National Real Estate Insurance Group
Investment Property Insurance That Just Makes Sense
By Carole VanSickle Ellis
For most people, property insurance is a “given.” After all, homeowners know that failure to insure what is likely their most valuable asset could cost them literally everything, and most renters have been admonished to obtain renters’ insurance upon signing every lease in their renting history. While not every homeowner or renter opts to obtain insurance, it is nearly universally acknowledged that potential losses are very, very serious if a policy is not purchased or is not a fit for the situation.
However, for real estate investors who may own multiple properties at a time and implement a vast array of strategies using those properties, the stakes are exponentially higher. Yet, most investors lack a full understanding of the types of insurance they may need based on their investment tactics and how to know if they are even fully covered.
“Property insurance is a volatile and sometimes crazy market, and it has changed particularly drastically in the last five years,” said Brooke Beets, COO at National Real Estate Insurance Group.
NREIG has been providing custom insurance products for real estate investors since 2008, and prides itself on the ability to provide solutions for nearly every type of residential investment property. “That is all we do,” Beets continued, “whether our clients are using creative acquisition strategies or purchasing properties using individual retirement accounts (IRAs) or trusts. We focus on what our clients need and then tailor our business to suit that.”
While most homeowners may achieve a relative level of security simply by obtaining a basic policy with one of thousands of property-insurance providers, real estate investors take on a more complicated and substantial level of risk when acquiring a property for investment purposes. Beets explained real estate investors have nearly boundless creativity and must, of necessity, insure the properties they acquire even when the transactions are unconventional.
“We have clients that purchase using retirement accounts and trusts, via subject-to agreements or non-performing notes, using conventional financing methods, and using countless variations and combinations of these strategies,” she explained, noting that the insured assets themselves can have unusual insurance requirements as well.
“Clients do not just purchase long-term rentals. They also purchase vacation rentals, corporate rentals, fix-and-flip properties, mobile homes, module homes, and condominiums, to name a few,” Beets said. Naturally, real estate investors also must insure higher volumes of properties than the average homeowner. To address that, NREIG increased its offerings for larger properties from between one and four units up to 20.
“The key is to make sure that the right policies are in place for a property, that adequate coverage is in place, and that every party that should be named on the policy is named,” Beets said. “It’s our job to make sure that this happens and that the client knows exactly what they need and how to get it.”
Strategies & Processes that “Just Make Sense”
When NREIG founder Tim Norris first started out in the insurance industry, he quickly realized there was a gap in the market when it came to the specialized services real estate investors need. As Norris began investing in single-family and commercial properties, his understanding of the unique requirements that go along with real estate investing led him to fill that gap with NREIG.
Shawn Woedl, who worked alongside Norris from the beginning and was named CEO of NREIG prior to the founder’s retirement, shares Norris’s passion for innovation and belief in the absolute necessity of this trait when it comes to working with real estate investors. One of his most-often repeated mantras is, “The most dangerous phrase in the language is, ‘We’ve always done it this way.’” The key, according to NREIG, is to do things the way that best serves the investors, and that means making sure that their policies truly make sense for the work they are doing.
Part of making sure real estate investors get exactly what they need involves constant monitoring of everything affecting not just the housing market, but the insurance industry as well. That is where Jason Jones, NREIG’s senior vice president (SVP) for Risk Management, comes into the equation along with his team.
“One of the most important things we do is monitor trends in claims to see if something has been left on the table,” Jones said. He explained that this data often indicates areas where property owners might need enhanced or more varied coverage before the owners themselves are aware of the issue. When this type of trend emerges, such as in a case where an area is experiencing increased flooding, then NREIG negotiates for more coverage for flooding with its carriers.
“We deal with risks and trends on a day-to-day basis just like real estate investors do,” Jones concluded. “We prioritize identifying and making changes that will make us more efficient and sustainable while doing the same for our clients.”
Jones added that communication is a crucial part of effectively helping real estate investors insure their properties, noting investors should make a point of opening channels of communication with their insurance providers so that everyone involved in the process is on the same page about the state of the asset and the investment strategy in place.
“Just in my position alone, I work with compliance, underwriting, and marketing regularly to communicate about the things we are finding every day,” he said. “These divisions – and others – are tasked with working with clients to make sure they are covered correctly in light of our findings. We love to offer our clients nuanced coverage tailored to their situations.”
Woedl recalled how an investor who remains an NREIG client to this day “nearly got destroyed on a property claim” because his insurance agent at the time (not NREIG) failed to explain how his insurance benefits would actually manifest in the event of a significant loss. The client, who had opted for extremely high deductibles, bought multiple policies that would not work in tandem in the event of a disaster, and failed to accurately estimate the cost of repairing the property, recovered only about 20% of the money he could have received to remediate the damages because of this deadly combination. Because most carriers are not equipped to analyze the many factors that affect investors and investment properties, they are unable to provide systems that make sense in a real estate investing context.
“That’s where we come in,” said Jones. “We are always in negotiations and talks with carriers, brokers, and partners to make sure we have the capacity to offer the products that make sense for our clients.”
“The Most Difficult Property Market in the History of Insurance”
Over the past five years, very few things have made good, solid sense in the real estate industry or in a broader economic context. As the COVID-19 pandemic swept through the United States, bringing state-to-state and even city-to-city variations on risk and regulation in real estate and other industries, the NREIG team tackled the challenge alongside its clients.
One of the biggest issues, said Beets, was that many clients who had been operating short-term rentals or fix-and-flip deals became “accidental landlords” as people staying in the properties found themselves unable (or unwilling) to move out at the end of the agreed-upon stay. There were also a number of hardship cases on the long-term landlord side of the equation, and regional regulations governing pandemic-era landlord-tenant relationships complicated things further.
“We worked especially closely with our clients during that time to make sure they were still getting the coverage they needed as their situations changed, sometimes rapidly,” Beets said.
In 2021, the company also executed a massive technology overhaul as part of a “client-first initiative” emphasizing knowledgeable communication via multiple avenues. “It is so important to us to build relationships and make sure our clients understand we are in this together as a true partner for them,” Beets said.
Part of being a true partner, as Beets described it, involves creating innovative products to meet the needs of investors. A prime example of NREIG’s innovation is the company’s “Tenant Protector Plan (TPP),” which Beets described as “essentially a renter’s insurance alternative.” She added, “This proprietary plan is one of the most popular options for clients, and they cannot get it anywhere else.” The plan is designed to help property owners whose tenants may be reluctant or unable to secure coverage for their liability in case their negligence causes damage to the property, their belongings in the unit and, additionally, to help the property owner in the event that the tenant abandons the property without payment or notice.
While 2020 and its aftermath were challenging, however, it is today’s market that Beets calls “the most difficult property market in the history of property insurance.” She explained, “Between catastrophic weather events, inflation, labor shortages, and increased building costs, the property insurance market is experiencing unprecedented volatility. Just five years ago, the market was not yet impacted [to such an extent] by these factors.”
In response to this volatility, many insurance carriers have begun imposing restrictions on new and existing business and even exiting some markets completely.
“This means costs, regulations, underwriting, and carrier appetite are all subject to the scrutiny of the hard insurance market,” Beets said. “We are writing business a lot differently now than we were just five years ago because in this market lenders are not as willing to lend, prices have gone up, and carriers are a bit more hesitant about certain geographical areas.” This can mean that the cost of coverage goes up while the coverage itself diminishes in some areas of the country.
Beets explained NREIG straddles the line between clients and carriers, providing networking, negotiation, and partnership in order to create more opportunities to obtain adequate coverage.
Strong Relationships to Shore Up a Niche Space
While the current market may be the most difficult for property insurers in recent history, it is certainly not the first time NREIG has dealt with changes in insurance carrier policies or changing investor preferences and investment strategies. To deal with the dynamic nature of the business, Jones explained his team is continuously looking for additional carrier partners in order to provide increasing variation in the coverages that the company offers.
“One carrier may prefer a certain type of deductible while another requires certain minimum amounts of coverage for certain geographic regions, and investors are the same way,” Jones said. “It is an ongoing process to gather as much coverage as possible together so that we will have the ability to align ourselves with the needs of the insured.”
For example, the Tampa Bay area in Florida often avoids direct hits by major hurricanes (category 3 or higher) but still sustains substantial damage when these storms come ashore in other areas of the state. This means that although Hurricane Irma, a category 4 hurricane that made landfall far south in Big Pine Key, did not directly hit Tampa Bay, it still was rated a category 2 storm when it swept through the area, knocking down power lines and causing a great deal of damage. This can make insurance carriers nervous because, Jones said, “there is a real likelihood that Tampa will sustain hurricane-related damage at some point.”
Many carriers are particularly wary of areas likely to sustain such losses en masse as a result of a large weather phenomenon like a hurricane. “Investors in those areas need nuanced coverage, and it is our job to jump in and bring onboard carriers who have the ability to help out in our niche space,” Jones concluded.
“It’s been interesting, working through all of these challenges and effectively communicating to our clients what the market is doing and why carriers are making the decisions that they are,” Beets said. “Every investor is unique; every location, every business model, every portfolio is different,” she continued.
“We know that nothing is one-size-fits-all. There are all kinds of investors and investment strategies, and, after being in business for so many years, we know that everyone needs something a little bit different. Our job is to make that happen.”
SIDEBAR
Handling Hurricanes
What to Know About Named-Storm “Busy Season” Trends & Your Investment Properties
As 2023 drew to a close, the NASA Earth Observatory formally announced another hurricane season was also drawing to an end and took a moment to reflect on 2023’s storms. “During an average season, the [Atlantic and Pacific Ocean basins] see 29 named storms. In 2023, there were 37,” NASA researchers wrote, adding that about one-third of these storms also demonstrated “rapid intensification,” which means wind speeds increased dramatically within a 24-hour window.
Storms that rapidly intensify in this manner “can cause catastrophic levels of damage if they strengthen right before making landfall,” noted analysts in the same report. This is due in part to the limited window of time for warnings, preparation, and potential evacuations, as well as the difficulties in forecasting the event itself. “Forecast errors for storms that undergo rapid intensification are approximately two-to-three times larger than for other storms,” according to an article published in October 2020 in the journals of the American Meteorological Society.
Meteorological changes and trends play a huge role in how insurance carriers decide to insure properties in different geographic locations. Most homeowners simply sign up under a carrier that claims to provide adequate coverage for a primary dwelling and leave the process at that, but real estate investors and those working in the insurance industry with them must do far more than that. “Insured investors must be clear about what coverages they have and what things they are concerned about being covered in every situation,” said Jason Jones, SVP of Risk Management at NREIG. “Improperly insured locations set investors back on their path to financial freedom, success, and growth of their business. It is our role to be a support system and allow them to ask questions, then give them feedback to make sure they are insuring things correctly.”
Jones explained many investors in areas with weather events like hurricanes fail to consider that a major event could wipe out a substantial portion of their portfolios if they are not adequately insured. “You need to think about what your plan would be in the event not just of damage, but a large loss,” he said. “There are different ways to insure those properties, but you have to know how much value you want to retrieve if the property is damaged beyond repair and what that looks like in your budget.”
