Replacement Cost Insurance

7 Replies

I am buying my second investment property. It's an old school building that's been converted to a 14 unit apartment building. The property has a positive cash flow. But, the previous owner was seriously under-insured according to my independent agent. I'm buying it for $265,000. But, the insurance company says the replacement cost is $2M and wants me to insure it for 80% of that. Otherwise, I'm considered co-insurance, and they will prorate any claims. I had a similar problem on my first property, which is a 5-plex, but on a much smaller scale.

Anyone have any thoughts - is this expected or am I getting ripped off. It's a big hit on my NOI.



I run everything through Arcana Insurance.  I just call them and they take care of it.  I cannot speak to your specific situation.  You might want to call them and see what they can do.  I am not affiliated with them in any way.  I'm just a customer.  

@Jeff Thoman  I have been going through this as of late!

ACV (actual cash value) policies do not pertain to modern day costs. For example one building I sunk a lot of cash in & it generates great $, I had an ACV policy... Come accident time, they put a "less depreciation" on my claim and didn't give me the money, "old materials". 

If s fire came thru, I would have been under insured and say the building was worth 100k to rebuild, I only would have gotten 30k.... All my "equity" would have been destroyed. Equity plays a huge part; also if it's a good cash flowing asset. 

RC (Repkacement cost) Insurance is always more...but weigh the benefits. In the event of s tragedy, you will get a check to re-build your structure & or take a settlement check. It'll be for a much greater amount than your ACV policy's!

I have a few apt buildings... When I took them over the previous owner had an ACV policy....he was badly under insured and was tentatively risking his equity... Let alone his cash flowing asset.. I paid almost 80% more (5k) on the annual premium but in the event of a tragedy, I'm getting paid in the full amount & I will have the option to rebuild. 

You only need insurance when something occurs... Trust me, you will feel good when your fully covered and don't have to worry about your money making assets disappearing! 

I have been back and for on this issue as I am trying to save money to Increase my profits, however I think insurance isn't the place to take shortcuts. Depending on the assets size, class & value, that will help determine your risk vs reward approach. 

@Jeff Thoman  give me some details and info on your agents policy.... I just got a few properties signed with new companies (apts / motels)

I can compare values and coverages too see if you're falls in line.. Also what's your deductible?

Make sure your policy includes "loss of income"... We had to file a claim last month & they wrote us a check for the loss of income on that particular asset (from the time of accident, till time of re-open)

@Jeff Thoman  what's the premium difference in the ACV plan vs RC plan?

These insurance companies are bloating up values to essentially "over insure" to cover their behinds during an accident. Most agents want you to get taken care off when things happen, so by over insuring, you'll get paid. 

2m although seems excessive!!!! 

@Nik S.  Thanks for the information. The details of the deal are:

Purchase Price: $265,000
Sq. Footage: 22,000
RCV: 22,000 * $100 (Figure used by ins. co. for construction) = $2,200,000 * .80 %  
           = $1,760,00 RCV
Premium: $9,521/Year
Deductible: $10,000

ACV (which the current owner has): $1,000,000 coverage
Deductible: $10,000
Premium: $5,592/yr

It just seems like a crazy over valuation, but I don't want to pay for losses over my deductible. It seems like there is something wrong with the system. If I had a complete loss, I would never build such a huge building to get 14 units.

I go through this every time I mess with my insurance.  House Value $100,000.  Insure it for $225,000.  I'm like tell 5 year old to whatever they do do not play with the matches that were "accidentally" left out.  Never heard of anyone actually collecting the $225,000

@Kirk R.    I had the same situation with my first property. It's a much more modern building and doesn't have the wasted space. It's a 5-plex, and I bought it for $100K. The insurance company insisted that I insure it for $225K. That seemed bad at the time. Now, I know it can be worse. It's something I'll keep in mind for future properties -- make sure the square footage is used effectively. Otherwise, I'm paying a lot of insurance for dead space. The property will still have a healthy cash flow, but not as good as I'd hoped. 

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