How Insurance Companies Respond to Rental Properties with Bad Roofs

Are you a real estate investor that just purchased a rental property with a questionable roof? This article will reveal two common ways insurance companies respond to investment properties that don’t meet their roofing expectations.

A few of my clients have recently purchases investment properties and the roofs haven’t been in the best of shape. The properties themselves weren’t in horrible condition. These weren’t properties that needed a few weeks of rehab. Instead, maybe some paint and cleaning and they’d be move in ready. As a result, they didn’t need to be written on a vacant policy first. As soon as my clients closed on the property, we wrote a dwelling fire policy to cover the properties.

A few days pass, underwriting reviews the photos of the property, the coverage amounts, location... and whatever else it is that underwriting does. :) On one of the properties, the underwriters wanted to exclude the roof completely. On another property, the added an actual cash value (ACV) endorsement. So, what does this mean….? And more importantly, is it panic worthy!?

I have no statistical data for this, but I think insurance companies fuel the roofing business. For better or worse, insurance companies replace a lot of roofs. I have a lot of opinions about this, and I don’t think using your insurance policy for a roof is generally a good idea. But I won’t go off on a tangent. Insurance is all about sharing responsibilities to mitigate risk. Insurance companies want to shield and protect themselves from unnecessary losses and claims.

Roof Exclusion

In the case where the insurance company excluded the roof, they saw that the roof was in bad shape from the moment that coverage on the property started. Consequently, the responsibility of replacing this roof is going to fall onto the new property owner. So, in this scenario until the property owner fixes the roof, there is no coverage on the roof. Coverage on the rest of the property continues to be covered exactly as the policy defines.

However, if a windstorm comes by and blows off some shingles, insurance will not help. Just like all things in life, this is temporary. Once the roof is replaced and proof is provided, (generally pictures or a receipt/scope of work from the contractor will suffice) the insurance company will remove the exclusion. At the time the exclusion is removed, the roof will be covered on a replacement cost basis once more. So, once your roof is replaced and the same windstorm comes by and knocks of more shingles, now the insurance company could potentially help (though, I’d still recommend against it-- ).

ACV Endorsement

In the scenario that an ACV (actual cash value) endorsement was added, this is much less severe than the exclusion. In most policies, the default loss settlement on a roof is for replacement cost. In this scenario, the insurance company determined that the roof is still functioning and an immediate replacement isn’t warranted, however, it is on its way out. Consequently, the insurance company doesn’t feel comfortable having replacement cost on the roof. With the ACV endorsement added, depreciation will be factored into the loss settlement.

In theory, if there was a claim on the roof and the replacement cost would be $5,000 the depreciation would then be removed to arrive at the actual cash value. Depreciation is calculated many different ways, but a generic rule of thumb is 1% per year up to 50%. So, if the roof is 20 years old, take 20% away from the $5,000 and the ACV settlement would be $4,000 instead of the full $5,000. And, just like the roof exclusion, this ACV endorsement would be removed in the event the roof is replaced and proof is provided.