Insurance Question

[Brian Campbell]

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.

Thanks!

[Eric Belgau]

@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.