The True Cost in Purchasing Insurance

I hate using the old worn out term “you get what you pay for” especially for Arcana’s first article with National REIA, but sometimes getting a “good deal” or saving a few dollars on your insurance premiums can lead to big problems when you need it most – filing an insurance claim.

Like most insureds, real estate investors are no different than anyone else — many times price points are the sole driver of decision making, not proper insurance coverage placement. Every policy you purchase should include at a minimum: replacement cost, all risk insurance coverages with normal exclusions, wind and hail coverages and liability coverages in the event of a third-party injury or someone claiming to being injured on your investment property. In today’s environment, I highly recommend a Flood quote whether the property is in a national flood zone 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.

One purchases insurance to have comfort in knowing when something goes amiss, and it will, the Claim will be paid within a reasonable time line at a fair value. 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 Association. This additional step will pay significant dividends in the long term.

Another challenge in today’s real estate investment market is finding an insurance agent who understands your business and the financial exposures you as a real estate investor face. I’m amazed how many times I hear “Uncle Joe or my fraternity brother does all my insurance”. First question I ask them is “Why?”, followed with “what does Uncle Joe know about your business and the industry you’re in”? This often leads to a “deer in the headlights” look staring back at me. You must have an insurance agent experienced in this type of industry, a lack of understanding of the exposures you have as a real estate investor could be fatal to your business.

Another big mistake is the assumption that a Homeowner’s policy is all one needs to cover their investment property, especially on smaller portfolios. They call their insurance agent once they purchase the property, have them add an endorsement to their Homeowner’s policy insuring their new purchase; listing the address, mortgagee, and the preferable insurance amount. Again, my first question is, “have you ever read your Homeowner’s policy?” A typical Homeowner’s Policy requires that the property is occupied. Occupied means more than just a table and chairs and a few pieces of furniture. If the property has been vacant at least 30 or 60 days, depending on the insurance company’s policy, and they prove the claim occurred when nobody was living in the property, there is a high probability they will deny the claim.

How about the property being vacant while you “rehab” the building? Does your Homeowner’s or Landlord policy cover the vacancy period and the “builder’s risk exposures associated with your construction project. Many policies exclude this type of risk potential.

In today’s investor environment, we are seeing more and more investors choosing to “hold” properties instead of flipping them to new buyers due to the high rental income returns being experienced in many markets. This introduces a whole new set of problems for the investor/landlord relative to their Homeowner’s coverage. From a property risk analysis exposure, if the insurance company can prove the tenant caused the damage in question, the Homeowner’s Policy may have an Intentional Acts clause giving the insurance company reason to deny a claim. From a liability risk analysis exposure, does the Homeowner’s Policy afford you third party coverage in the event a tenant’s guest is hurt while visiting your investment property? What if your tenant has a service animal at your location, does your policy afford you coverage? With your Homeowners Policy as your insurance program for your investment properties, there is also the negative financial impact of your investment property losses impacting your own personal insurance loss history.

So, choosing the wrong method of mitigating your potential financial losses whether through buying the wrong insurance policy or trusting “Uncle Joe” with his recommendations or both, has the potential to both sink your potential profits in your investment property and you having to pay more out of pocket when they raise your rates or cancel your Homeowner’s policy.
In the end, the main lessons here are choose an insurance agent who knows your business and the market segment in which you are working and then purchase the correct insurance coverage. The risks you face in the future will continue to evolve and you need a knowledgeable source who will put your best interest before the mere selling of a low cost policy. Understanding your financial exposures will go a long way in saving your real estate investments and possibly your business.

Mark A. Gannaway, CPCU
Chief Executive Officer and Founding Partner

Arcana Insurance Services is an all-lines property and casualty managing agency that’s been working with real estate investors since it began in 2005. But long before that, founder and CEO, Mark Gannaway, served as President, Chief Marketing Officer, and Executive Vice President for several other well-known agencies and brokerages. With over 35 years of experience behind him, including 20 with Lloyd’s of London as a US Coverholder; one of only a select few in the United States.