What amount should I insure the house for?

Question

I am shopping rates on my 10 rental properties. The agent from American Modern asked for a dollar figure I wanted to insurance for. My guys at Nationwide never asked me this they just insured for a set amount.

Example - I bought a house for 50K - its now valued at $70 - the replacement cost is 169K - do I want to insure for the full replacement cost amount? It seems high and I know it will bump up my rates.

Nancy Brook · Answer

I think insurance is an individual question based on risk tolerance.

I insure somewhere between purchase price and property value. If something happens to the property I want to make sure I can recoup my investment. This is a riskier position than having full replacement value but I'm willing to do it because I don't want to be insurance poor. That's me. You might be different.

Jeremy Pace · Answer

@Adam Craig

There's a much more complicated question here.

In the event one of your rentals burns down, will you be satisfied to just walk away with nothing?  Because if one burns down, the bank will take what is owed to them right off the top.  If so, insure the property for what you paid for it.

If you want to have the replacement money to invest (in rebuilding a house, or in something else) you'll need to pay the extra money for replacement insurance.  It's worth noting that in this case, you're really getting two separate coverages, in one big ball.  You're getting that bank satisfaction money that I mentioned earlier, and the amount of money that is would cost to replace the house.

Also, you can pick and choose.  You can have 9 of the 10 of them insured for value and one for replacement, or any other conceivable combination in between.  If you have one rental that really, really nice, or that you've done a lot of work on, or that you simply like ... you can cherry pick that one for different coverage.

Jason Bott · Answer

Just want to expand on @Ryan  D.

strategy, which many of my clients use.  Realize that many policies will have a coinsurance penalty.   If the building is insured to far under the Replacement cost value, you are sharing in the loss with the insurance company.  Also, only 2% of fire claims are total losses.  The partial claim is where landlords get into trouble.

Using @Adam Craig's example, the insurance company is stating the rebuild is $169k, but wants to insure for $70k.  Insuring 41% of the replacement value, could give you a claim payout discounted by 59% (the actual claim calculation is not this simple and I am probably off a few %).  So on a $40k fire, you would get $16,400 less your deductible.  If it is an Actual Cash Value policy, they could depreciate the claim even further.

Some landlords understand this and we have structure the insurance program to match their higher risk tolerance in exchange for premium savings.

These are all viable strategies, just do your due diligence on how your policy will pay out.

Ryan Dossey · Answer

Personally I insure mine for what I can pick a similar property up for and I make sure it's at least 10k more then what I paid. I've never had to use it and I hope I don't.

Steve Babiak · Answer

Market value is the cost to buy one just like it nearby. Full replacement cost is the cost to build one like it from scratch. In areas where properties are older and income is lower, market value will be far less than cost to build.

Jason Bott · Answer

@Randy E. you are blending personal policies with commercial.  Personal homeowners policies do not have co-insurance clauses, so this is most likely not an issue if it is tied to you personal policies. Adam has 10 SFR on a commercial policy, so this is a clause he needs to be aware of.

Most people feel the same way you do, but look at it from the insurance company's view.  2 homes insured for $50k each, 1 is 500 sqft, the other is 1000 sq/ft.  On the second house the insurance company has 2xs the exposure to pay out $50k.

Bottom line, commercial insurance policies have multiethnic different ways they can be structured.  You just need to be aware of what that structure is.

Randy E. · Answer

I did not know insurance companies would prorate the payout based on the amount the homeowner insured the building for.  I was under the impression that if I insured a property for $50K and it suffered $50K in damages, that the insurance company would pay out $50K.

Jason, are you saying that if I own a building with a "value" of $100K but I choose to insure it for $50K, that the insurance company will only pay half the damages (up to the insured amount) because I chose to insure the building for half of its "value"?  If that's true (even if only sometimes) I find it despicable.

I guess I have some questions to ask my insurance agent.

Jason Bott · Answer

@Adam Craig

You need to determine what you want the policy to do when you have a $5k loss, a $25k loss and a total loss.  Then make sure your agent structures the policy and coverage forms to create these results.

I think everyone is stating that this question is like asking "What stocks should I invest in?"  Each investor has different financial resources, skill sets, and risk tolerances that can drive the type of policy and values they insure for.

Mike Nelson · Answer

My question to follow up is how do you pick an insurance company?  You don't necessarily with the cheapest.  I have heard stories about people having an event, such as a fire, and having to hire an attorney because the insurance company does not want to pay the claim.

Randy E. · Answer

@Adam Craig, it's a question that changes with each individual investor.

I know one guy who has dozens of rental properties.  He insures nearly all for only for fire insurance and only for $30K-$50K.  His reasoning is that for that many properties, insurance is a significant expense for in insignificant risk of actually losing a building.  He doesn't worry about property damage as a result of the tenants because his experience has been that is a relatively minor expense.

I know other investors who insure their properties for full replacement value and then some, just to be safe.  These investors are very concerned with the possibility of losing their investment properties and leaving any insurance money on the table, so to speak.  They want to make sure they get theirs.

Other investors insure for the amount they owe on each mortgage, to satisfy the banks' stipulations.  But they don't insure for replacement value or even appraised value because they want to save on the premium.

It's really up to you and what you feel comfortable with.

What amount should I insure the house for?

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