Self Insurance

[Christopher Lombardi]

Does anyone know if any banks would allow an investor to self insure their properties?  I asked a few of my bankers as well as friends in insurance and no one seems to have an answer.  My issue is, with over 80 homes in my portfolio and an average insurance cost of $1,000 per unit,  I'm spending a ton on insurance each year and I never had to collect.  The only reason I have insurance is because the banks require it.  I would like to set up a separate asset account, that I would pay into annually, that would fund any damages to my property.   Has anyone ever heard of someone doing this with the bank's approval?

[Account Closed]

The property insurance make up the majority of dwelling insurance premium so I assume that is the coverage you are most concerned with. Dodd Frank requires that mortgages lenders require and go through specific procedures in order to verify property insurance is maintained. If property insurance lapses the bank is required to purchase it themselves. That being said their are creative ways to partially self insure. 

With as many properties as you have you should be able to find an insurance company willing to write all your properties under one policy with a blanket limit and one per occurrence deductible. 

Increasing that deductible is a form of self insurance and could substantially lower your premiums. Coverage for loss of rents in the event of a loss is included in most policies and not something required by most lenders. If you are willing to risk losing the rental income from a damaged property this is also something you could eliminate for a reduced premium. The same thing goes for equipment breakdown and other additional coverage in your policy. Finally, insurance companies will allow you to select your limit or earthquake insurance. Your lender is only concerned with recouping the amount of your outstanding loan and should allow you to decrease the limit of earthquake insurance each year as you pay down the principal on your loans.

Insurance seems like an unnecessary expense until you need it. So while the potential for reducing premiums may be attractive discussing your alternatives with an expert and performing a cost benefits analysis should be done before reducing your coverage in any way.