Insurance...what a game!

[Nik S.]

Good Morning everyone,

Got another curveball that came my way. I'm not asking for "legal" advice so rest assure, just matter of opinion.

..So I requested my agent to get the seller's insurance agent who has been insuring the property for the last 2 years. After speaking with the current insurance agent, he tells me that the current owner has been with State Farm for years but he has only had this property with us for a few years. Therefore, he got a "significant" credit discount with State Farm. I then had the agent send me a new quote for the property. 

The way these buildings are setup, they are essentially (4) buildings in total w/ 12 units in each and NONE are connected. 2 of the buildings are on the same parcel but are at least 30+ feet away from each other and the other 2 buildings are 1.2 miles down the street and those buildings are also NOT connected. Basically, in case of a fire, the likelihood of one building catching fire means its only possible for 1 to burn. It's not physically not scientifically possible for more than 2 to burn down (hence the location between the (2) properties). For example, if I catch my house on fire & your my neighbor 9/10 times it's not going to catch your house on fire. You get the point.

OK....so the State Farm agent sent me back a quote that was just under $10,000 (with a $10k Deductible)!!! I am okay with the deductible BUT the current owner is paying $5300 annually. So of course I asked why!.... The current owner has a replacement cost of $1.4m on the TOTAL of 4 buildings...Whereas the same agent sent me a quote giving a replacement cost of $2.6m. He said in case of an incidental, the current owner would either A) have to pay out of pocket considering the insurance check wouldn't cover all the potential expenses or B) risk his equity, pay off the mortgage and be done with it. Basically seller is currently risking his equity by valuing each building so low bc the replacement cost is $2.6 which is more than 1 million more than what it's currently insured at.

Then I asked, IF i were to value the buildings at $400k each, what would my quote be... it was STILL $7000+..... so his "credits" must be significant!! 

Regardless, this is my situation. I called my current insurer who handles our motels and he basically said that State Farm "controls" the market share of Apartment Complexes. He said he can never win against them. 

Sure I can afford to pay the huge premium but it's essentially just pulling more dollars from my pockets. 

Here's my thinking..... as I said earlier the likelihood of all 4 buildings going at once is just not possible.... would it be worth it to value each building less than the total $2.6m proposed by agent? If I value at $2 million total, I can save about $1300 annual ($110 p month) OR I can just keep it at the proposed replacement cost @ the $2.6m.... By me changing the value $600k less, I would save $100 a month basically.... I have asked him to adjust the deductible to 15k,20k,25k... it made NO difference really? so i'll keep it at either 10k or 15k.... The only variable that is effecting the price is the "value" I attach to each building. 

I could value each at $400k just like he did & save money on the total premium paid each year... BUT the kicker is, say (1) building has a fire and it needs to be replaced...modern day costs for 12 unit building will be more than $400k? IF it comes more than $400k, the rest will come straight out of my pocket....Each building has 12 units.... 

What is your thoughts on this situation? How would you approach....I am thinking I have to bite the bullet one way or another... but sometimes there is a BEST bite.... :-)

Again, appreciate your help.

[Joel Owens]

It depends on if you are getting commercial insurance or fire and dwelling. The units being residential or commercial they look at differently.

I have had insurance carriers tell me on the best rates they will not insure older buildings unless everything has been replaced. The reason is they know statistically buildings of a certain age the plumbing goes bad, wiring, roofs, all kinds of things etc. The insurance companies do not want to pay these claims. So the better properties are pooled into the best rates. Typically newer buildings with a certain type of construction.

I am not an insurance expert just relaying what I have run into. With State Farm they give a bigger discount if you have all of your insurance with them. I have car insurance with USAA. Nobody can beat their rates. State Farm wanted me to switch car insurance to get property. I said no way as it costs me money.

This won't relate to your property I think but I have also ran into the commercial side where the seller is using his actual costs. The insurance policy was showing as 3,000 a year. The policy for the new buyer was 12,000 a year. The difference being the seller was a developer and owned over 40 properties insured with the same company. Once he went over a certain threshold with number of properties to insure another one was a nominal expense.

So not only do you have to verify sellers numbers are accurate you have to check on after that what will be you the buyers costs owning the building and factor that into the price you pay and your projections.