All Forum Posts by: BreAnn Stephenson

My pleasure Jen! And yes, co-insurance is also something to consider too. In that vein if you can eliminate co-insurance that always seems to be best for investors. If you are under insured at the time of a loss in addition to applying depreciation and subtracting your deductible you may end up with a penalty if you're not careful.

What I was wondering on the liability for company A is what the cost is if the limits are increased to the same amount as company B... to the $1mil/$2 Mil... also, some companies will give you the $1Mil/$2Mil for EACH property and not just that limit for all the properties combined. Be careful that you aren't reducing your benefit as you add properties to the schedule. ;)

Good luck!

Hi Jen!

Some things to consider:

1. Are both property policies written on the same form...i.e. Basic Form has less coverages than Special Form for example. Basic Form doesn't include Theft, Water Damage or Falling Objects for example... If they are different from one another, you'll just be comparing Apples to Oranges...

2. You will also want to know if the policies are written on a Replacement Cost (RC) or Actual Cash Value (ACV) basis. Replacement Cost will make any depreciation they subtract from a claims settlement available to recoup after the repairs are made, vs. ACV where any depreciation will not be able to be reimbursed to you. Depreciation accounts for the usable life left in an item... for example if a roof has a 30 year life and you installed it 10 years ago, in an ACV situation you would only be reimbursed for the 20 years of usable life... in other words, they would subtract 33% from what it costs to replace the roof... Again, if not the same, you are comparing Apples to Oranges.

2. Is the Loss of Rents coverage over 12 months or 6 months? In the case above, I would guess that policy A is 12 mos. vs. policy B is 6 months... not really too big of a deal there, but just know that this coverage is usually paid out as it is incurred, meaning that they won't just automatically include that in a payout unless you've actually lost money from having to move your tenant out.

3. I noticed that there is personal property included in policy A. Make sure that this policy is written on the correct form... if it is a Homeowner's policy (HO-x) then really you have the incorrect type of coverage for an investment property. You shouldn't really have a need for personal property coverage unless you are furnishing the place yourself.

4. Difference in liability coverage... what is the cost from company A to match the same limits as company B?

5. Difference in deductibles is really up to what you can handle. A typical rule of thumb is to take the smallest claim you would file and double it.

6. Thinking of insurance as what you will lean on for catastrophic losses will help you as you go along. It's not meant to be there for regular maintenance which should be a part of your planned financial expense for the property. Claims frequency is a killer so reserving your insurance for larger losses will help you retain stable premiums and continuous coverage.

7. Does Company A or Company B specialize in insuring investment properties? Do they offer monthly billing? The ability to insure the property if it goes vacant? Can they insure renovations? How easy is it to add coverage if you keep purchasing? Etc....

Hope that helps!

-BreAnn

 In agreement with Kevin here. Forced placed will leave you without important liability coverage. Contents may/may not be necessary, but you don't want to go without liability. 

There are companies out there who insure investment properties on a regular basis and serve the REI market specifically. Finding someone who can insure on a monthly basis can also save you from having to pay premium up-front that you may or may not be reimbursed for. Keeps cash in your pocket to do the rehab instead of having it tied up in insurance premiums.

Mark, it has been nice connecting with you! For the sake of others reading this thread I thought it may be helpful to give an overview of premises liability coverage (the type of coverages you mention above). I posted the below on another thread on BP a few months back, but for the ease of finding the information, I will re-post it here. :) I have also made a few updates thanks to the input of a few helpful colleagues on BP! The other piece of the puzzle of course is your Property Coverage, which has its own nuances, but covers the actual building itself. We can always talk about what is included/excluded there another time. Hope this helps!

#1 About General Liability coverage: When we speak of liability coverage on an investment property the concerning exposure is premises liability. Think slips-and-falls for example. As there are other types of commercial liability coverage (workman's comp is an example you may recognize the name of), let's just be clear on which type of liability we are addressing below...

General Liability coverage is pretty simple and usually has the following categories:

a. Per Occurrence Limit - The maximum payout for any one occurrence (usually $1,000,000). Bear in mind, legal expenses that are incurred due to such a claim do not diminish this limit.

b. General Aggregate - The total limit for the policy period. Typically twice the occurrence limit.

c. Products/Completed Operations - For completed work on the property - usually a contractors liability policy will have this coverage. Accordingly, it is excluded in many policies out there for an investor.

d. Personal/Advertising Injury (For acts of false advertising/slander. That would be if you were harming someone else through your business methods. This may be excluded for premises liability as it could be picked up on a Commercial General Liability policy that a landlord/PM might obtain to protect themselves in business activities...to protect from wrongful evictions, etc.)

e. Damage to Premises Rented to You - Doesn't usually apply for investors as this has to do with space rented to you...such as any fire damage you cause to an offsite office you rent.

f. Medical Payments - Coverage for medical bills as a result of an injury occurring on the insured premises, without consideration for negligence. Many times an insurer will use this coverage as a "good faith" payment to help avoid litigation. This is exclusive of the per occurrence limit above, so don't fret if you do not have this limit in your coverage, or have a minimal amount such as $1,000, $2,000 or $5,000.

g. Deductible - Your out-of-pocket cost if you are liable for damages to another party's property or for bodily injury.

Sample limits for many policies that cover residential real estate are:

a. $1 Million

b. $2 Million

c. Excluded - See explanation above. For real estate, there is no "product", and the "completed operations" of a third-party such as a contractor typically fall under their coverage. Accordingly, you should always secure valid evidence of insurance from all contractors that work on the premises.

d. Excluded - See explanation above. Excluded here as we are dealing with incidents occurring on or near the premises. To gain liability coverage for your business activities, you may want to acquire a professional liability/CGL policy.

e. $50,000 (or Excluded)

f. $5,000 (or Excluded)

g. $1,000 (or could be $2500 maybe)

A couple of other important notes...

Liability typically will not cover:

1. Any contractors working on a property (they should have their own coverage for their workmanship and/or workman's comp)

2. Anyone else hired by you to do work on the property (i.e. don't hire your friend's kid to do work on the property as you are opening yourself up to risk)

3. Injuries from animals (i.e. certain dog breeds, amphibians, & insects to name a few). It is best to take a look at policy specifics as this exclusion can vary quite a bit. Carefully consider if you will allow tenants to have pets and what kinds, if any.

4. Trampolines or other play equipment that could be seen as an "attractive nuisance".

5. If you have a pool at your property there may be strict guidelines that must be followed. Many policies require that you adhere to municipal guidelines and may have specific instructions for signage, maintaining safety equipment on the premises (life preservers, flotation ropes, etc.), and could even require the pool be fenced or a certified lifeguard be present when the pool is open.

6. Total pollution exclusion - many policies have this exclusion and it can become an issue if there are injures due to Carbon Monoxide.

Premises liability coverage is important even though liability claims are more rare than property damage. They often are more costly and could take you out of business if someone is hurt as a result of your negligence. The cost of this coverage is pretty low, as you can usually get $1 Million per Occurrence/$2 Million Aggregate for $100/year/unit if you have a company that is also providing the property coverage...

Thanks @Jason Bottand glad I could be of help Dean!

Have a great weekend!

Hi Dean, I think I may be able to help clear this up pretty quickly. :)

In the US, in either case of Actual Cash Value (ACV) coverage or Replacement Cost (RC) coverage, depreciation is always subtracted from the initial settlement. The difference is that with Replacement Cost, the depreciation is recoverable whereas with Actual Cash Value the depreciation is not. 

Practically how that works for RC is you would receive your initial settlement and make your repairs. Then, once the repairs are made, if you spend more than your initial settlement amount plus your deductible, you can recoup some or all of the depreciation that was initially withheld.

Your deductible is always your out-of-pocket expense, so that does come into play, but again, once the repairs are made, gather your receipts to submit to your insurer. They may then be able to cut you a second check for any recoverable depreciation that you can still collect.

Also, they are not depreciating the repairs, the depreciation is based off of the usable life that was left in the damaged materials at the time of the loss. So, let's say you have a roof with 20-year shingles that is 5 years old that was damaged in a hail storm and it needs to be replaced. They are essentially reimbursing you for the 15 years you still had left on those shingles...to try to put it simply... If you have Actual Cash Value coverage, you would only receive one check, subtracting your deductible and depreciation. The depreciation here is accounting for the 5 years that you were able to use the shingles... If you have Replacement Cost, you theoretically would be able to get your 5 years back too... 

Now, one last thing... if the item(s) that are damaged are brand new, the settlement may end up being close or exactly the same in the case of either RC or ACV... this is because there is essentially little or nothing to depreciate. Then your only out-of-pocket cost would be the deductible.

Clear as mud? ;)

Hope that helps!

-BreAnn

Glad I could be of help Alan!

 Hi Alan (and all)!

Speaking to the insurance piece, yes, typically a carrier will not want a property to have knob and tube wiring. I can't speak to all insurers out there of course, but the policies that I have seen have excluded coverage for properties that have this type of wiring in place.  Also worth mentioning is that some insurers may also have restrictions on aluminum wiring as well. The policies I've seen thus far have been ok with it being present as long as it's "pigtailed." Otherwise coverage has been excluded for homes with aluminum wiring as well.

As Barry stated, knob and tube IS a big fire hazard and should be replaced. If anything, the current owner should be concerned about the residents she has in there now. 

Case in point, we just saw this loss a few days ago with a young family who ended up on life support from a fire caused by the improper connection of knob and tube and Romex wiring. The other horrible part about this incident is that allegedly there were NO smoke detectors installed. Here's the news story:

http://www.myarklamiss.com/news/local-news/west-mo...

That is a type of risk no one should take as it could cause not only serious property damage, but can endanger the lives of one's tenants too. I don't think anyone would want to be responsible for the death of a family because they failed to upgrade an electrical system.

Good luck and I hope that the current owner thinks seriously about upgrading the electrical soon!

-BreAnn

Though the surplus lines market isn't as well known to the general public perhaps, many surplus lines insurers have been around for quite a while. Lloyd's of London really is one of the grandfathers of insurance and was established in the late 1600's. Many surplus lines insurers also have AM Best ratings for financial stability of A or better. 

In terms of program business, it is also more common than one might think. Insuring as you've described is possible and doesn't necessarily mean that a claim check would be written out to all three parties - Southwest Real Estate, the additional named insured (you) and the lender (if applicable)... it is possible that a claim payment could be made to the additional named insured and the lender (if applicable) as an additional named insured has all the same rights and responsibilities as the primary (named) insured listed on the policy. I also find this definition of "program business" from IRMI's website to be helpful: 

Groupings of insurance customers or applicants with common operations that often form associations or risk purchasing groups (RRGs).

Any other agents want to add to the above to help understand program business? As it's a normal thing to me, I'm sure I may have missed a detail or two here... :)