Know the True Cost of Investor Insurance
The No. 1 question many insurance professionals get from real estate investors is “What is your price?” The exception to this is the real estate investor who’s had a claim on his or her property. Then, the first question is “Do you cover X?” followed by “How fast do you pay it?” and then by “How much?”
Real estate investors are so focused on their cash flows and capital returns that they forget the other “I gotchas” that set them up for financial ruin.
Case in point, a gentleman stopped by an insurance company’s booth at a large regional investor’s conference and asked the No. 1 question. Once he heard the cost, he shook his head and said the company’s pricing was way too high and he had a great deal with his local insurance agent. As he was walking away, the company representative said to him, “Send me your policy, and I will do a comparison of coverages!”
It turns out the investor did follow up eventually, but only after experiencing a large theft loss. The criminals stole the HVAC system and all the updated appliances in one of his houses that was ready to be purchased. He found out the hard way that, because he had no theft and vandalism coverage, he was out almost $30,000 for the appliances and damages caused by the theft.
Again, lower insurance premiums don’t necessarily equate to lower out-of-pocket expenses related to your insurance program. Payment plans, cancellation provisions and what “isn’t covered “in your insurance policy is more impactful on the investor’s bottomline returns than merely less expensive rates. Wise investors should be looking at every expense related to the purchase and financing of the asset. Don’t base your insurance purchase strictly on price. That can’t be stressed enough.
One must also know how building values are quoted (e.g., by the square foot, the door, the key, etc.) as well as terms like ADR, IRR, RevPar, cap rate and more. Additionally, concepts like construction renovation costs, replacement reserves and loan terms are important to understand.
Mastering this terminology is the foundation all true real estate investors must build upon.
Replacement Cost
At a minimum, real estate investors should purchase a landlord property insurance policy with replacement cost as well as all-risk insurance coverages with normal exclusions and liability coverages in the event of a third-party injury or someone claiming to be injured on your investment property.
Flood Coverage
And, in today’s crazy weather environment, consider a flood quote, whether the property is in a special flood hazard area or not. Five out of six flood losses experienced in Hurricane Harvey did not have flood insurance, and many were not located in a nationally-defined flood zone. Can you imagine how many real estate investors lost everything they had when they found out they had no coverage? The same issues are surfacing in the recent floods in North Carolina.
“Special Coverages and Deductibles”
Read your insurance policy, especially the exclusions and limitations sections. Don’t believe everything your friend who just became an insurance agent tells you. Many policies have “special” coverages, which typically means they are taking away coverages, not adding them to your policy. Most of these “special” coverages can be found toward the back of the insurance policy in the endorsement section.
A primary example would be a house that is vacant at the time of loss. That’s a common situation in the real estate investor world since properties are often being rehabilitated or are between renters if the property is being used for tenants. Most homeowner policies and some landlord polices may deny a claim because the property has been vacant for more than 30 or 60 days.
Another “special” coverage to watch out for is a “special deductible.” This is the out-of-pocket expense to you, the insured, before the insurance company pays for damages exceeding such deductible. This is common for wind- and hail-prone areas and is usually a percentage of the insured property value with a stated minimum dollar amount.
Another “special” deductible is a vandalism/malicious mischief deductible that may exclude coverage entirely or charge a very large deductible for this cause of loss. This can be found in the general wording of the policy or as a “special” coverage in the endorsement section located at the back of the policy.
If your real estate investor strategy includes “flipping” the property in a short term, the premium total doesn’t necessarily impact the out-of-pocket expense as much as the insurance policy cancellation provisions, especially assets purchased and sold within 90 days. Usually this wording is found in the general policy language under the cancellation clause header or in the endorsement section at the back of the policy. Insurance companies impose these hidden cancellation charges for not having the policy stay in force for an entire year. These charges appear as minimum premiums, earned policy fees and/or short rate cancellation penalties. They can be significant depending on how long you stayed on their insurance policy.
Experience Counts
Find an experienced insurance agent who is familiar with your industry and the risks associated with your investment strategy. Get your insurance questions answered in writing from your insurance agent. If the insurance agent refuses to do so, then it’s time to find a new agent. Unfortunately, investors are sometimes finding that an extremely low rate, quoted outside the industry-norm guidelines is not always accompanied by swift and accommodating claim payment. Do your homework and check references with your industry associates and leaders of your associations or network. These additional steps will pay significant dividends in the long term.
Mark Gannaway, CPCU
Arcana’s strategy is executed under the leadership and direction of Mark Gannaway, CPCU. Gannaway has 35-plus years of insurance experience, including executive roles in both insurance company and MGA operations. Before establishing Arcana Insurance Services in 2005, Gannaway served as president of Safeware Insurance Agency, chief marketing officer for CEM Insurance Company and in executive vice president roles for Tristar MGA, Inc. and A & F Insurance Agency. Gannaway has a strong background in underwriting, product development, risk evaluation, superior program knowledge on voluntary and involuntary insurance products, strong sales and vendor networks. He is proficient with loan applications, loan servicing and insurance agency management software systems. Gannaway understands the insurance and risk management needs of the financial, investor and property management communities.
