How should I update Insurance Policies?

Question

Hello everyone.
There are two property In queens that my family owns and I manage! The original insurances are covering the original purchase price of the properties, which are 25% of the worth in this day and age. I am also in the process of getting these properties into LLC's to minimize liability since these are now quite hefty assets. My LT lawyer told me to make sure I update my insurance policies when I eventually transfer my LLC's or get an umbrella policy. I also own a personal vacation home in the Poconos. I would love to hear your insight about what I should do or if there any recommendations that you guys have for insurance in NYC.

Thanks in advance,

DM me, I would love to chat more about it.

James

James Aravena · Answer

I will shoot you a message.

Mohammed Rahman · Answer

Hey @James Aravena - happy to put you in touch with my insurance guy for this scenario. Likely you should be prepared to absorb a moderate jump in your policy costs, as that seems to be the norm in the current market that I'm hearing from other clients as well as a broker/investor/prop. manager myself.

John Mocker · Answer

James,

The purchase price and the Current market price of the properties are not what your Insurance should be based on.  There are three valuation methods used in the majority of Insurance Policie:

1. Replacement Cost:  the cost to rebuild the structure with the same kind and quality

2. Actual Cash Value:  The Replacment Cost minus the depreciation.  The market value of the whole property minus the value of the land would give you an estimate.

3. Agreed value:  The insured and the Insurance company agree on the value of the Building in the event of a total loss.

There are a couple of companies that offer "Functional Replacement cost".  That is the cost to rebuild to same function.  an example might be a 3 story brick building that could be replaced with a 3 story frame construction building at a lower building cost but still provide the same function.

You should be revising the values based on the way your policy is written above.  If it is not written at Replacement Cost, you should have that quoted as well.  Even though, Actual Cash value will result in insuring a lower amount of coverage, partial losses are subject to the depreciation.  For example, if your building would cost $1mm to rebuild but the depreciated value o the building is $500,000, that means the depreciation is 50%.  If there is a $100,000 loss, the payment under the policy would be $50,000 (less the deductible).

The named insured on the policies need to match the ownership.  If you transfer the title into an LLC(s) the policy should match the title.

If you are managing the properties you should discuss with your agent your exposures:

1. Professional Liability (aka E&O or Errors & Ommissions)

2. General Liability (Bodily Injury & Property damage) - your clients may be able to add you as an additional insured

3. Workers Comp. :  Who is hiring the Subs working on the property.  If it is passing through you may need Workers Comp. on your business.  Ask your agent to explain the Scaffolding Laws in NY and how that impacts Liability.  Also have them explain the "Action Over Claims" relating to NY Subs.

Charles Carillo · Answer

@James Aravena

Yes, your attorney is correct. When you transfer the properties to LLCs, speak to your insurance company/agent to have them make sure that the LLC's name is on the policy. If you have debt on the property, and it is under your personal name, I would leave my personal name on it and just add the LLC to the policy.