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Insurance is a gamble. The insurer is betting you won't need it, while you bet that you will. And, although we do buy insurance with the understanding that we may use it, many real estate investors believe they can purchase insurance on the cheap or ignore certain "best practices" - exposing themselves to adverse risk and even devastating financial loss. As part of an asset protection plan, it is vital that you are comfortable with your coverage and protection BEFORE you need it. What follows are the top myths that abound about real estate insurance for investment properties.
Myth #1: Insurance is mutually exclusive of estate, tax, and financial planning.
Actually, insurance is interrelated to each of these, and as such, they should work in harmony with one another. Your attorney, accountant, financial planner, AND insurance advisor should certainly know what each of the other has planned specific to your goals. Excluding one from the others, or not allowing them to communicate with each other, is contradictory to efficiency and cost-effectiveness. Consider these four folks as your "trusted team of advisors" and encourage them to consult one another as necessary.
Myth #2: Being named as an "additional insured" on the existing homeowner policy will protect my interests in a subject-to deal.
Being named as "additional insured" could do much more harm than good as the first named insured is the primary recipient of any potential claim benefit or liability protection. An "additional insured" will garner liability protection only.
If you decide to keep the "homeowner's" policy in place and are named as the additional insured, be advised. If the insurance company discovers that the ex-owner, the first-named insured in this case, no longer owns the property, the insurer will deny your claim, based on the fact that the policyholder no longer owns the property.
Myth #3: Buying an investment property in your personal name and using your homeowner's policy liability is fine.
Exposing your personal assets to the risk of real estate investing makes no sense - financial or otherwise. If using your homeowner's policy is the only option your current insurance person suggests, then either find a new agent that is more real estate investing-savvy, or take the time to help your agent understand more about what you do.
Myth #4: The "personal" dwelling fire policy is a sufficient ("cheap") way to cover my non-owner occupied rental.
Those "experts" who promulgate this attitude in the insurance industry either don't have commercial-type carriers/markets and/or proper knowledge. Not only does the dwelling fire policy require liability to be extended from your homeowner's policy (see #3), many coverages that are vital to a true "rental" property are either missing or need to be purchased over and above what a homeowner's policy provides.
A commercial policy, on the other hand, includes rental loss coverage, unit limitations, and pollution exclusion issues.
Myth #5: I have a personal umbrella policy (PUL), so I don't need commercial insurance.
Like most insurance polices, your personal umbrella protection contains many exclusions. One of the most glaring for the real estate investor is the "business pursuit" exclusion. (If you don't consider your real estate investment(s) as a "business pursuit", then you should consider divesting!) In other words, your PUL is designed for "personal" exposures - not business exposures. A commercial umbrella over and above the liability in your commercial package policy is more appropriate and can protect your interests.
Myth #6: A claim that occurred before I (or my entity) owned the property shouldn't affect MY insurance rate.
The insurance industry not only underwrites "you," they also underwrite and rate based upon 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). Have your insurance advisor run a CLUE on your next property BEFORE you make an offer. The insurance rate can certainly affect your ROI.
Myth #7: Self-insurance is too risky.
A deductible is technically self-insurance. As a rule-of-thumb, consider the lowest claim amount you would file with the insurance carrier, then double it. This is the minimum deductible you should carry. You will hit a point of diminishing return, however. Though you may not file a $5,000 claim, if the premium savings is negligible (versus, for instance, a $2500 deductible), then you may as well go with the lower.
In the long run, statistically, the premium savings by carrying "higher than usual" deductibles usually pay for themselves. Remember also, that completely self-insuring a known amount, such as a property with an arguable repair or reconstruction value, can be a consideration. Self-insuring unknown amounts, such as liability claims, may not be the best idea.
Myth #8: I need "builders risk" coverage for a vacant or rehab project/deal/property.
Unless the rehab is "considerable" (definition varies by insurer), there are policies specifically designed for the rehab property. Ask your agent for the options available in your state.
Myth #9: You'll save money by hiring a "handyman" to perform rehab work.
Although their rates are considerably lower, "fly-by-night" handyman-type contractors most likely do not carry liability insurance (which puts the risk back on you as the owner) nor do they carry worker's compensation (WC) protection. Your business and personal assets are not worth the risk of saving a few bucks when you don't hire a "legitimate" contractor. Always require contractors to provide certificates of insurance (COIs) for both their liability and WC coverages.
And, be wary of tenants who cut the grass for reduced rent - as they potentially expose you to WC and liability issues, too.
Myth #10: Cheaper is better.
The cliché rings true: you get what you pay for - and this certainly applies to insurance. When purchasing insurance for your investment properties, work with an insurance advisor who understands the idiosyncrasies of real estate investing, understands the challenges you face, and has access to a carrier (or carriers) that meet your needs (in conjunction with the strategies discussed here).
And, don't be afraid to challenge them to get you the best VALUE for your insurance -- versus the cheapest rate.
Actually, insurance is interrelated to each of these, and as such, they should work in harmony with one another. Your attorney, accountant, financial planner, AND insurance advisor should certainly know what each of the other has planned specific to your goals. Excluding one from the others, or not allowing them to communicate with each other, is contradictory to efficiency and cost-effectiveness. Consider these four folks as your "trusted team of advisors" and encourage them to consult one another as necessary.
Myth #2: Being named as an "additional insured" on the existing homeowner policy will protect my interests in a subject-to deal.
Being named as "additional insured" could do much more harm than good as the first named insured is the primary recipient of any potential claim benefit or liability protection. An "additional insured" will garner liability protection only.
If you decide to keep the "homeowner's" policy in place and are named as the additional insured, be advised. If the insurance company discovers that the ex-owner, the first-named insured in this case, no longer owns the property, the insurer will deny your claim, based on the fact that the policyholder no longer owns the property.
Myth #3: Buying an investment property in your personal name and using your homeowner's policy liability is fine.
Exposing your personal assets to the risk of real estate investing makes no sense - financial or otherwise. If using your homeowner's policy is the only option your current insurance person suggests, then either find a new agent that is more real estate investing-savvy, or take the time to help your agent understand more about what you do.
Myth #4: The "personal" dwelling fire policy is a sufficient ("cheap") way to cover my non-owner occupied rental.
Those "experts" who promulgate this attitude in the insurance industry either don't have commercial-type carriers/markets and/or proper knowledge. Not only does the dwelling fire policy require liability to be extended from your homeowner's policy (see #3), many coverages that are vital to a true "rental" property are either missing or need to be purchased over and above what a homeowner's policy provides.
A commercial policy, on the other hand, includes rental loss coverage, unit limitations, and pollution exclusion issues.
Myth #5: I have a personal umbrella policy (PUL), so I don't need commercial insurance.
Like most insurance polices, your personal umbrella protection contains many exclusions. One of the most glaring for the real estate investor is the "business pursuit" exclusion. (If you don't consider your real estate investment(s) as a "business pursuit", then you should consider divesting!) In other words, your PUL is designed for "personal" exposures - not business exposures. A commercial umbrella over and above the liability in your commercial package policy is more appropriate and can protect your interests.
Myth #6: A claim that occurred before I (or my entity) owned the property shouldn't affect MY insurance rate.
The insurance industry not only underwrites "you," they also underwrite and rate based upon 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). Have your insurance advisor run a CLUE on your next property BEFORE you make an offer. The insurance rate can certainly affect your ROI.
Myth #7: Self-insurance is too risky.
A deductible is technically self-insurance. As a rule-of-thumb, consider the lowest claim amount you would file with the insurance carrier, then double it. This is the minimum deductible you should carry. You will hit a point of diminishing return, however. Though you may not file a $5,000 claim, if the premium savings is negligible (versus, for instance, a $2500 deductible), then you may as well go with the lower.
In the long run, statistically, the premium savings by carrying "higher than usual" deductibles usually pay for themselves. Remember also, that completely self-insuring a known amount, such as a property with an arguable repair or reconstruction value, can be a consideration. Self-insuring unknown amounts, such as liability claims, may not be the best idea.
Myth #8: I need "builders risk" coverage for a vacant or rehab project/deal/property.
Unless the rehab is "considerable" (definition varies by insurer), there are policies specifically designed for the rehab property. Ask your agent for the options available in your state.
Myth #9: You'll save money by hiring a "handyman" to perform rehab work.
Although their rates are considerably lower, "fly-by-night" handyman-type contractors most likely do not carry liability insurance (which puts the risk back on you as the owner) nor do they carry worker's compensation (WC) protection. Your business and personal assets are not worth the risk of saving a few bucks when you don't hire a "legitimate" contractor. Always require contractors to provide certificates of insurance (COIs) for both their liability and WC coverages.
And, be wary of tenants who cut the grass for reduced rent - as they potentially expose you to WC and liability issues, too.
Myth #10: Cheaper is better.
The cliché rings true: you get what you pay for - and this certainly applies to insurance. When purchasing insurance for your investment properties, work with an insurance advisor who understands the idiosyncrasies of real estate investing, understands the challenges you face, and has access to a carrier (or carriers) that meet your needs (in conjunction with the strategies discussed here).
And, don't be afraid to challenge them to get you the best VALUE for your insurance -- versus the cheapest rate.
Tim Norris is the President and Owner of National Real Estate Insurance Group, a company built to address the unique needs of the real estate investor. In addition to running his company, Tim is an active real estate investor and an NaREIA, OREIA and Cincinnati REIA member. He can be reached at 513-858-4310, 888-741-8454, by email at tim@nreinsurance.com or via the company website at www.nreinsurance.com.
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Exposing your personal assets to the risk of real estate investing makes no sense - financial or otherwise. If using your homeowner's policy is the only option your current insurance person suggests, then either find a new agent that is more real estate investing-savvy, or take the time to help your agent understand more about what you do.The above statement seems to be contradictory. The situation is very critical and need an experienced campaigner to resolve it.