7 Things You Need to Know About Insuring Your Investment Property

We can all agree that insurance coverage for your investment property is essential. The right insurance protects your assets and gives you peace of mind.

An insurance policy protects you from the potentially disastrous financial consequences of damage to your property. Your policy also often enables you to buy the property.

After all, if you take out a loan to buy this building, the first thing the lender will want to see is evidence of insurance.

Even though you know that you need to insure your investment property, insuring it correctly is not that simple. If you do a simple Google search on this topic, you will find hundreds of results.

Search results will include articles or ads by insurance companies promoting their product. But how do you know if their product is what you need?

In this article, we will give you a simple checklist of coverage pitfalls. As well as general investment property insurance know-how.

This will serve as your guide to finding the policy that is a right fit for you.

1. Coverages that you need to protect your investment property

Insurance policy's job is to protect you from the financial consequences of a loss.

Identifying correct coverages that are necessary is essential to safeguarding your property. Below are the three primary coverages that you need:  

Liability

A liability portion of your policy protects you when it comes to your liability as a landlord as well as the general liability of owning a property.

This coverage will cover incidents such as slip and fall or tenant injuries. You could be held liable if you failed to maintain the property adequately or failed to warn the tenant of potential risk and that led to an injury.

Another concern to landlords is coverage for alleged unlawful eviction.

When you are reviewing quotes, keep in mind that not every company automatically provides this critical coverage. Double check with your broker before signing on the dotted line.

Property

A big concern with any investment property is the damage to the structure itself.

Property coverage protects your investment. When choosing a policy, go with an "All Risk" policy, meaning only specifically listed perils are excluded.

vandalism coverage

Fire, hail, and theft are the most well-known perils that the policy protects against. Make sure that you also have coverage against vandalism.

It is also essential to confirm the carrier's stance on Vacancy coverage. Should your property become vacant temporarily, you want to make sure you still have coverage. Inquire about a "Vacancy Permit" endorsement.

Business Income

As a landlord the property is your source of income and as such your policy should provide coverage for this exposure.

Business Income coverage protects you if you lose your income, i.e. the rents you collect, due to a covered cause of loss. For example, if the building is partially damaged and the tenants are forced to move out temporarily for 3 months, the policy will cover that monetary loss.

2. Actual Cash Value (ACV) vs. Replacement Cost (RC)

In many property-driven policies, you have the choice of insuring your property on either ACV or an RC basis. Both of these refer to the methods of calculating the claim payout.

calculation method insurance

An ACV basis takes into account the depreciation of your property while RC does not. For example, in a total loss scenario, a Replacement Cost valuation will pay out what it costs to replace the building today.

Even though it costs more, the Replacement Cost is preferable.

3. Coinsurance clause

A coinsurance clause is a provision in the property policy that penalizes the insured if the property is not insured to correct value.

This policy provision specifies the minimum insurance to value percentage that you need to have to avoid penalties during the payout of the loss.  The value of the property is determined at the time of the loss based on Replacement Cost or Actual Cash valuation, depending on which one your policy is written on.

For example: Let’s assume that your building is valued at $100,000 at a time of the loss. If your policy specifies an 80% coinsurance provision, it means that you should have insured your building with at least an $80,000 limit (80% of the full value) to avoid the penalties.

coinsurance penalty

Let’s further assume that the loss you suffered amounted to $60,000. If you satisfied the coinsurance provision and purchased $80,000 (i.e., the minimum required by the coinsurance provision, 80% off the property value at the time of the loss) in insurance limit, your payout will be $60,000 (not considering a deductible).

If you purchased $60,000 in insurance limits, the loss payout would be calculated by first finding out the insurance to value that you purchased by dividing the amount of insurance purchased ($60,000) by the limit required by the coinsurance clause ($80,000). The result (75%) is multiplied by the loss amount ($60,000). The resulting number is your final loss payout - $45,000.

By not satisfying the coinsurance requirement you essentially are agreeing to pay part of the loss out of pocket (on top of a deductible).

The coinsurance clause can be 80%, 90% or even 100%. Please review your policy to determine if your limits satisfy this provision.

A word of caution – since the value is determined at the time of a loss, it’s important to review your policy and limits purchased frequently. The problem is that throughout the year construction costs may go up or the valuation would turn out to be inaccurate and you will still incur the coinsurance penalty.  Giving yourself “room for error” so to speak, i.e., purchasing higher limits than the minimum to satisfy the coinsurance provision is a good strategy to avoid the above described unfortunate scenario.

When reviewing quotes, consider purchasing one that provides an “agreed value” valuation, if possible. In this valuation, both you and the carrier agree to the valuation, and the limit purchased and thus get rid of the coinsurance provision.

4. How much insurance coverage do I need?

This is one of the biggest questions we get from our customers. Especially those that are new to the investment property world.

Insurance carriers have calculators that help determine the cost to rebuild your property. They take into account such things as the age of the roof, the plumbing, any upgraded finishes, etc.

damaged roof shingles

Is the roof shingles or tile? Is there a basement? Is it finished? The answers to these questions (and more) help determine the value of the property.

Remember, that even though the policy promises to replace the property, it will still only pay up to the specified limit.

Consider Extended Replacement Cost coverage if the carrier offers it. This coverage effectively increases your policy limit amount by a specified percentage. This percentage varies so please consult your policy for exact values.

5. Choosing the right broker

Just like a good doctor, or a trusted mechanic, the right insurance professional will make a world of difference when you are shopping for an insurance policy.

A knowledgeable insurance broker who is experienced in insuring investment properties will know the best insurance companies to approach. He or she will help you compare quotes and will know what coverages pitfalls to look out for.

Your broker can also be invaluable during the claim process.

helpful insurance broker

A claim is a chaotic and stressful event with many moving parts. A responsive and proactive insurance broker will be your liaison with the claims adjuster.

Your broker will make the process easier by coordinating submission of the claim easier, processing paperwork and gathering any information needed. As well as working with the insurance carrier if you are having any issues.

There are two types of insurance professional: A Captive Agent or an Independent agent / Broker

A Captive agent typically works for an insurance company, representing their products only. An Independent insurance broker partners with many different insurance companies.

It allows him to shop for the best coverage and premium and find a policy that is a right fit for your unique situation. Working with insurance broker gives you choices!

6. Choosing the right insurance company

Just like it is important to select the right insurance broker, it is equally important to choose the right insurance company.

You might be asking – well, what makes an insurance company the right fit?

There are a few criteria that you should keep in mind when reviewing quotes. Make sure that the company you select satisfies as much of the following as possible:

Financial rating

This is one of the most significant criteria you should be paying attention to.

Carrier's financial rating is an important indicator of how financially strong the insurance company is. In other words, how likely (or unlikely) they are to run out of money and not pay your claim.

 

A.M. Best, Moody’s and Standard and Poor’s are three well-known companies that rate insurance companies amongst others and bring these ratings to the public.

The rating committee reviews the carrier’s assets and financial liabilities and assigns the rating. This rating is updated as needed.

The ratings assigned are in a letter format from A (the best rating) to F (company going into liquidation). When you review the quotes you will likely see any of the following letter ratings:

insurance company rating

A++, A+, A, and A-: The best rating a company can have. Any of the A ratings are considered superior and indicate a stable company with plenty of cash in reserves. These are the companies to partner with.

B++, B+, B, and B-: This rank indicates that the carrier is trustworthy but more susceptible to adverse changes in the economy. If your budget allows - go with the A-rated company, however, B rated company is acceptable as well.

C++ and C+: This rank indicates an insurance carrier that is struggling financially. Most brokers do not present the quotes from such companies as they are only marginal in their financial health and present a higher risk of going insolvent.

Admitted vs. Non-Admitted

Another important criterion by which to choose the company is whether it is an admitted or a not admitted carrier.

An admitted company is a company that has been approved by the state’s insurance department. The state is backing it financially.

If the company goes, insolvent state’s guarantee fund will pay out for each claim that the insurance company can not cover. A non admitted company does not have such financial backing.

This makes it all the more important to select a company with the best financial rating you can, especially if it is not admitted.

Claims process

The only time you are really anxious to hear from your insurance company is when a claim happens.

A claims process can seem intimidating and complicated. You need to be able to rely on your carrier to work with you to resolve the claim with your best interests in mind and as effectively as possible. 

JD Power and Associates and NAIC (National Association of Insurance Commissioners) provide records of any significant complaints as well as customers’ ratings for insurance companies.

7. Factors that affect the cost

Many factors affect the cost of your insurance.

vacation rental

In a property policy situation, the most important factors that the carrier considers are the details of the property's construction, such its location.

The carrier will also take note if the property is intended to be a short-term or vacation rental.

Conclusion

We hope that this article provided some clarity on what to look for when you are comparing the quotes to insure your investment property.

Keep in mind, that your insurance is only as good as the claims they pay.

So don't go with the cheapest offer without ensuring you are getting all the coverages that you need. Many carriers eliminate essential coverages to achieve a lower, more enticing price.

Have you ever considered cheap insurance only to find out it is missing important coverages?

Kernan Insurance Agency

9932 Brewster Lane

Powell, OH 43065

 
Main office: 614-764-0121
Toll free: 800-718-2663
Fax: 614-764-0310
 

Office Hours:

Monday - Friday: 7:00 AM - 5:00 PM

Weekends: By Appointment