Choosing real estate insurance to protect your investment projects can be tricky – after all, you don’t plan to own this for long, so why opt for additional coverage? As a lender, Upright operates daily in the world of risk management and has seen first-hand where cutting corners for a lower cost leads to more trouble than it’s worth. Read below for some of the common “cost saving” insurance missteps that can lead to disaster:
One of the most common mistakes when selecting an insurance policy is not carrying enough coverage on the property. Frequently, we see policies only written with enough coverage to protect the total monetary investment into a project (i.e.: your purchase cost and your renovation budget). However, that won’t account for your time and labor. While a total loss could be covered in this case, you will be left with nothing to show for the time invested or the profits lost.
Pay attention to your estimated replacement costs, they’re important. All insurance companies are going to pay claims based on their value calculations. When evaluating a property, the replacement cost of a home will be assessed on the cost if you were to knock down, excavate, and rebuild. If you choose to under-insure a property, you could face coinsurance penalties and shorted or denied claims if you fall below the standard 80% coinsurance clause. While not all coinsurance is 80/20, this is the most common, and the penalty will apply for any under-insured property regardless of the ratio.
For example:
Your newest investment property is given a $1 million replacement cost by your insurance company, but to save on premium, you only insure it for your anticipated sale price of $650,000. In this case, the home is under the 80% coinsurance clause ($800,000) and therefore, puts any claims you make at risk for penalty and short payment.
2. Specifying the Type of Coverage
Another common misstep when choosing insurance is not specifying that there will be renovations made to the property. A vacant homeowner’s policy will protect the property as it currently sits, but not the renovations being made or claims/losses caused by the renovations themselves. Any policy you take out should include a builder’s risk endorsement or language stating that the building improvements are covered.
3. Special Form vs. Broad/Basic Form
This might be a little less common knowledge, but the form your policy is written on matters. Special Form should always be the top choice so long as it’s available. If your agent says that Special Form isn’t available for the property in question, shop your options. Not all agents can quote the same depending on the type of agency you’re working with. Here’s an easy way to differentiate between the two:
Special Form – if the policy doesn’t specifically exclude a cause of loss, then it will be covered.
Broad/Basic Form – if the policy doesn’t list a cause of loss as covered, then it won’t be.
4. Carrying General Liability in Addition to Property Coverage
General liability coverage tends to be the less expensive portion of a premium, but oftentimes there are questions on why having this additional coverage is necessary. As a general rule, property coverage relates to the physical property, while liability relates to unforeseen events that leave the property owner open to risk.
For example:
If you are showing a partially finished home and someone trips over exposed materials and causes themselves bodily harm, any potential lawsuits that might arise will likely name the owner of the home (you). In this case, general liability will protect you.
Your contractor likely carries general liability as well, but you still need the coverage individually and in the name of your LLC. Your contractor’s coverage only extends to bodily injury or property damage caused by their trade work. It does not insure the property you own and any claims that arise that are not directly related to them.
While it can be tricky, choosing the insurance plan that best fits your real estate goals is very important. It is essential to understand the different options available to you and which ones make sense for your business. Most importantly, make sure you partner with insurance providers that you can trust to give you the best plan for your business's needs.
