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.