Is insurance just for the loan?

Question

So my natural bent would be to go as cheap as possible to simply satisfy the loan requirements. I guess I am a skeptic that thinks between the deductible and the claim fighting that I won't ever get any benefit from the insurance itself. Instead I tend to focus on my CapEx reserves and savings. Am I missing something here? I am just now moving beyond one property in California to a duplex in Ohio. Looking for insurance right now and just want to make sure I am not missing something. Thanks.

David Zheng · Answer

you need to shop around more for insurance if you are getting those kinds of quotes. I never thought I needed insurance but a pipe flooded one of my rentals and It cost $30k. I ended up paying $2k out of the pocket. honestly it is a 50k place, just pay it off quicker and remove the insurance at your own risk. Like you said. CAPEX should cover some of it if you budget well. but like others have mentioned if financed, You WILL have to get insurance in all situations

Samantha Klein · Answer

If you don't keep insurance on the property if its mortgaged, the bank will get insurance for you and you won't have a choice in the matter. Not having insurance is just not smart. The only time you could get away with not having it is if you have many, many units and can self-insure but you'd still want a large liability policy.

Joe Splitrock · Answer

Of course with insurance and warranties, the companies offering them pay out way less than they take in. They pay huge commissions to their sales people and bank high profits. I get insurance with the highest deductible options. I do insure all my properties, even if they don't have a bank loan. That is so in a catastrophic situation I don't lose everything. I did once place a claim for $9000 for a kitchen fire, but I have paid way more than that over the years.

Jason Bott · Answer

@Ken Virzi Insurance policies will list which Perils are covered.  Wind, hail, fire, lightning, water damage, ect.  There needs to be an "Occurrence" that the policy needs to respond to.

No policy covers wear and tear.

Example - If a strong wind storm damages the roof, and water starts leaking into the building from that damage, the damaged roof and water damage would be covered.

If there is no storm, but the roof has deteriorated to the point there is a hole in the roof, there is no coverage for the roof or the water damage.

the first example has an Occurrence, the wind storm.  the second example does not have an Occurrence.

Insuring a $50k property for $500,000 is not a good strategy.  there are insurance companies who will insure for a much lower value with the understanding that you have invested $50k into the building.

If this is in OH, there are many companies who will insure a lower limit without you taking on massive risk.

Alexander Felice · Answer

Insurance pays for legitimate claims, you'll certainly here the horror stories but the overwhelming majority of claims pay out. Especially if they are large claims. People who get in trouble are the ones who make claims for $2-3K damages, which you won't have a problem with.

Quotes should have hazard and liability combined, so it's not just property insurance.

and as david said, if you have a mortgage, you have to insure it. We can discuss the relative merits and needs for days but you have to provide insurance so it's sort of moot.

Also, make sure they know you want a landlord policy! This will be cheaper and maybe that's where some price difference is coming from. Get multiple quotes, the costs can range dramatically. Also, call and get new quotes every single year. Complacency is EXPENSIVE when it comes to insurance. I just switched to state farm and my cost basis dropped 30%!!!!

David Zheng · Answer

Yeah I think you're weary of insurance company cause you hear a lot of bad experiences which is more vocal and shared than success ones. I have statefarm for my rentals and they are great. The claim was easy and communication was great.

Ken Virzi · Answer

@David Zheng OK this is interesting. So when your pipe burst the insurance actually paid? I guess I am assuming that if I had a pipe burst they would say my plumbing was too old (which it is, will rehab the place when the current tenants move out). But you are saying insurance covered it. This is exactly the kind of information I am curious about. This surprises me. So was it easy to make the claim?

Ken Virzi · Answer

@Alexander Felice I will have a mortgage so I need it. I am trying to think it all through and I like to attack the argument from all sides. Sorry if I am coming off wrong it is just how I evaluate things, I have not ever needed insurance in my life for car or house etc so I was actually looking for insight that I do not have. Rental properties are a new thing for me.

Are you saying the liability portion of your insurance costs you $500 a year or the entire premium is $500 and includes $180k in property insurance?  I just got a quote and it seemed crazy high so I am trying to figure out if I am missing something or if I should cut it down tremendously.

Alexander Felice · Answer

you came here asking what the insurance is for if not just to replace property damage. Now it feels like you're trying to convince me you don't need it.

Insurance is literally "IN CASE SHIT HAPPENS" if the negative event where likely, they wouldn't even sell you insurance.

People in Houston didn't have flood insurance because just as you said "not sure there is much of a risk"

my house was flooded in NC during hurricane Matthew last year, not in a flood zone because "not sure there is much of a risk"

If there is no mortgage, I don't believe you need insurance legally, whether or not you get it is 100% up to you. My insurance for $180K in landlord policy replacement value and liability coverage is ~$500/year, so to me it's worth it. If it's not worth it then bail on it, but you're talking as if it has no value, or it's a scam, which simply isn't true.

Is insurance just for the loan?

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