Coverage Amount - Value of Property or Amount of Mortgage

[Joseph D.]

How much total coverage should I be buying on my rentals?  These are SFRs - the insurance company seems to offer, as a default suggestion, the amount of the mortgage, not the total purchase price of the property.  I'm curious to hear what others do and how they determine their total coverage amount.

[Alex Toler]

Joseph,
There are three different ways in which you can cover the properties: Replacement Cost, Actual Cash Value, and Agreed Value.
Replacement Cost:  The insurance company determines how much the home will cost to rebuild after a complete loss, and then use this amount as the coverage.

Actual Cash Value:  Is determined as the "fair market value" of the home.  In this case, outside of a total loss, you will be subject to depreciation eating into the payout from the insurance company.

Agreed Value:  This is an amount agreed upon by you and the insurer in which to insure the property.  Any claims that do not reach the agreed amount will be paid out as replacement cost.  In the case of a total loss, the agreed amount will be paid out.   Please note that it is much more difficult to find carriers who will write this type of policy.

I've never come across a lender who will allow you to have less coverage than the sales price of the property.  In a perfect world, I'd love to have all rentals on an agreed value policy, but these are hard to come by.  I write most of mine on Replacement Cost unless my client insists on Actual Cash Value.

If you ever want another eye to look at your policy, or help explain what you have, I'd be more than happy to give you an unbiased opinion.