Insurance help: Who will insure for Appraised Value?

Question

Hello Everyone,

Closing date is arriving quickly for my first investment property.  A 3 unit in Massachusetts. I've called many insurance companies and a couple agents.  Everyone I talk to wants to quote me for full replacement value of the dwelling, and they all come up with approximately the same value, 650k.  The purchase price is 226k.  All my quotes have been 3k+ a year because of this.  I would like to insure the dwelling for appraised purchase price of 226k.

Did I make a mistake estimating insurance cost and I need to pay 3k a year?  When I ask about insuring for appraised value I get "No we don't do that" or "you really should go with replacement cost" and the call ends quickly.

It sounds like plenty of people insure their properties for less than full replacement cost, how do they do that?  What should I be saying?  Who should I be talking to?  In short what am I doing wrong?

Also, I live in Connecticut, the property is in Massachusetts, my primary residence insurance company will not insure in Mass.

Thank you.

Terrell Garren · Answer

As you build your portfolio and cash flow, you can accept more risk by self ensuring.  I select the highest possible deductible and Actual Cash Value of around 80% of the replacement costs.

Sam Shueh · Answer

All insurance companies use replacement value say a hurricane washed your R3 away. Assuming the place is 3000 sf total and replacement cost is $225/sf=$675K. That is labor, material, and warranty. I came up with very similar quotes without knowing its size.  If you want $80/sf in my area it does not even cover labor cost.

Ryan Kissane · Answer

This company caters to real estate investors.

You can get a replacement cost policy that is based strictly on a dollar amount value per Sq ft.

You pay monthly not by the year. Super easy to work with. All your properties are on one bill and you can add or subtract properties as needed.

I pay around $150 per month for each of my 3/4 family properties in Connecticut.

https://nreig.com/

Jason Bott · Answer

Gary, what your asking for is an Agreed Value policy.  This is where you and the insurance company agree on a value for the building that is usually much less than the Replacement Cost.

The standard Home and Auto companies will not be a good fit in this situation.  This is more common on the Commercial side of the business and a strategy I use with many portfolios where the market value is under $50 per sq/ft.

A few key things to consider when insuring for less than Replacement (some have been referenced above),

1)  If you insure for $250k, have a $400k loss, and the city will not let you tear the building down, do you have a viable solution to avoid coming up with the $150k out of pocket?

2)  In regards to insurance premium, insurance rates are not always the same between an Agreed Value policy and a Replacement Cost policy.  Insuring for $650k @ Replacement Cost might be $3k in premium, while an Agreed Value Policy for $250k might be $2,300.  That's $400k more risk for $700 in annual premium savings.

3)  An Actual Cash Value policy can insure for less than Replacement Cost, but the insurance company will almost always include a Co-insurance clause. The Co-insurance clause can penalize you for being under insured.   If you are insuring for 40% of the Building value, they will most likely only pay 40% of the claim.

Wayne Brooks · Answer

One reason they won’t do this is simple;

If you had a fire or other incident that caused repair costs of say $200k....that would be 90% of the insured value if insured for $226k and about 30% of the $650k.....while your rates are based on the insured value....not  good math for an insurance company.

Russell Brazil · Answer

Maybe @Charlie Mcpherson will chime in and correct me if Im wrong....but I think insurance rates are set by the state in Massachusetts. Thats why a number of companies dont touch Mass.

Christopher Phillips · Answer

@Gary Chlastawa

It's normally replacement value. That is the amount of coverage you need if the property burns down or is hit by another type of natural disaster and needs to be repaired back to market value.

The value is based on the type of construction like brick versus wood framed.

Saving yourself a few dollars will hurt when there's a big issue.

Insurance help: Who will insure for Appraised Value?

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