There’s a 90% Chance You Have the Wrong Insurance Policy

by | BiggerPockets.com

I have spent my career advising on insurance options. And for the past 15 years, I have worked exclusively with real estate investors.

Something I have discovered throughout this journey may shock you. Of all my clients, whether they are beginners, experienced investors with high-value assets, or even groups with portfolios in the high millions, only one in 10 have the best insurance policy for their situation!

Can you believe it?

As investors, we do so much research to achieve our goals. We learn how to build pro formas, calculate ROI, and master several other new-to-us skills. But as a whole, we are undereducated when it comes to insurance.

One thing I love about my job is that I can help steer investors toward the best policies for them and provide the information they need to lower their overall insurance costs.

Why Do So Many Investors Get Their Insurance Policy Wrong?

I’ll go ahead and state upfront that it isn’t because anyone’s dumb. In fact, investors tend to be very smart people. But we’re not perfect.

Frankly, most people don’t really want to spend the time to educate themselves about insurance. The very word makes a lot of people recoil—whether it’s a result of bad experiences or a feeling of unnecessary dread.

I get it. My people (insurance agents) don’t always have the best public image. But while we admittedly don’t spend our days rescuing kittens from trees, most of us really want to do good for our clients.

I want to correct our bad image!

So, I’m writing this article to clear up any misconceptions. More importantly, I want to help you determine whether your policy is right for you.

I’ll use plain English, too, with the hope that this information will foster a better understanding of insurance policies by avoiding the dry, miserable tone of most insurance content out there—for both of our sakes.

Here goes.

a couple going over business documents in a living room with an agent

Mistake #1: Assuming Home and Auto Is the Be-All and End-All

New investors are more susceptible to this mistake—and that totally makes sense. Most people’s first encounter with insurance is when they’re seeking out home or auto coverage.

This often leads to the mistake of using a homeowners policy for a rental property, which can spell serious trouble if you don’t live in the rental property or meet the other criteria necessary for the policy to be effective.

But the truth is that you have a wide array of options beyond this choice. A landlord policy is most important for real estate investors.

I’ve spoken before about the essential types of coverage for rental properties. Getting familiar with the basics doesn’t take long and can save you a lot of money in the long run—both in premiums and in the protections you’ll receive.

Related: Which Types of Insurance Coverage Should I Have on My First Rental Property?

Mistake #2: Fear of Commercial Insurance

If you frequent real estate investing forums like I do, you will see tons of conversations about how to avoid commercial insurance, whether you can use your homeowners insurance instead (more on that below), and how many properties you can have before you have to “go commercial.”

All of this panic and fear is completely unnecessary. In fact, the right commercial insurance doesn’t have to be costly.

I understand the reason for all of this hullabaloo though; it’s the many misconceptions around commercial insurance policies. Big-box companies, the type with adorable animal mascots or memorable jingles, will not offer great commercial policies. But often these companies are the ones investors, and in fact most people, are familiar with.

I’m here to tell you that you have alternatives. Commercial insurance from the right provider, set up by the right agent, can even be cheaper than homeowners insurance or other options.

So, how can real estate investors remedy this mistake?

The first step is acknowledging that there is a world beyond the big-box companies. There are groups and providers with experience who cater to investors just like you and can advise you on your best options. Those who operate across state lines will have an especially wide variety of choices that can be tailored to even the most unique situations.

There are also smaller providers who have a great deal of policy options, but if you go this route, you’ll have to do your homework on what (if any) experience they have with real estate investors.

close up of small toy home with hands shielding both sides of it implying insurance coverage

How to Evaluate Whether Your Insurance Policy is Right for You

Fortunately, anyone can figure out whether their insurance policy is truly the best one for them. The process consists of four simple steps. 

Step 1: Determine What You Want the Insurance Company to Cover in the Event of Property Damage

Ask yourself truthfully: if your property were damaged tomorrow, would you want the insurance company to do 100 percent of the work, or would you be willing to do some of the repairs yourself? If you own property out-of-state, you might want them to handle everything. But if you invest locally and possess the skills necessary to make the repairs, you might answer differently.

Step 2: Determine What You’re Willing to Spend Out-of-Pocket

If you had a hard time picking a percentage in Step 1, this should help you out. Decide what you would be willing to spend out-of-pocket for claims of the following amounts:

  • $5,000
  • $10,000
  • $50.000

Write them down; get it on paper.

Related: Investors: Be Smart About Your Property Insurance

Step 3: See How Your Policy Squares Up With What You Really Want

Check to see if your current policy lines up with the ideals you wrote down in the first two steps. If not, see if your insurance agent can help you make the necessary adjustments. If not, it’s time to start looking for a new one.

Step 4: Audit Your Coverages Line by Line

Standard landlord policies may not provide all of the coverages you truly need—unless you ask for them.

As a refresher, the bare minimum you need are:

  • General Liability Coverage
  • Building Coverage
  • Loss of Rents/Business Income Coverage

Here’s the bottom line: anyone can figure out if their insurance policy is right for them, and it only takes an hour or less. This assessment can not only help ensure you have the bare minimum you need but also provide an opportunity to trim the fat if you have excessive coverage. You would be absolutely amazed at the number of real estate investors I see who have coverages on their policy—that they’re paying for—that are completely irrelevant to the property being insured.

So, while auditing line-by-line may not be your idea of a wild Friday night, it can save you thousands. I find it’s well worth the time.

The wrong policy can cost you thousands, either through lack of appropriate coverage or premiums that are far too high for what you actually need. Carve out 30 to 60 minutes and run through these four steps. And of course, you when in doubt, speak to a qualified insurance agent who has experience serving real estate investors.

How confident are you that you have an appropriate insurance policy? Any specific questions for me?

Ask away in the comment section. 

About Author

Jason Bott

Jason Bott specializes in creating insurance programs for Real Estate Investors, currently insuring over 20,000 units in 30 states. He is a shareholder of Robertson Ryan & Associates, the 37th-largest privately-held insurance agency in the U.S. He has assisted everyone from new investors who need to insure their first property to major groups with multi-millions in spending capital--and everyone in between--with their insurance needs. Jason loves sharing his insider info and teaching real estate investors about insurance. He is currently serving as the President of the Independent Insurance Agents of WI. When he's off the clock, Jason loves hanging out with his wife and their four awesome kids.

29 Comments

  1. Christopher Smith

    I’ve had a hard time getting umbrella coverage.

    Either I have too many properties (per Geico where I have my auto), or I must drop and replace my current auto carrier (which I don’t want to do), or drop and replace my rental property carriers (I have more than one since I have rentals in more than one state).

    Its become a bit of a rubik’s cube affair with no obvious good answers.

    • Jason Bott

      Christopher, many investors run into the same issue you have. The BP forum is littered with this complaint.

      The main culprit to this issue is that an Umbrella policy can only go over a Personal policy or a Commercial policy, not a combination of each.

      A commercial policy would solve all of your issues above, IF you have commercial policies on your rentals. From your comments I would bet you have personal policies.

      The fact of the matter is, once you hit between 5-10 units, you have out grown the personal insurance market and need to restructure your over all insurance program. I recommend having your Home, Auto and Personal Umbrella in one grouping, and your REI business in a second grouping.

  2. Frank Boet

    I own a rental condo. The HOA covers the outside of the condo, so my insurance agent suggested that I get an HO6 liability insurance policy. It costs about $575 for the whole year. Is this correct and is an HO6 policy enough coverage?

    • Jason Bott

      Frank, a HO6 is the correct form if you are living in the unit. If you are renting it out, then you would ask for a Rental Dwelling policy.

      The Limit of coverage can be changed up or down on an HO6, so that is a nonissue.

  3. Lear R.

    Hi Jason, every few years I attempt to modify my policies on my single family homes (3), to commercial policies that provide coverage, you’ve described in this article, however I’ve run into two issues, being told my properties aren’t “truly commercial properties, or tepid or non-responsive commercial insurance agents. Also being told that the type of policy I seek is outdated or no longer available. This has come at least twice from The Hartford. Are there sensible and affordable (policies that cost the same or less than what I’m paying now, that meet the criteria you described?)

    • Jason Bott

      Lear, you have a few things going on here.

      1) 99% of commercial insurance brokers are employees and do not get paid commission on policies that have annual premiums of less than $10k- $25k. I believe this is the reason you get little response from them.

      2) Most agents are specialized in the REI space to know which insurance companies are interested in insuring REI.

      As an owner of my agency, I don’t need to worry is a client it too small or not. I can focus on helping investors, no matter what their size. Because of that, I insure many investors who have 2-3 SFR, and those investors are on a commercial policy.

      I’ll drop you a PM to share with you the companies my clients use who have 2-3 SFR.

  4. Rachel Luoto

    Former Commerical Insurance Underwriter: When getting quotes, ask for a few deductible options, an Umbrella option, and an Earthquake option, also known in the industry as DIC (this essentially covers the glaring gaps and exclusions in a standard policy). Always go high with GL/Umbrella, because these limits often include the legal fees and in a drawn-out court battle, small limits can get eaten up with nothing left for the settlement. There’s not a big cost different in $5M and $10M GL, because the risk is so unlikely that the rate is very cheap, however, $10M is gone fast if a tenant needs lifetime medical care.

  5. Dante Pirouz

    You are spot on with this article Jason! I found out that we were overpaying for the wrong insurance when we had our boiler blow and flood 3 units. No water damage coverage at all. I then got a quote on commercial insurance with the coverage I wanted and now we pay around $50/unit/month which is about 50-75% cheaper than we were paying before per unit with Allstate-style policies. The one thing that I don’t love is that the coverage is cheapest only with my husband on the policy which just doesn’t sit well with me…why is my gender/race penalized regardless of my track record/business accumen? Life isn’t always fair I guess!

    • Omar Lopez

      hello I see you operate in Michigan, I’m in Ohio I have a few properties that we had insured . all individually.. here I read that you can have all of them under an umbrella, which sounds more practical to me..
      can you point me to the right direction where to look as I am confused I stopped looking but with tenants I’m feeling vulnerable at this moment ,as we had 2 events 1 was a fire at a property,, luckily it was controlled but nevertheless its costing me out of pocket.. also going thru an eviction so that will be another expense and with vandalism and shady tenants we have to be protected … any help will be appreciated . thanks in advance

    • Jason Bott

      Dante, sorry to hear about the uncovered claim. Unfortunately, it sometimes takes a claim for investors to be able to truly understand what policy they have, and more importantly, what type of policy they want moving forward. Glad you found a better fit.

      In response to your comment about the premium being lower by having your husband on the policy, I have only found that to be the case if you are being quoted a Personal lines policy, which is tied to ones credit score and insurance score. If by his addition it improved the over all underwriting score, then I guess it could make sense. That being said, I have never seen it happen on the thousands of commercial policies we write.

  6. Carlos Varum Jr

    I can admit I was afraid of switching to a commercial insurance policy – I got the same answer as a couple of the others here posting that I had too many properties and needed to switch (I am a BRRRR investor). BUT I kept calling around the local brokers and I eventually found the right “Insurance Guy” that I was able to click with and he ended up getting me the right commercial policy to cover all my properties. It was easy to add new ones as they were stabilized (construction finished and fully rented), and he got me an Umbrella that sat on top with enough coverage that allows me to sleep well at night. During construction I have separate Builders Risk policies with other companies. It appears (and maybe Jason can comment) that the Commercial Policy guys who offer competitive pricing are not ‘risk takers’ and want nothing to do with the construction part of our acquisitions. They want nicely finished, safe, inspected, properties and reward you with a competitive price in return.

    When my Insurance Guy first quoted the Commercial Policy I was shocked by the large number … think about adding up the number that you pay for insurance on all your properties…but when I did the math it was comparable (even cheaper on a couple properties) then what I was paying before.

    I think the problem is a lot people get the “bad” insurance agent experience, where they are your friend, but you have that gut feeling you are being cheated (and you may be). Jason, you seem to be one of the good ones (the Jerry McGuire) that is opening up and informing clients… and for me it took a while and a lot of calling around asking for quotes until I found the right “Insurance Guy” that met my needs and got the right numbers for me. But I still cross check with other insurance companies every once in a while to keep him honest! 😉

    So my advice to the other poster and readers is, keep calling until you find the right “Insurance Guy” that can get you the right Commercial Policy for you!

    • Jason Bott

      Carlos, I couldn’t agree more. You need to find the right agent for your needs and it can be a long road until you find the right match. Personally I love to work with the REI market, but if you want me to just work on your Home, Auto or Health insurance, I wont do it! I hate working on those policies.

      As far as Builders Risk/Construction policies, the insurance markets likes investment properties in 1 of 3 different phases; Rented, Being Rehabbed, Vacant. Very few insurance policies like to have all 3 of those on one policy, but it is possible.

  7. Omar Lopez

    hello I see you operate in Michigan, I’m in Ohio I have a few properties that we had insured . all individually.. here I read that you can have all of them under an umbrella, which sounds more practical to me..
    can you point me to the right direction where to look as I am confused I stopped looking but with tenants I’m feeling vulnerable at this moment ,as we had 2 events 1 was a fire at a property,, luckily it was controlled but nevertheless its costing me out of pocket.. also going thru an eviction so that will be another expense and with vandalism and shady tenants we have to be protected … any help will be appreciated . thanks in advance

  8. Michael Flanigan

    Jason-I currently have a commercial policy for the houses I am currently remodeling to flip. When I went to get financing, they on one of them they said my commercial policy wouldn’t work and that I needed a policy just for that house. Is it typical of lenders to not accept commercial policies?

    Thanks!

    • Jason Bott

      Michael, this has to do with what type of loan you are taking out.

      Keep in mind, I’m not a banker and do not know all of the lingo. But as I understand it, most loans that are for single family homes have a requirement that the insurance be a ‘Home Owners” insurance policy form rather than a Commercial policy form. If the lender does not get the right insurance, they can not resell the loan.

      You would need to get a commercial loan for this not to be an issue, but the terms are going to be unfavorable compared to your personal loan.

  9. Shana Rose

    Thanks so much for the great article!! I have 7 units total, in 2 different old historic type houses in Louisiana. We have a lot of trouble getting any kind of insurance, much less affordable insurance. Many times we are relegated to the state run ins. co. If you are able to give me a quote I would be thrilled.

  10. Bob M.

    I have a commercial policy that max’s out at $1M liability on each of my SFR properties. I have my personal umbrella policy too but which I know won’t cover my rentals. When I asked my insurance broker about a commercial umbrella liability policy in order to get higher liability coverage o. My rentals he quo.ted me a very high number, said it was probably cost prohibitive, and told me $1M was more than enough on each property. This is counter to what I’ve read on many of these forums where people talk about having up to $10M liability coverage on their rentals. Should I look to switch to another broker where I can increase my liability coverage?

    • Jason Bott

      Bob, in looking at my client base who are invested in sfr, 1 out of 5 will carry more than $1M in Liability. There are many different factors to weigh out to determine what your particular Liability limits should be, but at the end of the day, the main factor is if you are comfortable with the limit you have.

      $1M of umbrella coverage should be $400 for 10-20 sfr, so not too expensive.

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