{"id":145792,"date":"2022-11-30T10:48:34","date_gmt":"2022-11-30T17:48:34","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=145792"},"modified":"2023-08-09T10:27:38","modified_gmt":"2023-08-09T16:27:38","slug":"how-to-read-your-property-insurance-policy","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/how-to-read-your-property-insurance-policy","title":{"rendered":"How to Read Your Property Insurance Policy"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC1475621870&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">Purchasing adequate landlord or <a href=\"https:\/\/get.biggerpockets.com\/nreig\/\" target=\"_blank\" rel=\"noreferrer noopener\">property insurance<\/a> for your investment property is vital if you want to protect your income and maintain long-term financial security. However, the coverage to which you\u2019re entitled will depend on the terms and conditions of your policy. As such, you must read every part of a property insurance policy form before proceeding with a deal.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Ideally, we recommend comparing insurance deals alongside someone with insurance expertise to help you make an informed decision. While some insurance providers may appear to offer irresistibly cheap rates, they may not deliver the full coverage you need to protect yourself from all eventualities. A financial expert or insurance agent will quickly spot any holes in an insurance policy and ensure you don\u2019t lose money unnecessarily. Of course, it\u2019s also a good idea to learn as much as possible about the insurance landscape to ensure you\u2019re well-equipped to engage with insurers and make decisions that work for you.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What Do Insurance Policies Include?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">One of the first things to understand about insurance policies is that they come with seven key components, including:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><span data-preserver-spaces=\"true\">Declarations:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">Declarations appear on the first page(s) of your policy and specify the name of the person to whom the insurance applies, the relevant policy address, a summary of the policy, policy limits, and other vital points of information.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Insuring agreements:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;This part of the policy outlines who, what, and how the insurance provider is insuring the client.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Definitions:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">The definitions page clarifies any key industry terms used in the policy.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Coverages:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;This section states the amount of risk or liability protected under the insurance policy, including which items or parts of the property the policy covers.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Exclusions:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">This section is designed to clarify any questions about coverages by explicitly stating what the policy does not protect.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Conditions:<\/span><\/strong><span data-preserver-spaces=\"true\">&nbsp;The conditions of your policy lay out the circumstances under which coverages apply.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Endorsements:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">Also known as an addendum, an endorsement refers to an amendment to a policy document.<\/span><\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Key Questions To Ask About Your Property Insurance Policy&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Before you purchase an insurance policy form, you must ask yourself a few vital questions. These include:&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. <span data-preserver-spaces=\"true\">Is it a named peril or an open peril policy?<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\"><a href=\"https:\/\/www.amfam.com\/resources\/articles\/understanding-insurance\/named-perils-policy\" target=\"_blank\" rel=\"noreferrer noopener\">Named peril policies<\/a> only cover events explicitly listed in the policy form. These types of policies can be split into two categories \u2013 basic and broad. Basic insurance policies cover the following named perils:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Fire<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Lightning<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Storms or hail<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Explosions<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Smoke damage<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Damage caused by aircraft or vehicles<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Riots or civil unrest<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Vandalism or malicious damage<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Leaks caused by sprinklers<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Sinkhole collapse&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Volcanic activity<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">Broad-named perils are tailored specifically for property and include additional protection areas on top of the basic form policies, including:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Burglary<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Fallen objects<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Ice or snow<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Frozen plumbing<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Accidental water damage<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Electricity<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\"><a href=\"https:\/\/www.lemonade.com\/homeowners\/explained\/open-perils\/\" target=\"_blank\" rel=\"noreferrer noopener\">Open peril policies<\/a>, on the other hand, offer cover for losses linked to perils that are not explicitly ruled out by the policy. Such policies are often more expensive than named peril coverage, although they may provide better protection. Basic vs. broad coverages will vary from carrier to carrier.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. <span data-preserver-spaces=\"true\">Does your policy offer replacement cost or actual cash value coverage?<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">If your insurer provides replacement cost value (RCV) for damaged items, they\u2019ll reimburse you for the amount needed to replace the item without taking depreciation into account. If they offer actual cash value (ACV), on the other hand, you\u2019ll receive the cost of replacing your property minus the amount of money by which it has depreciated due to wear and tear. Broadly speaking, RCV is considered a superior form of insurance for property owners. Each policy addresses <a href=\"https:\/\/www.usnews.com\/insurance\/homeowners-insurance\/actual-cash-value-vs-replacement-cost\" target=\"_blank\" rel=\"noreferrer noopener\">ACV or RCV<\/a> for dwelling coverage separately from personal property, i.e., if a customer wants RCV on both the dwelling and contents, they need to check both. They are addressed separately in the policy.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">3. Are flood and earthquake coverage excluded?<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Damage caused by floods and earthquakes is often excluded from insurance policy forms. If your landlord or property insurance doesn\u2019t cover floods or earthquakes, you\u2019ll need to take out a separate policy, particularly if you live in an area prone to flooding or seismic activity. You may also be able to add flood and earthquake coverage as endorsements on your existing policy, although this will depend on your insurance carrier\u2019s policies.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">4. <span data-preserver-spaces=\"true\">Are your defense costs outside the limit of liability?<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Insurance claims sometimes come with a range of defense costs, including lawyer fees, costs of expert witnesses, court costs, and fees associated with filing legal papers. Why? Well, insurance claims are not always clear-cut, and you may need to demonstrate that you are not liable for the damages in question. Defense costs can quickly add up, potentially threatening your reimbursements. This vulnerability is known as liability loss exposure \u2013 in other words, the possibility a person or business will lose money due to a claim made against them asserting their legal responsibilities for certain damages.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If your defense costs are inside the limit of liability, they\u2019ll be the first expenses deducted from your policy limit when you want to make a claim. If your defense costs are outside the limit of liability, then your insurer offers separate limits or even unlimited funds for defense costs. In such a case, your defense expenses will not erode the sum total of your final settlement. Obviously, you should try to obtain coverage that provides defense costs outside the limit of liability. You may wish to consider taking out liability insurance, which transfers the burden of financial losses due to liability claims from the insured and onto the insurance provider.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">5. <span data-preserver-spaces=\"true\">What kind of water damage does your policy cover?<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Water damage represents one of the most common (and most costly) insurance claims by property owners. However, identifying and claiming for water damage is a little more complex than you might expect. While your policy may cover one type of water damage, it may not cover another type. Most property and homeowners\u2019 insurance policies cover the following types of water damage:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><span data-preserver-spaces=\"true\">Water damage after a fire:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">Most insurers will cover damage caused by the water used to extinguish flames, such as water from a hose or sprinkler system.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Accidental leaks:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">These include leaks from appliances or faulty plumbing.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Burst pipes:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">Insurers typically cover burst pipes caused by very cold weather. However, they will not cover bursts caused by neglect of the property and insufficient heating.&nbsp;<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Roof leaks:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">Your policy is likely to cover water damage caused by severe storms or fallen trees. However, you\u2019ll need to be proactive about fixing the roof quickly, or you won\u2019t receive coverage for further water damage.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Ice dams:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">You may be eligible to claim for ice dams that form in your gutter quickly and damage your home. However, this claim may be void if the damage is related to poor maintenance.<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">As mentioned, a standard property insurance package is very unlikely to cover flood damage, including damage from tsunamis, storm surges, hurricanes, very heavy rain, and rivers that have burst their banks. If you live in a flood-prone area, you\u2019ll need specialized flood insurance. Other types of water damage your policy is unlikely to cover include:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><span data-preserver-spaces=\"true\">Water damage caused by leaks through a foundation.<\/span><\/strong><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Cost of broken appliances:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">While you may receive compensation for water damage caused by a faulty washing machine, you cannot claim the cost of the washing machine itself.<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Water damage caused by negligence:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">Failure to address plumbing issues when they arise will harm your claim.&nbsp;<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Water damage caused by earthquakes.<\/span><\/strong><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Water damage related to backed-up sewers or drains:&nbsp;<\/span><\/strong><span data-preserver-spaces=\"true\">If you\u2019re worried about this problem, you may need to purchase tailored coverage. This is typically available via endorsement to the standard landlord policy and varies by carrier.&nbsp;<\/span><\/li>\n\n\n\n<li><strong><span data-preserver-spaces=\"true\">Water damage caused by a sump pump fault.&nbsp;<\/span><\/strong><\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">6. <span data-preserver-spaces=\"true\">Will your insurer change your roof coverage when it reaches a certain age?<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Some insurance providers alter roof coverage when the roof in question reaches a certain age, changing the reimbursement terms from replacement cost value to actual cash value. Whether or not this applies to your policy will depend on your state. For example, Texan insurers tend to be stricter about insuring older roofs at replacement cost, given the frequent and severe hail and thunderstorm activity in the state.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In fact, it\u2019s worth considering the location of a property and the age of its roof before making an investment. Roof costs could represent a significant cause of profit losses if you\u2019re not careful and fail to pay attention to your insurance exclusion. Other exclusions include cosmetic damage that doesn\u2019t affect the roof\u2019s functionality.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Bottom Line: Always Read Your Policy!<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">While reading insurance policy forms may not sound like a thrilling activity, it\u2019s a vital part of protecting your investment property. Without adequate coverage, you could be hit with a huge bill that jeopardizes your finances and even puts your tenants at risk.<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_f32d439089448829bd74d3f0bbe455ee\" class=\"visibility-group alignwide  hidden\">\n        \n\n<div id=\"hero-block_4545114782f6b536e624bf671d84d52b\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-1\/2 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Find the Right Agent, Close the Best Deal<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:18px\">Step #1: Use Agent Finder to match with top <em><strong>investor-friendly<\/strong><\/em> real estate agents to help you find, analyze, and close your next deal.<\/p>\n\n\n\n<div id=button-custom-event-block_9de9011321a6cdb99087d68cb2a9b503 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/agent\/match\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Agent Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/how-to-read-your-property-insurance-policy&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Find an Agent<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/Marketplace-Blog-Blocks-Agent-v3.png\" alt=\"investor friendly real estate agent\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/how-to-read-your-property-insurance-policy&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Purchasing adequate landlord or property insurance for your investment property is vital if you want to protect your income and maintain long-term financial security. However, the coverage to which you\u2019re [&hellip;]<\/p>\n","protected":false},"author":613636,"featured_media":145793,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5524,7119],"tags":[],"class_list":["post-145792","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-for-beginners","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/145792","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613636"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=145792"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/145792\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/145793"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=145792"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=145792"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=145792"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}