Can you set up a legally qualified self insurance?

[Kyle S.]

I am wondering if it is possible to set up a legal self insurance company for rental property insurance? I am not talking about just dropping coverage and taking the risk, and I am not talking about dropping insurance and putting monthly payments into a savings account. I am talking about a legal insurance company that would write a policy that a lender would accept. I have scale to an extent, maybe not enough for this, and I also have other landlords that may join me in something like this.

[Chris Seveney]

Quote from @Kyle S.:

Quote from @Bill B.:

But you would have to have the cash set aside in escrow to pay off the entire property if there was a disaster. Kind of defeats the purpose.

If you have a $500k property they won’t just accept $100/mo is going toward “insurance”. You’re going to need an account with $500k sitting in it to pay them off if the house is destroyed. You’re better off just putting the $500k in a cd and getting paid $2k/mo in interest and spending $100 of that on insurance. 

Imagine you put the $100/mo aside telling the bank it’s “insurance”. 2 years later the house burns down and the account has $2,400 in it. The bank says your “insurance company” needs to pay off the $450k mortgage balance, where’s that money coming from?

With enough properties it could make sense. If there are 100 100k houses and I am legally allowed to underwrite 10m in coverage with a reserve of 300k, and I am saving 60k a year in premiums, that could make sense, especially if I am allowed to make a return on the 300k (holding bonds or something). Realistically, I am never going to have over 3 total losses in discontiguous houses at the same time, so hopefully something like this is a legal possibility.

My actual scale is a little larger than that but not way beyond that. So I am optimistic hoping I have the scale to do something like this, but its realistic enough to be worth looking into it.

 As mentioned, your lenders will want you to have $10M in money put aside. You can underwrite it but who is going to back the policy? While you may think three claims could never occur, what happens if a bullet passes through the a home and kills someone and the tenant decides to sue. The legal on that alone will be huge (more than the house is worth probably).

What some people do is they will self insure up to a value. For example the first $50,000 in damages/claims they will insure and then get a policy to cover anything above that. 

This will provide lower premiums and save money and also cover you for a catastrophic event.