Insurance Question

6 Replies

I have 5 rental properties and 6 houses I've sold on contract. My insurance guy has talked me into carrying replacement value insurance. Most of my monthly ins. cost average to be around $45-$50/month for most properties. I do have a 3 unit building on a main st. in a small town and ins. for that property is $114/month.

My insurance guy has always used the hail damage situation.....replacement coverage would get me new roofs while cash value policies would mean a big out of pocket expense.

He also said most companies won't insure for cash value.

I'd like to get some advice on this from you experienced investors.


Hmm...I would think the only thing that might require replacement cost insurance would be the mortgage company, if your properties are not owned free & clear, since they have a vested interest.  However, I've never seen an insurance company refuse to write a policy for cash value.  They would certainly prefer to write it for replacement cost, because they get a bigger premium.  Assuming you are not encumbered by an insurance requirement from a lender, I would call some other insurance companies.  It sounds to me like someone is fleecing you.

@Brian Campbell  

Let's say you have a home that would cost $100k to replace, and it burns, and it's a total loss.

We all know a replacement cost policy will pay you what it costs to replace it - or $100k.  You have to meet the coinsurance requirement, which is usually 80%.  So as long as you have the place insured for $80k, your insurance company will pay out the $100k.  There's usually a package of additional coverages and endorsements the company throws in to make the presentation look impressive (compelling you to buy) and to make the policy look thick (dissuading you from reading it).  There's additional value in those endorsements, varying from carrier to carrier.  The carrier also has the requirement to replace "with like kind or quality."  If that house has hand-crafted polished brass bathtub fixtures, you're entitled to hand-crafted polished brass bathtub fixtures.

An Actual Cash Value policy pays you the "cash value" of whatever is lost.  The limit on the policy is determined with a calculation that, for the sake of simplicity, is replacement cost minus depreciation.  On a $100k home, an ACV policy might have a limit of, say $65k.  There are throw-in endorsements on an ACV policy as well, but they usually aren't as generous as they are on a Replacement Cost policy.  If the house has a hand-crafted polished brass bathtub fixture, you'll get the depreciated value.  Depending on the individual and company adjusting the loss, that could end up being very little.  Because of that, ACV payouts rarely come anywhere near the limit of the insurance.

Some carriers have indeed stopped writing ACV policies.  It's not just that they get a fatter premium check for Replacement Cost.  It's also because ACV payouts are often startlingly low, resulting in more contentious settlement processes.  Most of the captives that are still writing ACV policies don't write particularly good ones.  To get a quality ACV policy, you should go through a good brokerage.

Thanks for the responses but I'm still not sure what way to go. I just want to be able to pay my loan off if there is a total loss or be able to repair the home if there is significant damage to the home. IF there is a considerable savings for an ACV policy, AND other investors with more experience and knowledge than me (won't take much) recommend changing to ACV policies, I would definitely strongly consider changing. Otherwise, I'll stay with my current replacement polices.

@Brian Campbell  

Fully understood.  You might do well to specify investors with experience settling an ACV claim.  It is certainly true that there's a savings to be had.

If you have a loan, it's probably a moot point.  Most lenders require the building to be insured for replacement cost, largely because an ACV policy probably won't pay enough to cover the note if there's a total loss.  If there's significant damage, you can expect to come out of pocket to a significant degree.  20-year siding that's ten years old would likely be depreciated by 50%, and new siding would be bought with today's prices.

Although I'm an insurance guy, I am personally a huge fan of public adjusters.  If you have one in your contacts list (every landlord should), you might do well to present this question to him or her.  A public adjuster will have exactly the experience you're looking for, having adjusted claims on both ACV and Replacement Cost bases.

There were changes several years ago. Previously, carriers depreciated the materials and the labor component. Insurance carriers no longer can depreciate labor; only materials.

On an ACV policy, materials depreciation may vary according to type, age and use. Tile floors for example may last 100 years while carpeting and drapes are good for about ten on average or a roof, anywhere from 10 years (roll roofing) to composition 20 -25 or metal roofs 50 years or more and tile roofs even longer. (hence your ability as a landlord to depreciate these things on your taxes).

Yes, ACV policies are less and you can weigh your equity v. principal owed v. age of the house materials to determine if an ACV policy will pay off the lender's interest in the event of a large or total loss but this may leave you with little or nothing. In other words it would be a penny wise and pound foolish move.

On primary residential policies, I would not worry about being insured to value (co insurance requirement). These are on commercial policies and older residential dwelling named perils DP policies not commonly sold anymore but are not a concern on the more commonly used special form HO policies of today. You do want to make sure however that the HO policy contains a guaranteed replacement cost coverage and at least 25% code upgrade coverage. Most will build in at least a 10% code upgrade but for a small amount more, you can have the higher percentage.

Thanks for the responses! For now, I'll stay with what I have.