Very high insurance costs ($400/month) ! Any ideas ?

Question

I have a signed purchase agreement for this fourplex for $328,000 in Minneapolis. Its a 2 story building with 2 units on each floor and an unfinished basement. Total 2500 sq feet above ground. There is gas based central heating. The electrical and the furnace are all new.

We have 5 days to do an inspection and back out ...

In my deal analysis model, I had put $150/month as insurance premium. Since yesterday i have called 2 insurance agents and both say that as per their system the replacement cost for this place is $550,000 and the insurance premium comes out to be $400/month, which is a deal breaker.

We really like the place and would love to figure out a way to keep.

Anyone have any ideas on bringing the insurance costs down ? (Moving my other insurances to the same company is not helping by that much)

Joel Owens · Answer

CLUE stands for (comprehensive loss underwriting exchange) for the readers who do not know about it. CLUE can follow a person or the property. So if a person has a history of filing claims on properties they own insurance companies know about and conversely if a property has a history of multiple claims against it they know that as well. Many times with insurance claims it is better to pay for it than file a claim unless it is really large. If you file too many claims your insurance will increase your premiums a bunch or drop you all together. Some insurance companies will not even insure buildings that are really old where the plumbing, electrical, etc. has not all been replaced. Insurance companies are like any other business in that they are hedging their risk against size of a claim and frequency versus the revenue coming in for them on the policies they give out.

Jon K. · Answer

Very interesting. I know someone who had a house hit by a tornado. The roof was partially gone, so it flooded during the next rain. When they were trying to repair the roof, it caught fire (small fire). No insurance company wanted to touch the place. The insurance guys all told this family to "MOVE, RUN, FAST." Fortunately they were leasing the place and could get out.

Tarun Kapoor · Answer

I think i am missing something here. Can anyone help me understand why would anyone want to take ACV insurance ? Lets say a renter turns off the heat in winter and it breaks the pipes, floods the house, causing a repair bill of $25,000. I make a claim to insurance and based on depreciation calculation, i get a payout of $10,000 and have to give $15,000 out of pocket. This would be a terrible situation to be in. So, why is ACV worth considering ?

Tim Norris · Answer

As to which David just alluded, "co-insurance" and whether a policy requires it. Is just as important when evaluating ACV versus RC. On policies that offer RC and without a co-insurance requirement, you have a lot more flexibility in how much coverage you can carry.

Lance H. · Answer

Hi Tarun Kapoor, Hopefully this is allowed as I have no financial gain from this. I'm in the Twin Cities area and would highly recommend you call either Dave or Warren at Reis Insurance Agency. My family and I have done all of our business through them for years. He is always happy to not just quote but talk you through any possible options to meet your goals. Worth a call anyway to see if he can come up with any ideas. Again I do not have any financial benefit, just trying to help out!

David Beard · Answer

The only reason to go with ACV is to save significant money on premiums, of course. It's not qualitatively better, it's worse. Or did I misinterpret what you're asking? As far as partial losses, you're referring to the effect of "co-insurance" language in some insurance policies. I'm actually checking with my own agent on this and will let you know what I hear. Also, in a partial loss situation I'd expect to be able to get the restoration work done for quite a bit less than the retail pricing that the claims adjuster will use as the basis for compensation.

Tarun Kapoor · Answer

Thanks everyone for their answers.. Can anyone explain me why insuring for "actual cash value" is better than "replacement value". My agent told me that in his 25 yrs of career he has had to claim for a full loss only once. Mostly, its partial loss. And in situations of partial loss, insuring for ACV vs RCV is not a good idea. So he is saying that lets say you insure for 300K when the replacement value is 600K, then the insurance company knows you insured 50 cents on the dollar. So when there is a partial damage and the assessor determine that it will cost $100K to replace the damages, they will pay me $50K.

Kelly N. · Answer

We've got Allstate, but as far as I know State Farm and various other big insurance companies do this. The broker I talked to last week handles mostly high risk stuff with smaller insurance companies, it sounded like it was something most or all of his insurance companies would do as well. Kelly

Sam W. · Answer

Tarun Kapoor Foremost offers ACV. They actually "cap" the ACV based on a metric they use. I'm sure there are other companies as well.

Joel Owens · Answer

Are you getting fire and dwelling insurance or commercial insurance?? Fire and dwelling is much cheaper than a commercial policy at least it seems that way in my area. I have had this discussion before in that insurance companies say it doesn't matter what you bought it for or what you think the market value is. They go by either what it would take to build the exact same thing or if you built something similar. The similar is much cheaper than actual identical replacement. Are you getting a loan on this or paying cash?? If a loan what kind of insurance coverage is the lender requiring??