Outside the Box: Looking at Property Insurance from a Different Perspective

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My last post generated some great discussion regarding property insurance.

In that post, I went over ten tips regarding what can be a very frustrating part of our industry.

In this post I want to expand on one of points I made previously and that is: I only get enough insurance to get the lender out of the way and the property cleared.

First, let me point out how I view property insurance.  Property insurance is there to protect me from catastrophic events.  It is not there for anything less.

What is a catastrophic event?  In my opinion, a catastrophic event is something that destroys or nearly destroys the entire structure like a major fire or tornado.   Therefore, the only time I am ever going to make an insurance claim is if something catastrophic occurs.

Why Do I Hold This View?

Over the years I have dealt with many insurance companies and agents.  I have watched them change the rules on me without warning.  I have watched them drop my coverage and leave me hanging.  I have watched them as I have made legitimate claims and then significantly raise my rates on everything else.

What’s more, as I have grown and developed my business, insurance has become more difficult to obtain and maintain.  As you grow in the real estate investing business you will not fit the mold anymore.  You will be seen as a risk.  Some insurance companies will begin looking for ways to get rid of you.  They will be waiting for one slip up or claim.  It is just too risky for me to jeopardize my coverage by making claims.  I just do not want to rock the boat when it comes to insurance.

So, knowing this…

What Type of Insurance Coverage do I Get?

I get as little as I can get away with to keep my costs down, which generally does not include full replacement cost.

I am not looking to get a large settlement.  I am not looking for insurance to replace my roof after a hail storm.  I am not looking for insurance to replace my stolen HVAC equipment.  To me, insurance is not there to pay for repairs. You may call me crazy, but I can’t afford to rock the boat.

As I said, insurance is there to protect me from a catastrophic loss.  Thus, I want it to pay me to get the lender out of the way if the property can no longer provide income.  I also want it to pay me to get the lot cleared.

From that point, with the lender out of the way, I can move on and decide what to do.  I can sell the lot or perhaps get a construction loan to rebuild.  Furthermore, I also carry high deductibles.  Since I am simply not going to make small claims, why not have a high deductible?  It costs less and improves my cashflow.

Does this method mean I need cash reserves?  You bet it does.  Does it mean that I am sort of self-insuring?  Yes, I think it does.  But because of my experience with the insurance industry, this is the way I choose to run my business.

Can I do this all the time?  No.  Some lenders require full replacement cost and lower deductibles.  Therefore, I have to carry what they dictate.  That being said, don’t just take my word for it.  Be sure to check with your lender before changing your coverage and also be sure to discuss your needs with your trusted insurance agent.

Again, insurance to me is to protect against catastrophic loss.  I am not looking to score a big payout.  Instead, I just want everyone else out of the picture so I can move on.

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About Author

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

31 Comments

  1. Agreed Kevin.
    I have never made a claim due to fear of being dropped as high risk. Since I am in Detroit, it is tough to find an underwriter with reasonable rates. Insurances are in business to make money not to loose money. Basically, I need liability insurance more than the replacement cost.
    Thanks for the post.

    • Kevin Perk

      Thank you Kay.

      Let’s face it, insurance companies make their money in one of two ways. Collecting premiums and denying claims. I would rather they collect premiums than deny my claims when I need them.

      Thanks for reading and commenting,

      Kevin

  2. We just raised our deductibles on 4 properties to 5k. We will save $800 annually for comparable coverage.

    Kevin, I think you made a great analogy in the last post. You don’t use car insurance to change your oil, why would you use home owners insurance for minor repairs.

    Jason

  3. Sara Cunningham on

    Both of your articles have really made me think long and hard. As I told you in your first article, I too have experienced being dropped and had real problems finding an insurer because of claims and the number of properties. I have. All my rates went up 30% this year. I don’t think I will ever make another claim unless the property is totaled. Unfortunately my lender won’t let me raise deductibles on the ones I still owe on. After reading this I am going to change the deductibles on my paid off properties though. Thanks for the information.

    • Kevin Perk

      Christopher,

      It could, or someone could feel that replacement value is worth it. Totally up to the investor. That is what makes real estate so cool. There is no one way to do it.

      Thanks for the read and the comment,

      Kevin

  4. Nice perspective.
    I am fairly insured in many different areas in my personal and businss life. However, I just began to think about self-insuring against flood with a new buy and hold. I live in Charleston, where it is just barely above sea level. The flood insurance quote I received was $1,500. This on top of $2,000 in hazard insurance. I am willing to consider paring down the hazard to less and less so that I can maybe get that cost down to near $1,000. But with the flood, I was thinking maybe just self-insuring. I put the odds of a catastrophic event occurring at maybe 1% a year, so if I hold this place 28 years, which is Plan A, then I could either save $28,000 or use whatever part of that I have accrued to make repairs. I doubt that a category 4 or 5 hurricane will come through here and destroy the house utterly. It’s possible, but it’s only happened once in recent history. So more likely to occur would be flood waters that, due to a strange weather event or an oak branch falling through the roof during a rain storm, soak my wood floors, 1st level drywall, and perhaps some appliances. This feels like about $25-35,000 in damage. If I had to hold the house forever, it would make a certain sense to go ahead and pay and thus stave off the inevitable catastrophe. As with the case of fire or someone injuring themselves, a hazard policy with a high deductible and modest payouts seems better because the chances of something occurring are probably greater than with flooding. Also, at this point, the house is owned free and clear, and though I wanted to cash out refinance, I might just keep it as is, and thus won’t have a bank telling me what to get. Now if I could figure out a way to deal with $5,000 in property taxes per year I’ll be all set :/

  5. I completely agree with this view on insurance. Catastrophe protection and liability coverage is why I buy insurance.

    The minimum deductible my carrier writes is $3,000. In the price range I buy in ($20k-$60k), the difference to upgrade to replacement cost isn’t really that much. Because of this, I always get the RC coverage. But I’m only going to file claims, like you said, if catastrophes happen!
    Awesome article Kevin.

    • Kevin Perk

      Meharn,

      Like I said above, there is no right way to do this business. What works for me will not always work for you. Plus every market (especially for insurance) is different. I am glad you have something that works for you. I can totally see the advantages.

      Thanks for taking the time to write and for the kind words, I do appreciate it,

      Kevin

  6. Several years ago I met a person in CA that had sixteen free and clear SFR all rented and scattered all over town. She had an interesting plan on insurance. She only had liability insurance. Should one of her houses be destroyed she would then sell one of the others to replace the destroyed one.

    As I recall, she saved apx $10K a year on premiums and figured that a total replacement cost of a house to be apx $35K. This area is not known for sever earthquake damage.

    Please comment.

    Regards

    Foster

    • Kevin Perk

      Foster,

      Sounds like a plan I would look into. If I could sell a property quickly to get the funds I needed it might just work. But it could also make me a motivated seller, which may not be so good.

      An idea worth exploring. Thanks for sharing it,

      Kevin

      • Ivan Paxton

        Selling one house to rebuild another sounds like a lot of work for no gain. It would be easier just to sell the damaged house (probably for land value only) and use the time elsewhere. Either way her portfolio would be reduced by one.

  7. Hi Kevin! Another great article. Can you give me your top 5 insurance carriers you use for your rental property? Its such an iffy thing to know who will pay out as needed, but with my deductibles at 5k, Im already there with you on just using it for catastrophic!

    Lisa

    • Kevin Perk

      Lisa,

      I’m not sure there are 5 that exist. :) I use a local broker who shops things around. I will say that once you accumulate several rental units, 5, 10, 20 who knows, you can forget about the major insurance companies. They generally will not even look at you.

      Thanks for the comment,

      Kevin

  8. Funny thing about replacement cost coverage… All my properties are located within 2 miles of the fire dept, no big earthquakes in Ohio, no hurricanes, not in flood areas, etc. I asked my local insurance guy how many total losses they’ve had within city limits since he’s been doing ins. (about 20 yrs). His answer… none. Example- I have a 3,000 sq ft triplex that is worth about $65k, but at around $100/sq ft to replace it’s insured for $300,000 and we already established the odds of total loss are like a million to one in our town. Frustrating to me because I’ll likely never have a total loss. We did have a hail storm that got me 2 free roofs totaling about $20,000, but jumped my rates 15%. Not sure if I’m required to have RC, was told I was but that was several yrs ago. The article makes me think I should revisit this, thank you.
    Dave Tanner

  9. Kevin, Thank you. I had never thought of insurance this way and it is true. My home was burglarized just over a year ago and doubled my homeowners insurance. A few months later a tenant trashed one of my properties, about 20k worth. I didn’t file a claim because two claims in a five month period would be devastating. For me not the insurance company because they would simply find ways to not pay and double my rates again or drop me and all my other properties. I did learn that they can only change your rates at renewal not before. I’m not sure but I think they can drop you when ever they want, with reason. It’s been over 10 years since I filed a claim on a rental.

    With that one I learned that the deductible is for each event, not each claim. I made one claim and expected to pay (deduct) $500. But I paid $2,500.00 in deductibles. I didn’t even know this was possible. The event(s) went something like this: Husband and wife were fighting, Mom screams at the kids to get in the car, NOW and they did. H&W took the argument outside Mom and kids left in the car. Dad took the other car and followed them. Not so bad right? Wrong!

    Husband punched holes in all doors while arguing. Mom screaming for the kids to get in the car. Two of the three kids were playing in the bathtub while it was filling up. Bigger sister grabbed them and went to the car without turning the water off. Mom and kids in the car while husband stood in front of them still yelling. Mom tried to use the car as a… silencer. She charged at him and rammed the car into the garage wall then backed up into the neighbors fence knocking it down and ripping out the chain link fence that hooked to her bumper.

    All this within a matter of a few minutes, I filed one claim. The insurance co saw it differently.
    1) Fist punches in all the doors.
    2) Tub flood; vinyl flooring, sheetrock and paint upstairs and
    3) Soaking wet carpet and pad downstairs with a dripping wet ceiling.
    4) Rammed car into garage wall
    5) Neighbors fence torn down.
    They charged me my $500 deductible for each totaling a $2,500. deductible. They did pay out quite a bit fixing everything. I did learn later that I should have questioned everything and disputed it too. Because of this I have not filed a rental claim since. Exactly what they want. I love your thinking and am strongly considering it.

    Another thing I learned… 4 or 5 years ago I changed insurance companies. Five homes all at one time. I found myself under Insurance inspections of all five homes at the same time. All five homes needed something and all the demands had to be met within 30 days or I’d be cancelled. The demands were everything from cleaning off the roof to painting, replacing the roof to removing trees and more. All these things at one time to be done in 30 days. I changed companies to save $300. per month. Their demands cost me about $10,000. I could do everything but the painting, it was winter. They told me that if didn’t paint the detached garage (which was a home built 12×12 playhouse with a dutch-door and flower pots) they would drop all my properties which were on separate policies. So I painted it, white primer, took the pictures and the rain washed all the paint off. Done and they were happy. Never again will I change all at one time. Move the primary home first, gradually move or leave the rentals.

    Sorry this was so long but I felt it necessary to share. Thank you for your post, you have struck a nerve that has been pinching me for quite a while. Time to take care of it.
    Does your broker insure all your properties with the same company or separate them?
    Lisa

  10. Kevin (and others),
    Using you insurance philosophy, how much would you insure the following property for if you owned it – Two family, could sell for $45k, replacement cost $225k – $250k, cash flow of $7.5k/year (for the past seven years), no mortgage. I am currently way under-insured on this property (not sure I would even get enough to cover clearing the land if I had a significant event). To get replacement coverage would increase the premium by approximately $800/year. To get replacement coverage on all of the properties I currently own would cost an additional $6k/year (60% more than I am presently paying).

    • Kevin Perk

      Larry,

      Would $50,000 clear everything up if disaster struck? And if it did, would you want to rebuild? Could you get a loan at that point to rebuild and would it make sense to do so in terms of income you could generate or potential sales price?

      All things to think about. Hope this helps somewhat. Thanks for reading and commenting,

      Kevin

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