What Insurance Policies Should Be Considered by a REI?

Question

I am new and wanting to build on a good foundation for purchasing 3-20 unit multifamily buy and hold- please chime in if you have helpful thoughts.  Please list the insurance policies / types of insurance I should consider and pros/cons & purposes.  Here's my list so far:

1) Property Insurance

2) Renters Insurance (require my tenants to have)

3) Professional Insurance for my legal entity (will be an LLC, LP, etc)

4) Umbrella Policy

Grant Shipman · Answer

@Mark Brick hmmm that challenges my thoughts from before, but that's how I learn.  The link below from State Farm website says that part of renters insurance is liability which covers property the policy holder (the tenant) damages that does not belong to the tenant (it gives the example of throwing a ball through a glass window).  Have you see different play out in real life or different renters policies that do not provide liability?

https://www.allstate.com/tools-and-resources/rente...

@John Mocker as a professional in the insurance industry, can you provide any clarity here for me?

Grant Shipman · Answer

Wow- I had that wrong.  Thanks for your help, and I like your style @Mark Brick

Grant Shipman · Answer

@John Mocker what a helpful response!  My current company is only me as a buy & hold 3-20 unit multifamily investor.  I will form different partnerships (LP's or LLC most likely) with one other individual to purchase each property.  All these properties will be managed by a 3rd party property management (not me).  In this case, I understand your post as saying that I should consider the following insurance products:

1) Liability & Property (either a "PI Dwelling Fire Policy" or "BOP".  I should research these products in regard to Loss of Rents / Business Income; Contents (appliances in the units); Loss of Assessment;

2) Professional Liability: you recommend b/c I would be taking on silent investors as partners correct?

3) Umbrella Policy: do you recommend this or do you recommend it based off certain factors?

4) Consider Flood or other insurance hail, tornado, etc.

5) Consider Builders Risk IF I am renovating a property before renting it out.

And none of the following insurance products b/c I do not have anyone on the payroll nor manage the properties myself: workers comp, business auto, equipment.

I'll PM you like you asked to ask you more specifics about the Fire Policy vs the BOP.

@Mark Brick Thanks for chiming in.  If one of your tenants does not get renters insurance, what happens insurance-wise if that tenant leaves the faucet on in the sink and it floods the apartment and ruins the floors?

Mark Brick · Answer

Yes, in the State Farm, baseball through glass example, in the end, if that tenant doesn't have insurance when they break the neighbors window, they have to pay for the window out of pocket.  You're not responsible for your tenant's actions.  And to be clear, this would not cover the building that they are renting (walls, windows, floors, etc)  But all of this stuff about renter's insurance shouldn't effect you at all, unless,

A: The renters are coming up $15 short on rent each month

or

B: They don't have it and a pipe burst/fire happens and they can't pay rent at at all.

I know a lot of landlords and apartment communities (especially older ones with older plumbing) that require renter's insurance.  I choose to give them basic facts and let them choose for themselves.

John Mocker · Answer

Grant,

The First policy you will need is a package of the Liability & Property.  Depending on the number of units it could be:

1-4 units (could be a personal insurance Dwelling Fire Policy)

5+ units (or could be used on 1-4 also.   Commercial Package or Business Owners policy aka BOP)

There are other coverage that you should look into and that would normally be part of the above policies such as:

- Loss of Rents / Business Income

- Contents (for your contents such as stoves, refridgerators, etc. in the units)

- Loss Assessment if it is a condo unit or part of HOA

- ordinance & law if the bldg laws would require rebuilding with different methods that may cost more

There are other coverage items that may be recommended depending on the property

You would need Professional Liability if you are providing services to others (ie. as a realtor or consultant).  If you are just buying and holding for yourself with no other investors you may not need it.

The Umbrella policy is designed to give additional liability coverage that kicks in when the limits of the underlying policy(ies) are exhausted.  Depending on what policies you have there will be minimum limits you must have before the Umbrella would start.  Most Umbrella's over the Package or BOP policies would require that they have $1,000,000 limits.

Flood Insurace, even if you are not in a flood zone, should be looked at.  Thousands of homes in TX, LA, & FL are dealing with flood damage right now that are not in flood zones.

Workers Compensation coverage if you have anyone on payroll, any subcontractors that do not have their own coverage, or if you have any Statutory employees (most common would be realtors).

Business Auto may be needed depending on the ownership, size, type, and use of the vehicles used to service the properties.

Equipment coverage may be needed if you have Tools and Equipment you use to maintain the property such as Tractors, Bobcats, power washers, generators, etc.

Builders Risk policy could be needed if you are renovating a property before renting it out.

Hope this helps with some possible policies you may need.   Feel free to PM me if you want a better explaination of any of the policies.

Mark Brick · Answer

@Grant Shipman, this theoretical tenant's having or lack of renter's insurance wouldn't affect your situation of them flooding the apartment. You would use your home owners insurance policy to cover some of the damage and decide as a landlord whether to bill the tenant for the damages. Their renter's policy only covers their personal belongings.

What Insurance Policies Should Be Considered by a REI?

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