Does your Insurance Policy Give you Full Coverage? — by Alex Craig

This is a longer post then I usually publish for our weekly email, but I feel one of the more informative and important one’s as it deals with insurance. Just because you have insurance, does not mean you have the complete coverage you may think you have.

The standard homeowners insurance policy you have on your primary residence insures your home’s structure and your belongings in the event of a destructive event, such as a fire. In addition, homeowners insurance policies are generally “package policies.” This means that the coverage includes not only damage to your property, but also your liability—that is, legal responsibility—for any injuries and property damage to others caused by you or members of your family.  Most rental property insurance will cover the standard items that a typical homeowner policy covers, but there may be exclusions you are not aware of, or do not know to ask your agent.  First of all, before we dig into this, let me be clear, insurance claims are rare. Out of 875 homes under management, we file on average 2 to 3 claims a year. I have owned property for 14 years and made my first insurance claim on a long term buy and hold last year.  The claim was a fire and thankfully everyone was ok, but the damage was extensive. The claim I filed was for a complete loss through the insurance policy we put in place for our clients. When the claim was complete and the check cut, my mortgage was paid off and there was plenty left over; really, I came out way ahead on the claim. Complete fire loss and golden parachute is not part of my real estate plan, but that is why I have good insurance in place. Now back to the exclusions. In my example, fire and other items such as wind, pipes burst, tree damage and hail are the most typical claims and generally covered by most carriers. The 3 most common exclusions are typically assault & battery, molestation/sexual harassment, and animals. Yes, these are all morbid occurrences and to date, have never seen any claims on these first hand, but they have happened, otherwise insurance companies would not list them as exclusions. Out of the exclusions I listed, the one that I would be concerned with is animals. While we screen our tenants for vicious breeds, that does not mean they can’t sneak a pet in or what is more common, a neighborhood dog biting your tenant on your property, which you likely would be held liable. Why are you held liable? Because you likely will be the only person with any money worth suing. These types of claims, while rare in the single family space, are far more likely to happen in Multi-Family. On the pets, it is an assumption that only vicious breeds are the ones responsible for pet biting lawsuits, but that is not true. All dog’s have teeth, all can bite, thus any pet can carry some risk. That being said, we strongly recommend not marketing your vacancy as “Pet’s not allowed” as you are not giving your property the best opportunity to rent against competing properties. Pet’s are big part of people lives, thus you simply need to make sure your policy does not have a pet exclusion.

I do not mention these occurrences and exclusions to scare you as it would be a silly reason not to invest in real estate; that is what insurance is for. I mention it because you need to know what your policy covers and does not cover. If you are buying through us and using the insurance program we set up through Insight Risk Management, then you are fine. The policy we set up for our own portfolio and clients does not have these exclusions and is replacement cost instead of cash value policies. Often times investors purchase cash policies because they are cheaper; they are cheaper because they have those exclusions and your claims are depreciated. Real quick, let’s hit the differences between cash and replacement cost value.

Actual cash value and replacement cost value are two different methods that can be used to calculate how much money you receive if your property is damaged. Actual cash value takes into account any depreciation that has occurred over time and replacement cost value is based on the cost to fully replace your property at current value. For example, if your policy covers your roof for its actual cash value, your insurance company will deduct depreciation from your roof’s overall value to calculate how much they will pay you. This means that if your roof is old it’s actual cash value is going to be significantly less than the amount it will cost to replace it.

Insurance is not the area you want to save a few dollars, the risk is simply not worth it.  The policy we secured for our clients is complete coverage that we were able to obtain as a large property manager. By aggregating all of our insurance purchasing with a single company, we have been able to leverage the volume to get better pricing that can be achieved by any one investor. This policy is exclusive to our clients, in other words, individuals are not able to secure this policy outside our management companies in Memphis and Little Rock.