Is some of your fire insurance a waste?

[Gary Dezoysa]

Experienced real estate investor John Schaub says that paying for a full fire insurance policy is a waste, because you never get a full payout. He says to shop around for a policy that will allow insuring 50% of a property.

Hopefully someone who's had a fire incident can enlighten me to the truth of this claim. I would assume that a policy that covers 100% of the home would pay more than one that covers only 50% of it, but John has been in this business a lot longer than I have.

[Jason Bott]

@Gary Dezoysa @Michael Evans I could probably write an entire book on just this topic.  You need to take into consideration the investors risk tolerance, reserves, the current market, future market, type of property, etc.

This is definitely not a rule of thumb but a strategy some investors can use some of the time.  Keep in mind that of all fire losses, only 2% of them are total losses leading to the "total payout" I think he is speaking of.  His reasoning (I think, as I have not read any of his stuff) is if you decide to take the $ and move on, you will be paid the market value of the property based on a current appraisal.  But if you want to rebuild, you will not have nearly enough.

When this strategy works.

I had a client who's claim settled about 2 weeks ago that was a total loss.  SF, 100 years old 1300 sq/ft.  Replacement cost @ $100 sq/ft is $130k.  We insured for $70,000 as the client knows the market well and knew he would not get more than that.  After some negotiation, he settled for $60,000 + demo and loss of rents. 

When it doesn't

Let's say this kitchen fire was $40,000.  Claim adjuster will say he should have been insured @ $130k, but was only @ $70k, 46% Underinsured.  They will then deduct 46% ($18,400) from the claim payment, issuing payment of $21,600.

My client has 350 singles and doubles, so even if this happens every year, he still has a net savings to his annual total cost of insurance/self insure.  For clients who only have a few properties, 1 loss that goes bad could wipe out 10-20 years of savings.