How to know if you've got enough coverage?

Question

We use state farm and have "cash value" coverage. They've explained 20 times what that means but I find I forget over time. It has started me thinking that maybe I should shop around? We're die hard State Farm clients (30+ years) and love the hand holding we get from our local agent but I'd like to have a better understanding.

Does anyone have any strong opinions on insurance companies or types of fire / damage insurance to have?

Thank you.

Does anyone have any strong opinions on insurance companies or types of fire / damage insurance to have?

Thank you.

Jacob St. Martin · Answer

Hello Kenneth,

I don't have a ton of experience in this but generally speaking you want a policy that covers full replacement cost not just current value. Sometimes the value of the structure is less than what it would cost to rebuild it the way it is which is why you want the full replacement cost. For instance, with the crazy construction costs right now if something happened to your home and you didnt have full replacement coverage you might run out of money before you finish rebuilding

Kenneth LaVoie · Answer

As the day progresses (and more back and forth with our agent), bits and pieces are coming back. We bought many of these properties very cheap and pretty distressed (duplex, all renovated ready to rent for 27K, 11 unit for 180K, couple 7-units fully rented for 160K ea. etc.) The cash value limits were up in the half million range for these properties and I believe at the time it would've been just fine regardless of full or partial loss. But over the decade, we've upgraded steadily, and even though the values stagnated for the first 5-6 years, the uptick in values started in late 2016 and i think that's why I'm suddenly realizing we've a little underinsured. I am considering putting feelers out however.

Kenneth Kuebler · Answer

Thanks Aaron. I appreciate the well reasoned response. I did wind up going with replacement cost, for the exact reasons you said - specifically it was a small $ up charge for a superior product.

Aaron Porter · Answer

This is the thought you should be having.  Is the $300/year worth protecting the $200,000 possible loss?  because that is exactly what it is.  a loss if your property burns down and you walk away from it with the "depreciated cash value" you still own the lot which you are required by law to clean up after a fire or flood, and then you can sell the lot.  you are still loosing that $200,000 in appreciated value.  for the extra $300/year you could rebuild the home and sell it for a net gain of at least the $200K as the brand new home is going to be worth at least what it cost to rebuild.  Replacement Cost Value insurance is more expensive than Actual Cash Value insurance but your claims processes are easier, you have less fights over the value of things such as a roof, and you are protecting your investment which means you are protecting the inflation and appreciation that real estate enjoys. @Kenneth LaVoie State Farm has great products, which they should as they are the largest insurance provider in the US.  But they have their shortcomings as well.  It would definitely be worth shopping your insurance portfolio around and seeing what an Independent Agency/ Broker can do.  I strongly recommend my clients getting replacement cost insurance.  But I also understand that at the end of the day with property and auto insurance it comes down to what do you want to afford?  Do you want to save the money on your balance sheet?  Or do you want the better coverage?

Cameron Moore · Answer

As an investor, you are fighting with a hand tied behind your back if you do not hire an Insurance broker. I understand it is a relationship game but captive agencies just cannot offer what brokers can. They can shop the ENTIRE market for you and find the carrier that most wants your exact type of risk in your exact location. They do it every renewal as well so when the carrier inevitably goes up, they can move you to another carrier.

I always explain to people, as a captive your agent only has one option to offer you. If the rate shoots up, their only option to try to keep your business is by small exclusions, raising deductibles, and moving a replacement cost policy into ACV with hopes there isnt a TOTAL loss on your home.

Kenneth Kuebler · Answer

I recently introduced myself as a first time rental buyer. This 4 bed property is for my daughter and three friends to live in for the next three years while attending college in Akron. Purchase and light reno will put me at about $110,000 all in. While discussing insurance with my AM Fam agent today, he is quoting $1400/yr for replacement cost at $350,000 and $1100 for cash value at $150,000 both with $1000 deductible. 1M liability.

I’m really struggling to understand why I would want replacement value on a rental. If the whole thing burns to the ground and I’m left with just an empty lot, I wouldn’t necessarily care to rebuild, I could just take cash value and walk away without a loss. But on the other hand, a brand new build would be more valuable if I sold it after a rebuild. And it’s only $300/yr difference for a premium product I guess. I’m a little confused as to what decision to make on this. This property doesn’t have to make me a bunch of money, it’s a learning opportunity for me and a nice place for my daughter to live in for school. Thoughts?

Henry Clark · Answer

We use State Farm for our personal insurance also.  For commercial however you should get insurance that is specific to your type of investment and clients.  For example we do Self Storage. State Farm does not do Self Storage as a major product, thus their premiums are roughly 60% higher than our Insurer who just does Self Storage.  Also we get coverage on if we Auction the wrong unit off, that is not covered by State Farm, or better Business Interruption coverage if we have a flood or fire.

Do you have coverage for wrongful denial to potential renters?  How is your Business Interruption should you have a fire or water damage and can't rent for 6 months to a year, with no rental income, etc.

How to know if you've got enough coverage?

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