Deductibles for Buy and Hold properties?

Question

I'm a new investor and buying a handful of buildings in a LLC.  I have read that you shouldn't make any claims on insurance unless its catastrophic to keep costs down.  If that is true, it seems better to go with a 5k deductible than 2500k to bring down the cost of insurance.

What do other people choose for deductibles?   I will have replacement cost for a newer building and ACV for older buildings.   Also, do you use the purchase price for ACV or inflate it a bit to cover depreciation in the event of a loss?

Account Closed · Answer

Hi Dana,

Great question! A good rule-of-thumb is to take the minimum claim you would file, double it, and use that as your preferred deductible. If you would never file a $1000 claim, then don’t carry a $500 deductible. If you choose a higher deductible, the premium savings generated will more than offset the difference.

As to your last question, you would not insure to the purchase price of the property. ACV and RC minimum values are set by the carries an insurance agency works with. Replacement is determined at the time of the loss, depreciation is then subtracted from the replacement cost value. It does not really do you any good to over-insure, because they will base the depreciation off of the replacement cost at the time of the loss and not the amount you have insured the property for.

Hope this helps.

Timothy W. · Answer

Generally I agree with you but there is a case to be made for ACV on new construction when you're not going to be calculating much on an age-based depreciation rate.  I don't know what the cost savings would be on premium but I'd explore the possibility for the first year or so then probably convert at about year 3-5 when I know the paint and drywall depreciation figures are starting to get significant.  It would all depend on whether or not the premium savings were worth the risk.  Then again, you an I read the policy which I've found to be a rarity in this business.

Russell Naylor · Answer

I always advise against ACV typically just because I'd personally always rather recover full replacement cost. But that's just my take on it.

Timothy W. · Answer

An ACV policy on an older property would probably not be wise, however as your property was recently rehabbed you may be able to do that if you're willing to bear the risk of the depreciation on any structural members that were not changed out during the rehab.  Be aware though that many structural portions of a house can have much lower depreciation rates, i.e. steel will depreciate much more slowly than paint.

If you have an 80% coinsurance agreement, make sure you base the policy limits on replacement value, not market value.  One thing on the broad form policy you may really not like is you have to have damaged by a named peril in order to have coverage.  If something happens and it's not on that list of things in the policy, it's not covered.  Burden of proof is on you to show what the cause is.  The nice thing about a special form is anything can happen to the structure and unless it's on a list of named exclusions from coverage, you have coverage.  Burden of proof is on the insurance carrier at that point if they want to deny coverage.

Dana Yobst · Answer

@Russell Naylor, it sounds like you are advising against ACV for an older property?   I do actually have an option for replacement cost too since the property was just completely rehabbed.  The requires 80% co-insurance where as the ACV does not. Also to note, the ACV is broad coverage and I could get special coverage for the replacement policy.

Dana Yobst · Answer

Thanks all!  This is super-helpful!

Russell Naylor · Answer

Over insuring will not offset the depreciation of ACV settlement on a claim. The depreciation is based on age and condition of the repairs to be made, the insurance limits on a home have nothing to do with it.

I am an insurance adjuster and I just want to make sure you understand the process of ACV, especially since you're doing this on your older homes. If you have a claim on older materials to be repaired or replaced, the depreciation can be up to 75% for most carriers. So you could end up paying your deductible plus up to 75% of those costs. I'm not trying to make a plug on this, so do what you'd like. But I get customer's sometimes who do not understand this and they end up much more out of pocket than they were expecting.

If you have any questions about repairs, claims, etc. Let me know! I won't be able to answer most specific policy info as I only work for one company and they are all different, but I can at least give some guidance on the processes.

Deductibles for Buy and Hold properties?

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