Rental Real Eayaye Insurance coverage question

[Steven Ludwig]

First post, Hi All. I’m working on re-writing some insurance policies I realized don’t have coverage I need for some rental real estate. Is there a preferred carrier I should be working with? Duplex in Ann Arbor and the single family house is in San Diego. Thanks! 

[Stuart Udis]

@Drew Sygit Actual Cash Value vs. Replacement Cost is far more nuanced than it’s often presented, especially in lower-cost real estate markets.

In many cases, even after a total loss, carriers do not simply pay full replacement cost. Policies often pay ACV first and reimburse the balance only if the structure is actually rebuilt, and even then reimbursement is typically based on like kind and not identical materials usually resulting in lower quality materials.

With older or non-standard construction, particularly solid stone or masonry buildings, it is very rare that a policy is written in a way that results in the structure being rebuilt using the same materials or methods. More cost-effective modern substitutes are the norm.

Because of this, replacement cost coverage should be evaluated on a property-by-property basis. In some cases it makes sense to insure for less than full theoretical replacement cost when the likelihood of a true total loss is low and/ or the carrier realistically will not be replacing the building with like-kind materials in the same manner. 

Real example: I recently placed coverage on a 4,000 SF four-unit mixed-use stone building dating to the mid-1800s. The property is worth roughly $875K including land, but the carrier priced replacement cost at $1.2M. Given the building was fully gut-renovated, detached, and constructed with 18-inch stone walls, the risk of total loss is slim, and even if it occurred the building would not be rebuilt the same way. Insuring at $1.2M would have been unnecessary premium expense, so I insured below that level.

Insurance should be structured around realistic loss scenarios with an understanding of how a carrier will treat a claim. Otherwise, unnecessary premium expenses will be spent for coverage that will never become relevant even if a claim were to arise. Meanwhile carriers have no problem charging extra for the "coverage".