Insurance for Triplex

[Nich J.]

I have a Triplex in Minneapolis that I recently purchased, and I'm questioning if i'm working with the right people and have the correct insurance policy on it.  I told my agent all I wanted was a policy that allows me to pay off the loan in the case of a catastrophic event.  The policy I agreed to had a dwelling coverage equal to the amount i paid for the property.  Four months into the policy I receive an endorsement letter and invoice from my Insurance agent that says after the carrier did an external inspection of the property they needed to increase the dwelling coverage by $90k to reflect the replacement cost of the property in today's market.  When I asked what this was all about I get a response saying that they convinced the carrier to use their reconstruction calculator and agreed to bring the increase down to around 59k.

My question to other landlords and insurance people out there: 

1.) Is this a weird situation or is this business as usual?  

2.) Do I need to have dwelling coverage to cover replacement cost or can I insure based on what i have into it?

Appreciate any feedback.  

[Brandon Hershey]

Hey Coach @Kevin Powell! Let's definitely catch up, PM me!

Of course the denial of claims for this instance is a rarety, but it could happen. In my dads 32 year experience he has only seen this once. The co-insurance penalty can be of concern when trying to insure your place for less than replacement value determined by the insurance company. To be honest the mortgage and banks opinion of what the insurance should be is irrelevant, hence why they are not licensed in insurance. Below is an example of what could happen by skimping on insurance in the event of a claim. Hope this helps illustrate how important it is as an investor to reduce your insurable risk by having a knowledgable agent.

Fred was insuring his house for $114,500

His policy had a coinsurance percentage of 80%

Fred had a $1,000 deductible on his policy

For purposes of this example, we will assume Fred had a $20,000 claim when hail damaged his roof and his vinyl siding

We discovered the first problem with Fred’s policy and that was, when he purchased his house back in 1991, he bought the insurance policy with the limit of coverage being required by his bank.

Sounds pretty familiar, right? So where’s the problem? The bank only required his insurance to be in the amount of his mortgage, not the actual replacement value of his house. And to top it off, Fred’s homeowners policy was not keeping up with inflation over the years.

How does that translate to actual dollars? When we insured Fred’s house, the replacement value was determined to be $217,000.

Here’s what would have happened in the event that $20,000 claim occurred BEFORE we fixed Fred’s policy:

According to the coinsurance clause, we have 4 steps to follow:

1. Multiply the value of the covered property ($217,000) by the coinsurance percentage (80%), resulting in an amount of $173,600. This is the least amount of coverage Fred should have had in place to avoid the coinsurance penalty.
2. Divide the actual limit of insurance of the property ($114,500) by the figure determined in step 1 ($173,600), which results in .659 or roughly 66%
3. Multiply the total amount of the loss ($20,000) by the figure determined in step 2 (66%) and you get $13,200
4. Subtract the deductible ($1,000) from the amount determined in step 3 ($13,200) to finally arrive at $12,200

And the results are...

Simply stated, a very unhappy individual (Fred) receiving the phone call of bad news if he had experienced a loss under his old policy. Since no one ever explained the details of the coinsurance provision to Fred, he simply thought if he had a $20,000 claim, he would be paid $19,000 after he paid his $1,000 deductible.

The fact is, Fred would only have received $12,200… a full $6,800 less than he expected to receive simply because he was subject to the coinsurance penalty. Without his knowledge, Fred’s deductible (in this hypothetical claim) wasn’t $1,000, it was actually $7,800!