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INSURANCE 101 FOR THE NEW REAL ESTATE INVESTOR

Investors who look to real estate for passive income are finding the marketplace has made its turnaround and realize that there are abundant profits to be made. While there is a significant amount of due diligence that must take place prior to your first purchase, your insurance requirements are fairly straightforward depending on how your property will be titled and then used.

In every case, the real estate investor will want to mitigate liability and property risk by transferring them to an insurance company. The insurance you need will always be based on the use or status of occupancy of the property which is typically one of the following:

OWNERSHIP

The method of ownership has a significant effect on how the property is insured in regards to the type of policy that can be used. For example, a home purchased by an individual can typically be insured on a personal policy such as a homeowner’s policy or dwelling/fire policy. Depending on the insurance carrier, you may be able to add your investment property to your regular homeowner’s insurance policy. Many of the standard insurance carriers have a limit on the number of properties they’re willing to insurance, but for the new investor, their personal policy would be the easiest and most affordable way to insure multiple properties. The first step should be to call your current agent or broker to see if they can accommodate multiple properties on a single personal policy.

Generally, if you elect to title your investment property under an LLC or S-Corp, your agent or broker is going to use a commercial policy that can also accommodate either single or multiple properties. Some insurance companies offer a master type policy that is used for insuring 10 or more properties where the insured (typically an LLC) can add or remove properties as needed.

COVERAGE NEEDED 

The coverage needed for your real estate investment is going to be pretty much the same no matter what type of property you purchase, what it’s used for, and how it’s titled:

Dwelling/Building Coverage – This coverage pays for damages to the building or the cost to rebuild it if there is a total loss. Your limit should be as close to the replacement cost as possible, While still weighing the market value and the deductible should represent what you can afford to pay out-of-pocket after a claim.

Contents/Business Personal Property – Pays to repair or replace damaged property you own Such as refridgerators, washers, lawn moweers and other building materials you may keep at that location. This coverage is especially important for furnished rentals.

Loss of Income – The loss of income coverage reimburses the policyholder if they are unable to collect rent when the property has to be temporarily vacated due to a covered peril, such as a fire or storm damage.

Liability Insurance – Liability coverage protects the named insured (name the policy is titled in) against liability claims and actions brought by a third party. The coverage will pay for defense costs, settlements by the insurer, and judgments awarded by the court.

Optional Coverages – Some landlord policies will also allow you to add additional coverages for an additional premium. This can be a separate line item such as Machine Boiler, or an endorsement that adds a package of additional coverages.

The good news for property owners is that all of the coverages listed above are typically offered as a package deal in the Landlord’s Insurance Policy. For property owners requiring liability limits higher than those offered in the Landlord’s Policy talk to your agent or broker about an Umbrella policy that can extend your liability limits to as high as $20 million at a very affordable price.

RECOMMENDED COVERAGES

Below are the recommended coverages based on the property use and type. Whether the policy will be written on a personal insurance form or commercial insurance form depends on how the property is titled.

Remodel and Sell (policy type: builders risk)

Hold and Sell (policy type: vacant home/dwelling fire)

Flip (policy type: vacant home/dwelling fire)

Residential Rental (policy type: landlord’s package)

Commercial Rental (policy type: BOP/commercial package)

 

Written By: Jason Bott

WHAT INSURANCE COVERAGES SHOULD I HAVE ON MY FIRST RENTAL?

At a minimum, rental properties should have three coverages:

• General Liability Coverage
• Building Coverage
• Loss of Rents / Business Income Coverage

General Liability Coverage – covers against lawsuits claiming you are responsible for Bodily Injury and/or Property Damage.

Bodily Injury – i.e. a slip and fall by a tenant or other person on your property.
Property Damage – i.e. a fire at your property damages neighboring properties you
do not own.

Building Coverage – this mitigates and restores the building from covered losses and this coverage is required by lenders to secure loans.

Building Coverage – i.e. fire, wind, water, vehicle impacts and other elements of structural damage.

Loss of Rents/ Business Income Coverage – pays for loss of rental income when a building that is rented to others is damaged by a covered loss.

Other items to consider:

1) Ideally have Replacement Cost, not Actual Cash Value (ACV). However, ACV may be the only option on older properties.
2) Special Form, if they do not offer that, then Broad Form. If they only offer Basic Coverage, be aware water and theft claims are excluded.

This is not a complete list, but are the most impactful coverages following a claim.

 

Written By: Jason Bott

DOES YOUR REAL ESTATE BUSINESS NEED AN UMBRELLA POLICY?

You accomplish this via an umbrella insurance policy. However, determining your liability limit is not an exact science. Ask the most seasoned professional how much is enough and you’ll get many different answers.

HOW CAN A TENANT CLAIM BECOME A MULTI-MILLION DOLLAR SETTLEMENT?

At the time of this article, if you Google settlement calculators, you will get 26 million results. Or, should I say your tenant will get that many results. Once they finish that search, they will do a second search for “personal injury lawyer” and come up with 31 million results. There is no shortage of resources or lawyers willing to try and take your hard earned dollars. Many attorneys will file a lawsuit on a contingency basis.

Here are some sample of questions typically found in a settlement calculator:

Medical Expenses:
Enter the total of your medical bills, even if you didn’t pay them out-of-pocket. _____________

Property Damage:
Enter the amount of damage (e.g automotive damage in a car accident case).  ____________

Lost Earnings:
If you missed work because of your injuries, input the sum of your lost income here. If you used available time-off benefits (PTO), enter that value as if it were unpaid. __________

Loss of Future Income:
If you will be missing more work due to ongoing medical treatment, or an inability to continue working at your current job while you recover, enter an estimate of the loss of earnings here. __________

Estimated Future Medical Expenses:
If you will require ongoing medical treatment for your injuries, enter an estimate of the cost of that treatment here. __________

Multiplier for General Damages:
The multiplier is used to estimate your general damages — your “pain and suffering.” The more serious, long-lasting, and painful the injuries, the higher the multiplier. (Between 1.5 and 5) _________

SETTLEMENT VALUE ESTIMATES

Economic Damages __________

This is the sum of your “special” damages or economic losses.

Non-Economic Damages (Pain and Suffering) ____________

This the payment for your general damages (pain and suffering) based on the multiplier you’ve chosen, and there is also a $1,000 “nuisance settlement” value.

YOUR TOTAL SETTLEMENT VALUE ________________

EXAMPLE OF LIABILITY FOR PERSONAL INJURY

Let’s consider an example of how things can go terribly wrong when it comes to personal liability:

One of your tenants has invited family members over to your rental property to watch the Macy’s Thanksgiving Parade, and there are several young children in the group. One of the children is playing on your front porch and suddenly falls several feet because a portion of the railing was not secure, and fractures her arm.

The suit against you damages will likely include:

In this case, a minimum of $1 million liability is required because of the continuing increase in health care costs and the aggressiveness of personal injury attorneys. Since most liability claims involve injuries, a $50,000 award for 20 years for a child losing partial use of her arm, will likely result in a $1 million claim.

HOW CAN YOU LIMIT THIS SCENARIO FROM HAPPENING TO YOU?

The answer is to purchase an umbrella liability policy with the appropriate limits. Here are seven question to determine the liability limit:

  1. Blue Collar or White Collar Tenants – Replacing the income of a lawn maintenance contractor is a small percentage of a trial lawyer.
  2. Property Ownership – Personal or LLC – If your properties are in your personal name, you not only want to protect the equity in your rental property but all of your personal assets as well.
  3. Is the municipality Pro Landlord or Pro-Tenant? There are some cities that are so risky; insurance companies will not insure properties in that municipality.
  4. How many units at that location? With a single unit, if there is a fire, you are likely to have one lawsuit.  A claim at a 20 unit building may generate 10-20 claims, on the one occurrence.
  5. How well is the property managed? If you can drive past the property on your way home from work, or even self-manage, the small issues will most likely be noticed and you can take care of them.  But if you are an out of state owner and relying on others to take care of the property, the smallest time sensitive problem can become a big issue if not acted upon quickly.
  6. Equity of the entity holding the deed – If you have a lot of equity within the properties you need to defend, you will want a higher limit umbrella.  If there is little to no equity, you may want to just shut down the LLC and bankrupt the property.
  7. If you have a property manager involved – This goes back to how closely the property is being watched and if small issues can grow into large issues and the property manager should also have additional insurance policies to defend you.

Written By: Jason Bott