Picking insurance from 2 options for my first rental property
Rental Property Investor · Denver, CO · Member since 2020 · 41 posts · 28 votes
I received 2 quotes for a 1929 built SFR in Indianapolis IN. It is a 1100 sq ft 3 bed 1.5 bath with detached garage, backyard, and an unfinished basement.
The difference in the premium for both options is significant, so I am seeking opinion on if it is work going with the higher cost option.
Travelers: $820/year
Auto-Owners: $1400/year
Hey @Kunal Lakhwani! I'm a broker in the Indianapolis area and represent Travelers. The dwelling limits are determined by a replacement cost estimator ran on each company's underwriting system. Auto-Owners is estimating it will cost $163k to replace, and Travelers is estimating it will cost $144k. If you think Travelers dwelling limit is low, you can insure it for more, but you are not guaranteed it if the house completely burns down.
In a worst case scenario, if the house burns down, a claims adjuster and/or a contractor is going to write a complete itemized estimate to rebuild the house with like, kind, and quality materials. If the adjuster or contractor's estimate is $150k, Travelers is only going to pay $144k, and Auto-Owners is only going to pay $150k. In this scenario, you didn't pay for enough insurance with Travelers, and you overpaid for insurance with Auto-Owners. There are other factors you may want to take into consideration though depending on your investment strategy and goals. In a worst case scenario where the house burns down, would you actually rebuild the home or would you pay off your loan and take your equity and any remainder of the settlement to go purchase another rental property? Do you plan on filing claims for $1k to $5k worth of covered damages, or do you have a relationship with a property management company or handyman that can make those cost-effective repairs, and you only plan on filing claims for large losses like $10k+ worth of damages?
If you would rebuild and/or plan on filing small claims, you might think about a lower deductible like $1,000 and a higher dwelling limit to be safe or add an endorsement Travelers offers called "Extended Replacement Cost," which adds an additional 25% to the dwelling limit in the event this something like this happens.
If you would not rebuild and you would just pay off the loan, take your equity, and invest elsewhere or you don't plan on filing small loss claims and only large loss claims, you may think about a higher deductible like $2,500 or $5,000 (will likely save you another $100 to $300 in annual premium) and insuring it for as close as the insurance company will allow you to get to the purchase price of the property (so at a minimum, your investment is protected).
The detached structures limit is just preset to 10% of the dwelling limit. Detached structures all consists of fences, sheds, decks, light poles, pools, etc. If the property has any of those and not just a detached garage, you may consider if you have enough coverage for detached structures.
Loss of rents is provided if the house becomes uninhabitable due to a covered loss (fire, tornado, etc.) and so your tenant is forced to move out. It is typically paid out monthly in the amount of 1/12 of the limit. I'd recommend taking whatever your total monthly income is for the property and times that by 12 to determine your coverage amount. If you charge $1,000 for rent, $1,000 x 12 = $12,000. If your house became uninhabitable, the adjuster would likely ask for a copy of your lease and bank statements to verify the rental income. The insurance company is not going to pay you a penny more than what you normally bring in for rental income. If you only bring in $1,000 a month, they aren't going to give you $2,000 just because you paid for higher limits.
In regards to the quotes, besides the nearly $20k difference in replacement cost for the dwelling, the coverages are pretty similar. The only difference is the Utility Line coverage on Auto-Owners. How much are you willing to pay to have coverage for your utility lines (main sewer line, drain lines, gas lines, electrical lines, etc.)?
Feel free to connect if I can be of any help.
@Kunal Lakhwani I see no real advantage to the higher priced insurance carrier. It is Travelers for me.
@Kunal Lakhwani Travelers 100%
@Kunal Lakhwaniundefined
Hey @Kunal Lakhwani! I'm a broker in the Indianapolis area and represent Travelers. The dwelling limits are determined by a replacement cost estimator ran on each company's underwriting system. Auto-Owners is estimating it will cost $163k to replace, and Travelers is estimating it will cost $144k. If you think Travelers dwelling limit is low, you can insure it for more, but you are not guaranteed it if the house completely burns down.
In a worst case scenario, if the house burns down, a claims adjuster and/or a contractor is going to write a complete itemized estimate to rebuild the house with like, kind, and quality materials. If the adjuster or contractor's estimate is $150k, Travelers is only going to pay $144k, and Auto-Owners is only going to pay $150k. In this scenario, you didn't pay for enough insurance with Travelers, and you overpaid for insurance with Auto-Owners. There are other factors you may want to take into consideration though depending on your investment strategy and goals. In a worst case scenario where the house burns down, would you actually rebuild the home or would you pay off your loan and take your equity and any remainder of the settlement to go purchase another rental property? Do you plan on filing claims for $1k to $5k worth of covered damages, or do you have a relationship with a property management company or handyman that can make those cost-effective repairs, and you only plan on filing claims for large losses like $10k+ worth of damages?
If you would rebuild and/or plan on filing small claims, you might think about a lower deductible like $1,000 and a higher dwelling limit to be safe or add an endorsement Travelers offers called "Extended Replacement Cost," which adds an additional 25% to the dwelling limit in the event this something like this happens.
If you would not rebuild and you would just pay off the loan, take your equity, and invest elsewhere or you don't plan on filing small loss claims and only large loss claims, you may think about a higher deductible like $2,500 or $5,000 (will likely save you another $100 to $300 in annual premium) and insuring it for as close as the insurance company will allow you to get to the purchase price of the property (so at a minimum, your investment is protected).
The detached structures limit is just preset to 10% of the dwelling limit. Detached structures all consists of fences, sheds, decks, light poles, pools, etc. If the property has any of those and not just a detached garage, you may consider if you have enough coverage for detached structures.
Loss of rents is provided if the house becomes uninhabitable due to a covered loss (fire, tornado, etc.) and so your tenant is forced to move out. It is typically paid out monthly in the amount of 1/12 of the limit. I'd recommend taking whatever your total monthly income is for the property and times that by 12 to determine your coverage amount. If you charge $1,000 for rent, $1,000 x 12 = $12,000. If your house became uninhabitable, the adjuster would likely ask for a copy of your lease and bank statements to verify the rental income. The insurance company is not going to pay you a penny more than what you normally bring in for rental income. If you only bring in $1,000 a month, they aren't going to give you $2,000 just because you paid for higher limits.
In regards to the quotes, besides the nearly $20k difference in replacement cost for the dwelling, the coverages are pretty similar. The only difference is the Utility Line coverage on Auto-Owners. How much are you willing to pay to have coverage for your utility lines (main sewer line, drain lines, gas lines, electrical lines, etc.)?
Feel free to connect if I can be of any help.
@Kunal Lakhwani I'd strongly recommend a higher deductible. Any claim you make (even if it is denied) will likely result in raised rates and possibly cause you to be dropped by your insurer. You really only want to use insurance for a major problem. As @Lindel Smith said in his fantastic and thorough description above, a higher deductible will save you tons of money. If you don't make any claims for a long time, you'll certainly save that extra deductible payment up and have it in the bank. I'm assuming this is DP3 coverage from your description. If it is only DP1, then you may not have the replacement coverage you think you do as the payout for a total replacement might be tied to market value and not actual replacement value. Lindel can correct me if I have that wrong.
@Lindel Smith Great explanation. I am curious if the 80% co-insurance is possibly an issue here.
One other thing to take into consideration is the actual Insurance policy terms. This is not a comment about either Travelers or Auto-Owners but I have had Shelter in the past and switched when I had a claim as I found the policy, which had the same dollar limits as the other quote but much cheaper, turned out to have much fewer actually items covered. I also have had fantastic service and great experience with Auto-Owners in the past. ( not all my personal experiences reflected above we are also Property Managers )
@Ric Ernst In Indiana, Travelers version of a DP3 is an endorsement you add to their policy called "Special Form coverage". Their standard Landlord Home policy comes with Broad Form coverage or what would be known as a DP2, and it also comes with Replacement Cost on the dwelling. I don't believe Travelers even offers an "Actual Cash Value" endorsement. I couldn't tell without looking at the quote, but I'd imagine those quotes are for Special Form coverage with Replacement Cost loss settlement or what would be known as DP3. It costs next to nothing to add the "Special Form coverage" endorsement to a Travelers landlord policy, which essentially just upgrades it from DP2 to DP3.
@Harvey Levin Those dwelling limits for both Travelers and Auto-Owners are likely 100% of their underwriting system's estimated replacement cost calculation for the property. I know with Travelers on their personal line policies, such as homeowners and landlord home, their underwriting system won't allow me to bind a policy unless the dwelling is insured for 100% of the estimated replacement cost. Also, I used to work in Shelter's Indianapolis claims department. I hope I wasn't the adjuster that had to be the bad news bear. That is why I'm a broker/agent now! lol It is much easier to educate clients on the front end as the agent instead of after a claim as the adjuster.
Thank you for such great, detailed responses everyone!
Update: I am going with Travellers with $2500 deductible.
Final policy:
Travelers: $710/year