the property must be kept in good condition, and well maintained, such as paint, roof, structure, etc. Lack of gutters, bad pavement, debris, old appliances or broken down cars in the yard may cancel the policy.
Loss of rent (business income coverage):
Loss of Rent coverage can be included in Commericial property policies. This provides reimbursement if tenants are forced out due to a covered loss. Many providers allow the choice of LOR coverage for 3, 6, or 12 months.
Different structures and business personal property coverages:
You also need to think about insuring detached structures such as garages or sheds, as they may not be covered if not specifically listed in the policy. Same with personal property in rentals, such as furnishings.
Co-Insurance
Co-insurance is a penalty during a loss for having your property underinsured. Usually, co-insurance is listed on the policy as 80%, 90%, or 100%, with higher percentages being more detrimental. It is an agreement to insure the property to the percentage of the value of the replacement cost.
For example, if your adjuster determines the replacement cost to rebuild your home to like condition was $250,000, and you had an 80% co-insurance clause, you must be insured to a minimum $200,000 to avoid penalty. If the home is insured for $150,000, you are 25% underinsured.
Avoid co-insurance at all costs. This may cause more harm or penalty than it does save money.
What Deductible Is Right For Me?
The higher the deductible, the lower the premium. When choosing, its smart to double the number of the lowest claim you would have to turn in. Liability deductibles are set by carriers, so negotiating for a higher cost wont benefit you.
Additional Endorsements
Exclusions that can be brought back by endorsements
- Earthquake or sinkhole
- Flood
- Terrorism or political violence
- Equipment breakdown
Liability Limits
There is no correct answer to the right amount of liability insurance to have, only what makes you feel the most comfortable. Most policies start at $1 million, with higher limits available.
Be sure your policy has defense costs outside of the limits you set. Umbrella policies are often chosen after an investor’s portfolio begins to grow. Many investors start with $1 million in coverage per property.
Having a great team to help you review policies, such as a lawyer, realtor, accountant or insurance agent, is a bonus.
