Understanding a Property’s Claims History
Evaluating the Potential Investment
By Shawn Woedl
Knowing a property’s claims history helps in evaluating a potential investment. Past claims can affect insurance rates, coverage availability, and can shed light on possible hidden damage and risk.
Doing your due diligence provides you with crucial information that can help you understand what to expect moving forward, mitigate the risk of an investment, and make an informed decision about whether a certain property is right for you.
Past claims and future insurance
Before providing coverage, many insurance carriers require you to provide accurate loss information on a property for the past three to five years. If this information is not disclosed before coverage is obtained and a problematic claims history becomes known, the carrier can either cancel your policy, or agree to stay on but increase your premium.
Having this information before you buy insurance can help you anticipate what coverage you will need to have based on the history of the property.
How do you go about obtaining prior loss history?
If purchasing a property from the current homeowner, you would obtain a C.L.U.E., Comprehensive Loss Underwriting Exchange report. Under the federal Fair Credit Reporting Act, anyone can pay a small fee to request a copy of a C.L.U.E. report on a potential new property through LexisNexis or a similar data company. The report will provide you with prior insurance claims filed at the property, the type of claim, and approximate total payout.
If you are purchasing the property from another investor, you can ask the seller to obtain a Loss Run report from their insurance agent or carrier. This can take two to four days to receive and includes the same loss information as a C.L.U.E. report.
What exactly should you be looking for on these reports?
The frequency and severity of losses are looked at as the same by most insurance carriers. Multiple minor losses or one catastrophic loss could both be seen as high risk; frequency is just as bad as severity.
Controllable losses are looked at very differently than “Acts of God.” Fires (specifically tenant-caused fires), theft, and water damage are seen as more negative than wind or hail loss or lightning strikes. Look for what payouts were used for, particularly when it comes to water damage, fire damage, and criminal activity.
If liability losses are present, carefully look at the cause of loss and consider if a tenant who was negligent for the claim is living at the property. Also, consider if there are additional mitigation efforts that should be done in order to avoid future losses.
How does this impact the insurance you are able to obtain going forward?
Some insurance companies also review loss runs and make decisions based on patterns. Even if they are minor instances, but if they happened frequently enough, they are going to adjust the types of perils insured and how much they will cover.
For example, if the property you are looking into has had three small fires in the last seven years, only totaling $5-$6,000 each, then an insurance carrier might decide to require you to carry a $5,000 deductible to prevent the carrier from paying out on these smaller losses moving forward.
The best coverage for you
Reviewing the loss history can aid in decisions on the type of coverage you may need on a potential new property. For example, if upon receiving the report you notice that there are multiple theft claims, you should consider a few things.
First, is this going to be a good area for you to invest in? Second, if you decide to move forward with purchasing the property, it may be in your best interest to obtain Special Form coverage to cover potential theft losses. Third, identify opportunities to fortify the property against future theft losses. Reinforce doors and windows, keep trees and shrubs trimmed, install motion-sensor outdoor lighting, install an alarm system, etc.
Another example is Flood coverage. If the report shows that the property has a history of flooding, you first need to determine if the risk is worth it. If you choose to move forward with the property, it will greatly benefit you to customize your insurance package with Flood coverage. This is a separate policy that is typically excluded on a standard property policy.
Choosing the right property deductible
Your deductible is the amount you are responsible for in the event of a loss before your insurance company starts to pay a claim. The deductible you carry on your policy will directly affect the premium you must pay for coverage. The higher your deductible, the lower your premium rate will be. There are multiple factors you should consider when choosing a deductible, including your cashflow and business strategies, but past property losses are also a factor.
Consider this scenario: Investor 1 and Investor 2 both purchase properties that sit next to each other. On paper, they are identical risks. Investor 1 chooses a $10,000 deductible and Investor 2 chooses a $1,000 deductible. Investor 1 is probably paying 20% less per year for insurance than Investor 2.
Investor 1 did not review the loss history, so they did not realize that both properties have had five small water damage claims in the last seven years in the winter due to burst pipes.
Investor 2 did review loss history and knew they did not want to pay for that loss every other year. With each burst pipe, both properties required $5,000 in repairs. After 10 years, there have been four more incidents and investor 1 has paid $20,000 out of pocket because the $5,000 repairs were under their $10,000 deductible.
Since investor 2 knew this was a risk ahead of time, so while they were paying a higher premium, they are only out $4,000 over the same four incidents (4 times their $1,000 deductible). However, they also know that if they take steps to reduce the risk, they might be able to avoid the burst pipes entirely. So, in the spring, they reinsulate the house and install sensors to notify them when the temperature of the pipe approaches freezing. When the winter comes, they avoid these losses altogether.
Investor 1 did not take preemptive action, so with the first claim, their insurance premium goes up 9% and then 20% on subsequent claims. All that money they saved by choosing a higher deductible went to those rate hikes. For investor 2, the higher premium and cost to protect the property was a short-term expense for long-term savings because they did their due diligence before purchase.
