Quote from @Mike Montanye:
We are under contract for an out of state turnkey rental. Trying to gather insurance quotes.
What advice could you offer?
What should I be looking for?
Nothing herein is legal advice.
If you are insuring a 1-4 family unit, and you live in one of the units, you will usually want a “HO-3 homeowner’s policy.” If you are insuring a 1-4 family unit and you don’t live in one of the units, you will usually want a “landlord policy.” Specifically, you will want a “DP-3 landlord policy.” (If the property is vacant, you may only be able to obtain the lesser, DP-1 landlord policy. It is recommended that you avoid the DP-1 and DP-2 if at all possible as they offer less coverage.) If you are insuring more than 4 units, you will likely have no choice but to obtain the generally more expensive “commercial policy.”
Always consult with an “independent insurance agent” in addition to any “name brand” insurance agents you talk to. Farmers, State Farm, Nationwide are examples of “name brand” insurance agents, and they will frequently (if not always), only be able to offer you one insurer choice. An “independent insurance agent” can offer you products across many product lines and insurers, and oftentimes (but not always) for less money than a “name brand” agent. In CA, our go to insurers are Safeco, Farmers/Foremost, and American Modern. Other states offer other insurers.
Avoid “actual cash value” insurance. Instead it is strongly recommended that you obtain “replacement cost coverage” insurance. In the event of a loss, “actual cash value” insurance ONLY pays you the depreciated value of the damaged property. DP-1 insurance, above, that you are encouraged to avoid, is generally “actual cash value.” DP-3 insurance, above, that you are encouraged to obtain, is usually “replacement cost coverage.”
It is recommended that you purchase enough insurance to pay for a total loss to the dwelling (dwelling “Coverage A”), a total loss to Other Structures (“Coverage B”), any Personal Property (“Coverage C”) of yours that is on the property (i.e., furnishings, refrigerator, washer, dryer), Loss of Use (“Coverage D”) (i.e., lost rents), Personal Liability (“Coverage E”) and Medical Payments to Others (“Coverage F”). These six coverages are common in almost every homeowners’ and landlords’ policies.
For the dwelling, if it sustains catastrophic damage, your coverage should be enough to demolish the remaining structure, dispose of the hazardous materials, and build a new structure. If you are in a location that has a risk of a large number of claims from other property owners at the same time (think: CA wildfires, midwest tornadoes, east coast hurricanes), you may want to add 20-30% to the reconstruction cost because in the event of a mass catastrophe, hundreds of other claimants will be trying to employ the same, small pool of available contractors and prices will escalate. If you do not have sufficient “replacement cost coverage” you will have to pay the shortfall to replace it, from your own pocket. If you do not have sufficient “replacement cost coverage” or enough cash available to make up the shortfall, and thus, decide not to replace the structure thinking the insurance company will just give you a check for the “replacement cost coverage” amount, you will likely be disappointed. “Replacement cost coverage” generally only applies if you actually replace the structure (or item in the case of personal property). If you don’t actually replace the structure or item, the insurer will generally only pay you the depreciated “actual cash value.” And if you have a loan on the property, the insurer will likely pay that “actual cash value” to the lender, not to you. And if the “actual cash value” is less than your loan balance, you will still be obligated to continue to make your payments on the balance of the loan, until paid in full, even though you now only own a barren lot possibly contaminated with hazardous materials.
In addition, if your dwelling is located in an area of specialized risks (i.e., CA earthquakes, flood zone), which are not normally covered by your DP-3 policy, you will want to obtain coverage for that specialized risk.
Similarly, it is recommended that your loss of use coverage (lost rents) provides sufficient coverage to replace your rents for 24 months. Twelve months coverage is an absolute minimum, but in the event of a mass catastrophe, it is very likely your rental unit will be re-built within twelve months.
For liability insurance, to protect you from lawsuits arising from insured risks, it is recommended you have a minimum of $1m coverage. $5m is better, but is usually only available with an umbrella policy. In CA, an add-on $5m umbrella can be purchased for about $500-600. A stand alone umbrella policy will likely cost a little more.
The higher the deductible you can afford, the lower your premium will be. When applying for new insurance for a new property, almost the first question that is asked by the agent/insurer is, “How many claims have you had in the past 3 (or 5) years?” Assuming the answer to that question may well determine whether or not that insurer will provide you with any coverage, let alone at what cost, many landlords take the position that the landlord will “self insure” to a certain amount, to avoid making claims except in a worse case scenario. If you take that course of action, and conclude that you are going to “self insure” to $10,000, then a deductible of $5,000 is absolutely reasonable. Only you can determine what is a “worse case” scenario for yourself, and for how much you are willing to self insure.
