Multi-Family Insurance Question - Replacement cost/Repair Cost

5 Replies

Hi all, 

I hope all is well! Thank you for taking the time to review my post. I have an insurance related question. Please see below:

Property type: 3 Unit

Location: Kansas City, KS

Year built: 1911 (older property)

Facts: When I closed on the property, the lender required that I obtain guaranteed replacement cost insurance. This was very expensive...roughly $3k per year. Anyhow, several months have gone by and now the loan was resold to a new loan servicer. I reviewed the insurance requirements for the new servicer and it appears that they will allow a repair cost policy. 

Question: I quoted out a repair cost policy, and it is approx $1500 per year (nearly half the cost). That said, the insurance agent stressed to me that the repair cost is different than replacement and it is paid out as "cash value." In other words, if I were to file a claim, then the insurance company would assess the work, see what the repair cost would be, then depreciate the value to come up with the "cash value," and then may me that portion. 

Is this typical? Would you recommend keeping the better policy or do most people use the repair cost policy that pays cash value? Pros vs cons? 

Any input would be greatly appreciated. This would reduce my expenses by $125 per month which would be great, however, I don't know if the policy has adequate coverage. 

Thanks a bunch !

Hi Luis,

I personally never recommend ACV (Actual Cash Value) coverage.  Replacement cost is the way to go.  However, some companies will write "Functional Replacement Cost" for older homes.  This basically means that if there were ever to be a covered claim, they would replace older build items with today's "like kind and quality".  This allows for the replacement cost estimate to be a lot less and therefore a lower dwelling coverage and lower premium.

The only time I will write an ACV policy is if the client specifically asks for it and it's a lower value home.  For instance, I will occasionally get the investor who paid 30K cash for a property and really just cares about having the liability coverage on the policy.

@Luis Silva

I own property in KCMO and I use REI guard (very happy, tried a lot of companies for quotes). They let you set what you want to get back if the property is lost. I have it set so I'll get all the money back that I have sunk plus the mortgage on the property. To build what I have would cost almost double what I have in it so the insurance is very expensive. I figure if I lose the property to fire/disaster then I'll just walk away and sell the land. In the meantime I won't pay a fortune for insurance. Thats how I think about it - in case that is helpful.

@Luis Silva Switching from RC (Replacement Cost) to an ACV (actual cash value) policy on an 1911 building, will greatly increase your risk.

If you have a $40,000 kitchen fire, the RC will give you $40,000.  the ACV policy could depreciate it down to $20,000 or more depending on how old everything was.  If your kitchen is new, then maybe they only deprecate 10%-20% of the claim payout.

If your comfortable with this risk for the premium savings, then make the change.  If it makes you uneasy, then stay with the RC policy, but go out and shop it as $3,000 is a bunch of premium for a single location.