Help! Is my property over-insured?

11 Replies

Good evening everyone,I

It may sound silly but I need help determining if my first investment property is over-insured. I have a 3/2 SFR I purchased in 6/2014 for $98,500 in Houston. I estimate the property to be worth approx. $105,000 after my improvements. As part of the closing process I contacted the insurance agent who did the policy for my primary residence and just paid for the policy. I have read through the forums and see people quoting $600 premiums for their properties and I'm not sure if property insurance is more expensive in Houston or if my policy is not the proper type.

Does this seem like overkill and too expensive of a policy?

It seems too high, I would shop around for better rates, discounts etc..

Hi Denise!

First of all, good place to pitch this question... I have a couple of thoughts coming from an agent's perspective.  This is a mini-book, so sorry about that...

1. The cost of insurance in Houston can be more costly because you are in an area that is at a higher risk for hurricanes.  If you are including coverage for this peril, the cost is going to be higher.  This policy does include coverage for windstorm, hurricane, and hail.  The cost doesn't seem excessively high to me, but I would like to see what others from Houston have to say too...

2. You could choose a higher deductible if you wanted to lower the cost, but that is up to you. You don't want a deductible that you can't "afford" in the event of a loss, but if you are going to make most of the smaller repairs without leaning on insurance (which I would advise to keep your rate more steady), you may be able to take on a higher deductible, say $2500 or $5000, for example.  Some of our investors even have a $10K deductible.  

3. It appears that you may only have Basic Form coverage by the looks of your declarations.  Basic Form may be fine or you may want to choose a policy format, like Special Form, that offers coverage for additional perils such as Theft or Water Damage.  Just be sure that you know what is -and isn't- covered. 

Side note: Damage caused by water driven by wind in the event of a hurricane may be covered by the Windstorm peril, but that would differ from say, a burst pipe causing Water Damage.

4. You still may even want to purchase a Flood policy as rising waters during a storm event due to the overflow of rivers, etc. is not covered under the Windstorm or Water Damage perils.  Confusing I know, but Flood is always covered separately.

5. It appears that your liability limits are pretty low at $100,000.  I might advise increasing that to $500K or $1 Million as the cost difference should be negligible and if you do have a liability claim where someone is injured, the costs can escalate pretty quickly depending upon the severity of the injury.  In our Program we have a standard $1 Mil. per Occurrence/$2 Mil. Gen. Aggregate and then investors can add more if they would like.

6. As for the amount of property coverage (your current $120K), that really depends upon the investment and if you would plan to rebuild or not.  It can also depend upon how old the items are in the house..i.e. did you completely rehab from the studs up or did you do just cosmetic work... whether you have an Actual Cash Value or Replacement Cost policy, the first check you would receive would be based on the depreciated value of the items damaged.  If the items damaged are brand new, your aren't going to see much, if any subtracted from the settlement for depreciation.  On the other hand, if items damaged are older, you may see more subtracted as they have less "usable life".  With a Replacement Cost policy, you would be able to recoup that depreciation once your repairs were complete, but with an Actual Cash Value policy, the payment stops at that first check. I would check with your agent to see what type of coverage you have as ACV and RC can be very significant in a claims settlement.

7. An additional note on property coverage.  For some investors, they are simply wanting to make sure the amount they invested is covered if there is a loss... so they could bulldoze the rest, clear the lot and purchase something over 1 block.  They may decide to insure for their total invested capital only.  However, for those doing longer-term holds that have a high-return investment, they would want to insure the property for the amount it would take to rebuild it.  In that case, the market value and the insurance value could be quite different...Right now the cost to rebuild is typically higher than market value for example...

8. If you are simply doing cosmetic work to prepare your property to be rented, you should be ok with the type of policy you have as "tenant-occupied", as it should give you a little time to do "rent-ready" types of items like paint and carpet, etc. If you are doing true renovations like full bathrooms, kitchen and/or any structural work, you really want a builder's risk policy. Sometimes agents will slide renovation activities under the "rent-ready" category and that can put the insured at risk for having no coverage at all in the event of a claim as they are not insured under the correct type of policy.  Again, check with your agent to be sure that you have adequate coverage for the type of work you are doing.

Ok, so again, sorry for the book there, but there is so much to consider with insurance.  After you learn the ropes, it won't seem so complicated too... Hope that helps and I hope others chime in with their advice and feedback on the cost as well!

Cheers, BreAnn

@Denise Mayo-Walley

That seems pretty reasonable to me. I'm paying $1200 for my homeowner's policy with a replacement value of $150,000.

Remember that insurance is very high in Houston compared to other parts of the country. When I moved here in 2002, I had been paying $700 a year for my home in KC. After I bought here, I couldn't even find insurance because all the insurance companies were freaking out after Allison. When I found a policy it was $1800 a year.

@Denise Mayo-Walley

I too think the price is right. To get closer to $600, you will need to raise your deductible, maybe to 2%. My insurance would give me another $200 claim history discount. Also the age of the house matters -- $600 for 1970 house, but $760 for 1980 house. I don't know why it cost more to cover newer homes.

Maybe other agents can weigh in on this, but to John's point about newer homes being more expensive to insure... to me it seems pretty simple.  The insurance co. is going to have to pay out more to replace an item that is damaged on a newer home because not as much depreciation will be applied to the settlement to reduce it.

That stated, some co.'s actually have a surcharge for older homes, as they may be at a greater risk for certain types of perils... the great mystery of insurance right?

I will say that there are programs out there for investors that don't "discriminate" based on the age of the property, but base the rate simply on the combination of deductible, coverage amount, occupancy status, and coverage type (Basic or Special Form)...

Thank you so much everyone for your responses. I truly appreciate you all taking time to respond.

@BreAnn Stephenson - thank you for sharing your expertise with me. I truly had no idea that my liability coverage was on the low side. I am in the process of buying my second investment property and I  intend on having higher liability coverage on that one. I will also change the coverage on the policy I shared.

@Fred Heller - thank you for sharing how much you pay. At least I know I haven't been paying too much!

This is why I LOVE Bigger Pockets!!!  So many people are willing to share.

Your premium is fair for Houston.   I agree that you need to increase your liability limits.  $500K in the min I would be comfortable with but the premium difference is minimal to upgrade that to $1M. 

"Maybe other agents can weigh in on this, but to John's point about newer homes being more expensive to insure... to me it seems pretty simple. The insurance co. is going to have to pay out more to replace an item that is damaged on a newer home because not as much depreciation will be applied to the settlement to reduce it."  

I'll weigh in on this as an adjuster.  New or old, repairs cost the same.  In fact some old finishes like plaster cost more than new finishes like drywall.  The only time the new property would cost "more" to repair is on an ACV policy.  A newer property is also less likely to have code enforcement upgrade exposure.  There has to be some other factor at play here.

Originally posted by @Tim W. :

I'll weigh in on this as an adjuster.  New or old, repairs cost the same.  In fact some old finishes like plaster cost more than new finishes like drywall.  The only time the new property would cost "more" to repair is on an ACV policy.  A newer property is also less likely to have code enforcement upgrade exposure.  There has to be some other factor at play here.

 Thanks for this Tim and good points about the finishes.  I have a question though... why would it cost more for the ins. co. to repair something on an ACV policy?  Wouldn't the ins. co. likely be paying out less because the depreciation they apply cannot be recuperated by the insured... unlike a Replacement Cost policy form where the insured could come back and recoup part or all of the withheld depreciation?  Thus, an ACV policy's premium would be lower than RC?  Or am I just misunderstanding what you meant there?

Thanks in advance, BreAnn

Yeah I put the cost "more" in quotes because the ACV only exposure on a new property is generally higher than an old one because there's less depreciation.