All Forum Posts by: Paul Caudell

I've seen a similar hole from a broken sewer line, where it eroded out a little cavern gradually, every time someone flushed the toilet or took a shower, etc. That might explain the hole up through the asphalt (likely from a vent pipe that's gone missing) and the other pipes you mentioned. If you like the rest of the house, find out for sure what this hole is from, get estimates on the repair, add a cushion for the unforeseen, and use it to negotiate with the bank. 

Orlando might be right though, too. 

Glad to help!

Paul C. 

@Konrad L., 

I'll answer as best as I can.

You asked: "You mention how you have your 2-family house insured with a RCV policy, but you have it insured at $80k, rather than the RCV."  

-- Just to help clarify and differentiate the terms, I would rephrase the last part of this by saying "...rather than the replacement cost." or even "...rather than the replacement/rebuild cost."  The reason being that any time you see the acronym "RCV" it's referring to the settlement of a loss without depreciation -- not the policy limit.

If it's spelled out as "replacement cost value" technically it should be referring to the same thing as "RCV" -- which is the settlement of a loss without depreciation.

If you shorten it to "replacement cost" that can mean the same thing as "replacement cost value" and "RCV" if referring to the settlement of a loss without depreciation.  

However, "replacement cost" also means the approximate amount it would cost to tear down and rebuild the entire structure with like kind and quality of materials.  This is an amount used to determine the policy limit.  When used in this sense, the acronym "RCV" should not be used.  In my post above, I referred to the replacement cost as "replacement (rebuild) cost" to help differentiate.

There are policies and endorsement that can increase the limit to, say, 125% of replacement cost (for extra premium), and policies and endorsement that can decrease the limit to, say 85% of the replacement cost (in exchange for lower premium).

Besides determining the replacement (rebuild) cost, the other typical way of determining the policy limit is to use the market value, which I think is self-explanatory.  

You asked: "In case of a total loss, would you be reimbursed at $80k and have the option to either rebuild or take the money to pay off the loan or buy another property?"

-- The answer to this will vary by state, and by insurance company, and by policy, and it may also depend on the cause of loss. For instance, Missouri is a "total valuation" state for the peril of fire, so if a fire causes a total loss to the dwelling, the policy limit would be paid.

It would also depend on what the actual cash value (ACV) amount is in relation to the policy limit, since most companies, even with RCV coverage, pay the ACV amount up front and then reimburse you for the depreciation after the repairs are completed.

Here are a couple of scenarios. For simplicity, I’m not factoring in the deductible. Sometimes the deductible is not applied in a total loss claim, but again, that depends on the company/policy.

1) Say my duplex is insured for $80k, but a tornado hits it and causes $250k in damages (Remember, this is possible since the cost to rebuild is around $350k -- even though it's only insured for the $80k market value.). The adjuster might write a $250k estimate and apply the depreciation -- let's say it's 50% overall for simplicity's sake. Since the ACV amount of $125k is more than my policy limit, my insurance company would likely pay the full policy limit, probably minus the deductible, up-front. At that point, I would have the option to pay off the mortgage and sell the property, which might require tearing it down and selling just the lot. Also, some municipalities require that insurance companies pay the municipality a percentage of the settlement in a total loss, so they’re not left with an abandoned property. Or if it is abandoned, the municipality has the money to tear down the remaining structure.

2) A tornado hits the same duplex and causes $90k in damages, and the adjuster applies 50% overall depreciation, so the ACV amount is $45k. My insurance company would pay the $45k up-front (although depending on the policy/state, the full policy limit might be paid up-front, even though the ACV amount is less than the policy limit – it just depends and it may take some digging to find out). At that point, I would need to decide whether to rebuild, with around $10k coming out of pocket on the rebuild ($90k damages minus $80k policy limit), or use the money to pay off the loan and sell the lot, if possible.

You asked, “Also, how would I know whether I choose the 'open perils less exclusions' or 'named perils' policy?”

-- You’d have to ask the agent which policies are which, and they might stumble around at first and have to get back to you on it. It doesn't hurt to have an agent walk you through each type, just to get a sense of what they cover and don’t cover.

You said:

The Liberty Mutual RCV policy, which I most likely will be choosing, has the following included:
-Standard Coverage with Home Protector Plus; -- I’d bet this is open-peril less exclusions, as it does not appear to be a low-end policy, but don’t take my word for it. 

-Dwelling with Extended Replacement Cost; -- This probably increases your coverage to (I’m guessing here) 125% of the policy limit if you comply with several conditions, such as selecting an increased dwelling limit equal to or above the estimated replacement cost (or rebuild cost), and you must actually repair, rebuild or replace the dwelling after a loss.-Other Structure on Insured Location; -- This is for a detached garage, fence, shed, etc. The Other Structure limit is usually a set percentage of the Dwelling limit, maybe 10%.-Personal Property with Replacement Cost; -- For a landlord policy, personal property is typically property owned by you that’s “usual to the occupancy or maintenance” of the property – so appliances, furnishings if you provide them, or tools/materials used for maintenance.

-Loss of Use; -- This reimburses you for loss of rents if a covered loss makes any unit(s) uninhabitable, up to the reasonable amount of time for the repairs, or a set period such as 12 months, whichever is less. Depending on the policy, it may pay the full monthly rent amount to you, or instead it could be 1/12 of the Loss of Use policy limit per month.

I don’t handle liability claims, so I won’t try to elaborate on liability and medical payments.

Ordinance or Law 10% and Water Backup. – Both are great to have. Not all policies cover water damage from the back-up of a sewer or sump, and the building ordinance coverage kicks in if there are code upgrades needed for proper repairs.

There are differences by state and by policy, and of course it'd be impossible to discuss every nuance.  All that to say, I hope this helps you more than it confuses.

 Paul C.

Hi Konrad,

I'm glad you asked this question, as I've been considering writing an article on this ever since I saw a BP article a couple weeks back with a lot of insurance misinformation.  I believe that article has been removed from the site.

I've been a property insurance claim adjuster for about 10 years for one of the companies you mentioned.  Please know that I handle residential (4-units and less) claims, so this info is geared toward that realm as opposed to commercial multi-family -- there are some differences in coverage between the two.

So, I think there may be some confusion on the terms you're using, which is common.  The confusion was evident in the BP article I mentioned, and I've even spoken to insurance agents who mis-use the terms.  I'll try to clarify and differentiate them here.

Almost every property insurance policy provides coverage on either an actual cash value (ACV) basis or a replacement cost value (RCV) basis.  Neither of these determines the policy coverage limit, but instead they dictate how a loss is paid.  

RCV means the full cost of repairs for a covered loss (less your deductible, of course).  ACV means the full cost of repairs, minus depreciation (and your pesky deductible).  The depreciation is figured based on the age and condition of the damaged materials. For instance a 30-year laminate roof that is 15 years old would be depreciated by 50%.

Here's an example that's common in the Midwest where we have lots of hail storms: Suppose a hail storm comes through and causes significant damage to your roof, and the estimated cost to tear it off and replace it is $10,000.  Also suppose your deductible is $1,000.  If you have an RCV policy, your insurance company would pay the full cost of repairs less your $1,000 deductible, so you'd get $9,000.  

If you have an ACV policy in the same example, you would expect to receive the full cost of repairs, minus your deductible, and minus depreciation.  So the 30-year roof that's 15 years old would be depreciated by 50%, or $5,000.  So, your insurance company would pay out $4,000, based on $10,000 repairs less $5,000 in depreciation and the $1,000 deductible.

Also, with an ACV policy, most policies specify (because many or maybe all states require this) that in the case of a total loss, the full policy limit will be paid.  This means that even though it's an ACV policy, the depreciation does not factor into a total loss.

As a side note, most insurance companies make an RCV settlement in two payments -- the first payment (which is typically the ACV amount of the loss) is made when the loss is evaluated.  Then, the second payment is made after the repairs are complete, as long as the repairs are completed by a deadline specified in the policy -- typically 180 days or 365 days from the date of loss or the date of the first payment.  But between the two payments you'd get the $9,000, which you would turn around and pay plus your $1,000 deductible to the roofer to complete the $10,000 job.  The second payment is typically adjusted based on the actual cost of repairs, with the idea being that your out-of-pocket should be no more and no less than your deductible, regardless of whether you shop around for a better price on the job.

Another side note.  Even RCV policies typically settle certain items at ACV.  For a residential (4 units or less) landlord policy, those items will vary slightly by company/policy but are typically landlord personal property, carpeting, domestic appliances, awnings, outdoor equipment and antennas, fences, and other structures that are not considered buildings.

I mentioned above that ACV and RCV coverage do not affect the policy limit, and here's where the terms get a little more confusing.  Many insurance companies give you the option to insure a property at its market value, which may be significantly less (or more, I suppose) than the cost to rebuild the structure (the rebuild amount is typically referred to as the replacement cost, which is where the confusion comes in, as this is not referring to RCV coverage).  In your example, it sounds like the replacement (rebuild) cost is between $718k and $923k and the market value is between $163k and $200k.  If you shop around, you will likely be able to find both RCV and ACV policies for the replacement (rebuild) cost, and you will likely be able to find both RCV and ACV policies for the market value of the property.

Here's an example.  I have a 1905 all-brick 2-family building with a replacement (rebuild) cost around $350k and market value around $60-$80k.  Because I would not plan to rebuild in the case of a total loss, and I don't want to pay the additional premium, I have it insured at $80k, and the policy includes RCV coverage.  

Unless you have significant reserves set aside, I would not recommend an ACV policy on a site-built home (mobile homes, maybe).  Those claims with ACV policies are no fun for the homeowner or the adjuster.

The last thing I'll add, but won't go into because it would involve another article-length response, is that an "open peril less exclusions" policy is pretty much always preferable to a "named-peril" peril policy, though the premium will be somewhat higher.  The reason being that open-peril policies provide coverage for more types/causes of loss.

Whew.  

I hope this helps you (and others) have more informed conversations when out shopping for insurance -- everyone's favorite thing.

Paul C.

As well, I'd be interested in more details. 

Paul

Hi Lee,

For about 12 years, I've used a slightly modified version of the lease from the landlord's guide on St. Louis City's website. My iPhone isn't letting me paste here, but just Google "St. Louis city landlord lease" and the first hit is "Inforent: A Landlord's Guide."  Click that and there's a list of helpful docs including a lease, rental application, lead paint disclosures, etc.  Also check out the Missouri Landlord-Tenant Law booklet in the same Google search. 

I've never used cozy.co but have been happy with TransUnion SmartMove for screening -- I think there's an affiliate link on Bigger Pockets. For rent collection I've just started giving my tenants deposit slips for a deposit account I set up at Bank of America. That way, I get an instant record of payment, the tenant gets a receipt, and they can make the deposit at any Bank of America branch. 

Hope this helps. 

Paul

I'm a residential property claim adjuster and see similar damage more frequently than I would like.  Of course flood damage coverage is unique to the national flood insurance program, but basements can fill up with water from a lot of sources and I see them every week.

ServiceMaster or similar companies are good but they charge a lot for work that's not rocket science.  Your water mitigation bill from a company like this, excluding the build-back, might run $4k-$7k+, and depending on the area and the number of properties damaged, they may not be able to get to you for several days.  What they will do is:

- Pump out the water or make sure it's pumped out before they begin, depending on the company

- Remove carpet and pad. "Clean water" and some "gray water" losses they'll typically remove the pad and dry the carpet in place, then clean/stretch/relay on new pad.  For flood water that has silt and other contaminants, they'd likely remove the carpet.

- Remove baseboard and likely save it for reinstallation/paint later. If warped, toss it.  If saving it, label it so you know where to reinstall it.

- "Flood cut" the drywall two feet up from the floor.  Some will go 4 feet up -- there's not a big cost difference.  If the drywall is not super saturated, they'll drill 3/4" holes every foot or two behind where the baseboard was removed and aim several of the "air movers" (industrial fans) at the walls for drying.  Drywall can get pretty wet and dry out and be just as strong or stronger than it was before.  At some point though it's cheaper to flood cut and replace the drywall than it is to pay for air mover rental or purchase.

- Now that the saturated materials are out, they will use several air movers and 1-2 big dehu's (the large industrial types) and monitor the moisture levels.  With the right amount of equipment, the structure should return to normal humidity in 2-4 days.  The dehu's are equally as important as the air movers, but they cost a lot.  If you can't find an industrial size one, get multiple smaller ones and resell them on craigslist. Typical to see 3-6 air movers per medium-to-large room, and 1, sometimes 2, dehu's in a basement.

Do other reading on it of course, but these are the basics.