Insurance - Don't have any & not worried. Convince me I'm crazy.

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Insurance - Don't have any & not worried. Convince me I'm crazy.

JR T.
Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes

I have 15 rental units and a primary residence in Frederick & Washington Counties, Maryland. Because they were acquired outright and my cash position has been continually strong since the time of the acquisitions I have not seen a pressing need for insurance. Because of my cash position I view insurance (for now) purely as a financial product to protect my investment principal.

The quotes that I've been getting come in around 2% of the total cash paid out for these properties. In the market where I'm most active I could acquire an additional 3-5 units every time five years elapsed without a claim, or fund claims from a premium savings account. This obviously wouldn't help me with a huge catastrophic loss but I haven't found anyone to sell me a product that only addresses that sort of thing.

The properties are in living trusts for estate planning and privacy purposes. Some insurance companies have had a problem with the trusts owning the properties. In a living trust I have all the rights of the deeded owner during my lifetime.

Please if you have ideas on how to make the insurance cost something reasonable in relation to the properties by seeking different types of coverages, know of catastrophic loss or other insurance products that might be a good fit for me, can provide a referral to an insurance broker local to me --- OR MOST OF ALL: can simply tell me why I'm dead wrong and WHY I should give up an additional 15 or so units over the next 20 years to have flagship insurance PLEASE reply to this thread and let's have a discussion. 

In 20 years I will likely retire from my primary profession (not RE) and at that time when the rentals are my primary income I'll want a policy that insures my income. That makes sense to me, but the current options don't and I'm not a huge fan of handing out huge sums of money to insurance companies simply for the "peace of mind." If I pay out a big premium, I'm expecting to one day have a claim that brings me within 60-75% of the lifetime premiums I've paid out.

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Joe Bertolino
Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
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I have been an insurance agent for 15 years. I don't even bother talking to prospects like you that need to be convinced to buy insurance. I wish them luck and let them bother some other agent. Insurance is a risk transfer tool that you can choose to use or not. You say you are not adverse to litigation and that you simply give the lawsuit to your attorney... but then who pays the bill? I see slip and falls with no basis that cost $75k to successfully defend. A one day deposition runs $8k. I have seen $2m judgements for tenants getting burned trying to do their own plumbing work. $200k dog bites... You name it, I see it everyday. People think they have the stomach for litigation until a jury is staring at pictures of a child's coffin. I have seen that exact scenario for a self managing landlord without working smoke detectors or files showing he checked them after a fire with fatalities. If you want to take that risk then go for it. The brightest minds in the RE world with 1000's of units in single entity LLC's and series LLC layering, staff attorneys and financial backing in the billions opt to buy insurance... but maybe you know more than they do. Good luck with your plan, it may work out for you, you could go 20 years without a significant claim or you may find yourself in front of a judge that doesn't think you are as cleaver as you do. Whatever you are comfortable with.
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  • Ryan Dossey
    Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes
    11y

    I would carry at the very minimum some type of a personal liability policy. You never know. As much as I use structuring to protect my financial interests for the cost it's more than worth it. 

    2Reply
  • Therese V.
    Investor · Midwest · Member since 2013 · 253 posts · 34 votes
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    First thing first, liability insurance is very important. What if someone gets hurt in one of your rental properties and sues you? Let's say it's at the time you own 20 rental units and each is worth 100k, for a total of $2M value. That particular injury suffered is fatal and not only do you owe a lot of medical bills, but there is a whole heck of a lot "life worth," pain and suffering, etc etc that totals to $3M that you end up owning the plaintiff. They will not only own all of your properties after this, but you will still owe them $1M. Sure, this may be a worse-case scenario type of thing, but the possibility is very real. That's the whole point of insurance: trying to hedge bets against things going wrong. 

    4Reply
  • JR T.
    OP
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    11y

    RE: Liability Insurance

    Thank you for the above comments on liability insurance. I really do agree on this point, but must ask - how long have you had your liability insurance policies? How much in approximate premiums during that time? How much in approximate claims?

    Is liability insurance something that can be purchased independently from the properties? What sort of premium should I expect for 2 million of liability coverage? I have general commercial liability policies in other much larger businesses that run around $425/year. I've not seen a similar type of policy in the RE arena. Am I overthinking it and just need to call my general liability carrier from the other business and have them write a policy for me?

    With all of the properties being in different trust names would I need to purchase a policy for each property? I would like to be protected in this area - I think the properties with no mortgages look like appealing targets to bottom feeder lawyers and with low-income tenants it's only a matter of time. 

    Suggestions?

    0Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
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    The question is not should you be insured, the question is can a plaintiff come after you personally and any assets you hold in your own name should they have a reason to sue? ...or think they do?

    Understand: in our litigious society you can not only lose your properties you can lose your personal possessions including your home, banks accounts, vehicles, etc.

    Insurance only covers so much. A business entity structure which can shield you from liabilities arising from your RE dealings is much more effective.

    2Reply
  • JR T.
    OP
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    11y

    @David

    The properties are titled so that I run the risk of losing each individual property to which a claim could be attached and nothing more. No personal liability, no liability that could extend out to other parts of the portfolio or my other endeavors. Also, I suppose it's important for the generous volunteers here to know I am not litigation adverse. Litigation is a normal part of my businesses and getting served a lawsuit would mean I'd take it to the lawyer's office - when I had time. It would not be any sort of life event. I don't get any "peace of mind" from insurance. Just a sick feeling in my stomach when I mail in the premiums each year.

    0Reply
  • Amy A.
    Portland, ME · Member since 2012 · 616 posts · 550 votes
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    This is a very interesting idea. Do I understand correctly that you are using individual entities to separate and protect your assets rather than insurance?  Are these individual properties worth so little that you are willing to risk losing them entirely?  Have you made your calculations based on the statistical risk of fire and lawsuit vs. the opportunity cost of the insurance? 

     No, I don't think you're crazy as long as your math and assumptions are correct.  However, you must be paying some legal fees to maintain these trusts and there are those who think that insurance is better protection.  Every lawyer will give you a different answer.

    0Reply
  • JR T.
    OP
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    11y

    The trusts were established for estate planning and privacy. While asset protection is a function of the legal entity it is not the intent. 

    I haven't obtained insurance because the premiums do not make sense to me with a strong cash position. If I lose one it would be a bummer, but writing a 5 figure check for an insurance premium would be a bummer sooner and more frequently. 

    These are low-income properties that I'm running a 15.7% unlevered cap on. They were bought for cashflow not price appreciation... I would like a way to be able to get my principal back in the event of a total loss if it were a reasonable premium. By reasonable I mean a premium which is reflective of the risk involved for the insurer - not a blind grab for 1.5 months of my rent receipts. 

    0Reply
  • Paul Choate
    Attorney · Shawnee, OK · Member since 2013 · 350 posts · 230 votes
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    I'm in the same boat. I would have to have a property burn to the ground every three years to justify the insurance premiums. My brother has an independent insurance agency and I can't get a good deal. I have not carried insurance for most of my investments. I am playing with house money now. 

    2Reply
  • Christopher Leon
    Realtor · Schaumburg, IL · Member since 2011 · 289 posts · 118 votes
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     like you said, insurance is just another financial product. For those of us that do not have a strong reserve like you, we should have it. Otherwise, self-insuring is the way to go! How often do catastrophes happen? Even if it did happen, the amount of years you have/will saved from being self-insured, I think you'll net ahead without it.

    @JR T.

    1Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    11y

    For 15 all cash properties, you can easily self insure. Especially if you have some decent reserves. However, as others have said, you absolutely need liability. When you self insure (which is what you are doing), you need to know what is the max possible loss. For the property, its the value of the property if it all burns down. So if insurance premiums are 1% of the property value, for 10 properties you pay 10% of a single home each year in premiums. So as long as you dont get a total loss of one property every 10 years, you are coming out ahead. This is a reasonable risk to take. However, the liability risk is unlimited. So how to do you self insure that? And dont think your LLC is bullet proof either. IF real negligence is proven, your personal assets can all be on the hook. So carry liability and drop other insurance. I only keep mine to satisfy the bank anyway!

    3Reply
  • JR T.
    OP
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    11y

    Thank you for your feedback. I am sold on the liability issue. I just need to know where to get a standalone liability policy and what challenges my ownership structure may present with that.

    Also what should I expect in terms of premiums?

    0Reply
  • Jason BottPro Member
    Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes
    11y

    @JR T. Your strategy is not crazy by any means, just not appropriate, or possible for most.

    Insurance (sharing/transferring risk) is just one tool of risk management.  Others are, 

    • Avoidance (eliminate, withdraw from or not become involved) Taking on other property to manage – not taking cash
    • Reduction (optimize – mitigate)
    • Sharing (transfer to insurer)
    • Retention/Self Insure (accept and budget)

    You are Retaining the risk and self insuring. 

    Most who are more conservative or not capable of taking the hit will tell you you're crazy! And a few insurance brokers looking to push product.

    ***We have a client who has 300 units, does not carry property insurance, just liability.  in 2013, they had a $120,000 fire, which was about 4 years worth of premium. 

    ***I have another client who has 1,200 units and takes a $25k ded, actual cash value policy and under insures each property.  He takes the minimum level of insurance the insurance carrier and his bank will allow.  He is straddling the 3rd and 4th strategy.

    Why not just buy a stand alone liability policy and an Umbrella for Liability protection. Per unit Liability is $30-$100 per unit, depending on the area of the country, urban or rural. As long as you are the majority owner of the LLC/Trust/IRA, it can be wrapped up onto 1 policy. I do it on a weekly basis:)

    5Reply
  • Ndy Onyido
    Toronto, Ontario · Member since 2014 · 615 posts · 172 votes
    11y

    Very interesting thread!. No one likes handing out checks for insurance.....However, like the name, its only useful when the inevitable happens. I do not like paying for insurance but I HAVE TO buy insurance...especially liability..

    I can play around protection for harzard/fire, but for liability, I have no choice...

    0Reply
  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    11y

    @JR T.

    Not crazy but probably not a statistician either.  So unless you are and an exceptionally good one I would say you probably do not understand the risk profiles you are essentially writing your own insurance for. Even insurance companies have trouble making good money despite employing some very bright minds and being diversified across different risk profiles and regions.  Even they outsource some of that risk to reinsurance companies for major cat type risks because they need to offload some liability. 

    Can you be ok? Sure just like you can eat cheeseburgers all the time and not die from a heart attack. I can't tell you many people used to tell me when I went to visit my grandfather in a home that their burgers were not bad for them and its all a liberal conspiracy because they made it to a ripe old age. I also know a lot of people who have spent a lot of time going really really fast while driving.

    2Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    11y

    @Charles Worth It depends on what you view insurance for. If its for catastrophic events, you have to admit the risk is rather small. In a given city how many fires burn down a house every year? Maybe 1 out of several hundred thousand. So thats your risk. You are paying 1/100 for 1/100,000 or lower risk. I may not be a statistician but that much math I understand. Also to underwrite your self, you need some cash reserves. That 1 in 100 year event may happen next year. And you have to deal with it. Then for the next 99 years, chances are you wont need the insurance. If you cannot afford it, then you should carry insurance. Its why the banks make you!

    0Reply
  • JR T.
    OP
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    11y

    @Jason I will send you a private message to discuss in more detail. 

    This thread is devoted to my very specific set of facts which is unique and any advice or feelings about not buying insurance are absolutely not suitable for most investors, perhaps not even my own circumstance, which is why I'm here.

    @Charles Worth no not a statistician. I am unable to make sense of the premium calculation. I have a hard time justifying giving up the premiums plus the end result of ~$5,000 each year in additional rent receipts for life by sending that money off to an insurance company. I'm looking for a valid business reason the insurance makes sense. It's entirely possible I'm doing something wrong to get quoted these ridiculous premiums.

    0Reply
  • JR T.
    OP
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    11y

    @Account Closed My circumstances right now are that I have to cash to pretty much replace the rental portfolio if the whole city burned down. It's also hard in light of the fact these buildings have been there for 50-125 years --- they made it this long, right?

    Now when I retire from my primary profession I will absolutely insure it for every possible hazard, loss of rent income, etc. because they will be my primary income and I'll want to do what I can to protect that income stream into retirement. I'm in my mid-30s so there's a lot of time left to not pay crazy insurance premiums I'll never collect a claim on. But if there's a business case for certain lines, like a stand alone liability policy I am anxious to learn. 

    I didn't mean this thread to be a place to fight about insurance. I'm genuinely hoping I wind up with a product I'm not finding today that will take away a bit of the worry.

    0Reply
  • Joe Bertolino
    Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
    11y
    I have been an insurance agent for 15 years. I don't even bother talking to prospects like you that need to be convinced to buy insurance. I wish them luck and let them bother some other agent. Insurance is a risk transfer tool that you can choose to use or not. You say you are not adverse to litigation and that you simply give the lawsuit to your attorney... but then who pays the bill? I see slip and falls with no basis that cost $75k to successfully defend. A one day deposition runs $8k. I have seen $2m judgements for tenants getting burned trying to do their own plumbing work. $200k dog bites... You name it, I see it everyday. People think they have the stomach for litigation until a jury is staring at pictures of a child's coffin. I have seen that exact scenario for a self managing landlord without working smoke detectors or files showing he checked them after a fire with fatalities. If you want to take that risk then go for it. The brightest minds in the RE world with 1000's of units in single entity LLC's and series LLC layering, staff attorneys and financial backing in the billions opt to buy insurance... but maybe you know more than they do. Good luck with your plan, it may work out for you, you could go 20 years without a significant claim or you may find yourself in front of a judge that doesn't think you are as cleaver as you do. Whatever you are comfortable with.
    9Reply
  • JR T.
    OP
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    11y

    @Joe Bertolino I think you misunderstood the point of my post. It was not to defend not carrying insurance. It was to present a case study of my unique set of facts and hopefully find some solutions that are based on solid business reasons. 

    Writing to tell me that I should buy insurance because "the brightest minds in RE" (whoever they are) do it and because you're an insurance agent of 15 years is not helpful.  I was rather amused that you wouldn't bother "talking to a prospect like" me in your insurance business but you'll take your personal time on a Sunday night to write an article objecting to my query with nothing relevant to the risk scenario, interesting. If you do not actually sell to prospects anymore you don't really meet the definition of an insurance agent anymore - agents sell insurance. Sounds like you've put yourself in a support role and quit selling - might be a good time to examine that.

    I would love to tap your 15 years of insurance industry experience to figure out what I'm doing wrong. Why I'm not getting offered risk-transfer products that are appropriate to my situation. I may or may not need the same products as the "brightest minds in RE." Coming from a financial services background I cannot make a 2% of value comport to the risk I'm trying to insure.

    I'm here trying to be convinced with real-world examples and data of products that will work for my situation. The real estate thing is only a few years old for me and I'm still learning the way. I know this is a part of the operation that needs work, which is why I came here for help. I'm very happy to have learned about the stand alone liability options - I've had 6 full blown commercial insurance quotes nobody bothered to tell me about stand alone liability policies --- I guess they don't talk to prospects like me either.

    1Reply
  • Account Closed
    Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
    11y

    The trusts should be able to isolate you from any liability beyond the value of the assets of each trust.  Of course, that depends on how well your lawyer does his job.

    If you want insurance, I would suggest requiring your lawyer to provide a written legal opinion that says you are isolated from liability.  His errors and omissions should cover it after that.

    0Reply
  • Joe Bertolino
    Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
    11y
    I didn't tell you to buy insurance, I wished you luck with your approach. From my point of view it is fairly high risk with a low reward. I also think you don't have a firm grasp on your exposure. I have seen attorneys rip through layers of "asset protection" in a deposition. I have paid six figure attorney fees. You can learn the hard way if you want to.
    1Reply
  • JR T.
    OP
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    11y

    @Joe Bertolino Thank you for again confirming your position that the approach I came here to ask for help with is wrong.

    Do you have any alternative suggestions? Or do you think paying out 2% of value each year in premiums is reasonable?

    0Reply
  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    11y

    @Account Closed

    you are correct the risk of one event is very small. If it wasn't the insurance would be sky high like it is in flood zones where the risk is more a matter of when and how bad and not if.  However, its the cumulative risk you underwrite for everything all together as well as probably a premium for peace of mind for risks that would really hurt you financially. As other people and you have noted the general liability policy is tough to self insurance and they are fairly cheap. 

    The other premiums I just have a difficult time thinking its not easier to find the right insurance company or just buy it than being able to really price the odds.  Also, fire might not be likely certainly not for more than one house but if the houses are concentrated in one area they could easily all be hit by a hurricane or major rains that ruin a few basements etc. Unlike an insurance company that is diversified over various areas the OP may not be. 

    0Reply
  • JR T.
    OP
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    11y

    @Charles Worth I'm heavily concentrated in two counties in Maryland. All of the brokerages I tried just tried to sell me a one-size-fits-all package, with a five figure price tag. It's obvious it would be prudent to move the liability issues off of my books and am hoping the advice I've received to purchase stand alone liability and perhaps stand alone fire insurance would be a good move. One of my buildings has had a fire within the past decade; it's not as though I think "nothing's gonna happen." I just think I can pay for my lifetimes of serious casualty by setting the premium payments aside and come out ahead.

    The liability issues are what really have me coming to Internet forums hoping to be convinced. It is scary and I would be more comfortable with the investment if I could solve that puzzle.

    1Reply
  • Joe Bertolino
    Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
    11y
    2% is the norm for a comprehensive landlord policy. Your properties having low values and low rents does not effect the exposure taken on by the insurance company, in fact loss ratios are much higher in that property class. Because you can buy for $20k doesn't mean you can rebuild, repair or even demolish the house and scrape the lot after a loss for $20k. It's harder to walk away from a damaged property than most think.
    2Reply
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