When the Property Changes but the Insurance Policy Doesn't

Question

I was reading a BiggerPockets interview this morning with Darren Nix from Steadily, and one point really stood out to me. He described insurance policies as basically being written for a snapshot in time.

The more I thought about it, the more I think that explains a lot of the coverage problems investors run into.

Investment properties rarely stay static for very long. A long-term rental becomes an STR. A property sits vacant longer than expected. Someone starts a renovation. A hot tub gets added. An owner switches from using a property manager to self-managing. Meanwhile the insurance policy often stays exactly the same as it was the day it was originally written.

I suspect a lot of claim denials and coverage disputes start there. Not necessarily because the owner was trying to hide something, but because the property slowly evolved while the policy never really evolved with it.

It made me wonder how many investors actually revisit their insurance proactively versus only looking at it when renewal comes around or after something goes wrong.

Has anyone here had a claim situation where the carrier focused heavily on how the property was being used at the time of the loss versus how it was originally insured?

Tony Wilcox · Answer

This is a common theme unfortunately, not just for portfolio's but also for primary homeowners policies. The carrier will also always look at how the property is being used at the time of loss. The agent can only do so much if they are not informed, however at our agency we do reach out every year at renewal to see if there are any updates.

It's important for investors to not overlook informing your agent of any updates to the home's occupancy or use. As in most industries, communication has to be a priority!

Richard F. · Answer

Yet another major issue arises when an HOA/condo property Owner does not review an Insurance Summary for the project Master Policy annually. Many projects have jacked up the Deductible dramatically over the past few years. If your Owner policy is not adjusted...guess who pays out of pocket!

Owen Rosen · Answer

Not just investors, you'd be surprised how many people neglect to inform insurance when they move out of a house, etc.

The overall point is a very good one!

Adam Tafel · Answer

My broker is incredibly proactive with my portfolio, we reassess about every year to make sure I have the correct coverage and I’m not overpaying. His name is Kermit Graber, if anyone would like an introduction I’m happy to make an intro.

Michael Norris · Answer

The biggest issue on claims I see is when the agent is not updated when a landlord or STR property becomes vacant (more than 30 days) or a vacant/rehab policy converts to being an occupied dwelling.

For the people in the back of the room: Most vacant policies do NOT cover theft from a vacant property and most occupied policies have a clause where coverage is significantly reduced when a property is vacant past 30 days. With the price of copper the scrap metal thieves are out in force so make sure you are getting your vacant properties secured!!

Half the time on the vacant > occupied situations we find out from the lender when the owner does a re-fi and the lender wants replacement cost coverage etc that isn't on a vacant policy.

And then there are clients with actual vacant properties trying to re-fi and the lender thinks it's an occupied property when in fact it is still being rehabbed and the coverage just isn't up to what the lender wants.

Also lately there are some new lenders I am seeing clients go to who want us to insure 100+ year old homes in "ok" condition like they are new builds. You want to insure a property that was purchased and rehabbed for $100k all in for $550,000 full RCV coverage - ok that's $3800 per year to meet the lenders insurance requirements.

When the Property Changes but the Insurance Policy Doesn't

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