How Is My Insurance Policy Compared To Yours?

Question

My local independent agent has carried my policies for 4+ years on these properties. How do these rates compare, should I shop around before renewing?

Property A: Just cash out refinanced this bungalow last spring. Appraised at $48,000, needs a roof and rents for $650/mo. The policy is $734 annually.

Property B: Paid $42,000 with 20% down and have about $8,000 self-done improvements. As an appraiser, I'd say it's market value is around $90,000. Rent is $850/mo. The policy is $1033 annually.

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Policy copy attached**

George Skidis · Answer

My Background: 30 years as an insurance claims adjuster. 15 as an insurance agent.

Most insurance companies use the same policies that are prepared by the Insurance Services Organization ( ISO ) and then approved by each state's department of insurance. These same companies can add bells and whistles to make their policy more attractive at the sale. Sort of like the sizzle of a hot steak on a metal platter. It doesn't make the steak taste any better, just adds the sense of hearing to the meal.

Your rates are based on several factors; location, value, your personal credit score, your personal and professional loss history, loss history of the property to be insured, cost to rebuild based upon area of the country and so much more.

Your loss history and credit score can impact the cost more than the location.

If you want to rebuild then by all means get Replacement cost coverage.

If you want to tear it down and buy another one across the street, find a company that will sell you a stated value policy like Foremost. They will pay you the policy limit for a total loss and DO NOT enforce a co-insurance clause or depreciation to reduce the settlement.

Insurance companies reduce their claim payments to you by applying a deductible, applying depreciation, and enforcing a co-insurance clause. If your current agent cannot explain those things to you, find a new agent who can.

Kevin Hoag · Answer

@Matt Lowery I think it is always wise to shop you insurance around every 5-7years or at least have your agent review your policies to see if he can do anything. Insurance companies are always coming out with newer rate structures and reconstruction cost calculators. In Cleveland you are looking at 100k-150k in dwelling coverage for $500-800 depending on the number of units(1-4) the zip code, age of home, individuals credit score and claim history. I have scene rates both lower and higher but the average is about $700 an year.

Mike H. · Answer

Its really hard to say whether your insurance is priced right. There are two key factors in my mind for insurance pricing. 1) Area the home is in. The lesser the area, the higher the rates.  2) Assuming you are insuring the house for replacement costs, how much are you insuring it for?

My areas are here in Illinois and I'm paying, on average about 500/year for houses worth about 150k. Thats with replacement coverage and lost rents (6 mos). Although its typically only 75 or 80 cents of the square footage - i.e. if 1500 sq ft house, then my max insurance is 120k.  Seeing your numbers though, it does make me think you may be paying too much. Again, area is a big factor though so its impossible to tell.

But have you considered lowering your coverage amount so you can lower your payments?

Last year I switched to a broker. My premiums dropped by roughly 20 to 25%. In addition, the policy they put me in is a commercial policy to where all my properties share some pieces of the policy.

The most interesting example is that if a storm in a town comes through and knocks out 3 roofs, I only have to pay my deductible once and I get all three roofs replaced. Whereas before, I would have had to pay my deductible 3 times (once for each roof).

As an fyi, maybe I should clarify what I'm referring to when I see setting coverage amount. For me, I have no intent on using insurance as a lottery ticket. So if I have a complete loss, I will not be getting enough money back from insurance to rebuild the house. I will only be getting back enough to pay off the loan and then having a chunk of cash (10k to say 40k) on top of that depending on the replacement cost numbers.

However, if I have a partial loss, then the replacement coverage will pay 100% of the repairs minus my deductible - as opposed to not having replacement coverage where if I have a partial loss (say a kitchen fire), they will depreciate the damaged items and only give me what they are worth as of the loss. So if you figure flooring is only good for 7 years and its 3.5 years old, then they will only reimburse me for half the value of the carpet and I'd have to come out of pocket for the other half.

Typically, I'm required to cover my homes at about 75 or 80 dollars a square foot in order to get replacement coverage. And I always want to be at least 10k over the loan amount.

So lets say I have a 2,000 sq ft home, then my coverage amount is typically about 150k. Thats enough to where I can get replacement coverage so I don't have to worry about them depreciating any items in a partial loss but its enough to pay off a loan and still have some money left over to clean up the lot and hopefully pocket a little more.

But ultimately, I see no reason to pay for coverage amount to the full value of the home. The odds of a full loss are extremely low. If it happens, I'm still going to do ok. But by only covering 75 or 80%, I can save 20 to 25% on my premiums. I have 66 houses and that adds up quick.

I figured I saved about $2,000 to 2,500 a month in premiums by doing it this way.

Even in a worst case scenario of a full loss, i'm able to pay off the loan, clean up the lot, and still pocket a little (plus have a lot that I'll own free and clear). In a partial loss, they'll pay 100% of the rehab minus my deductible.

To me, thats what insurance should do. Its worth it to me to save 2k a month or more on my premiums while risking some windfall should a complete loss occur.

Jason Bott · Answer

@Brett Coryell the coverage you reference is standard coverage.  The only item that is not standard, is the property enhancement, which is obviously an improvement.

2 metrics to pay attention to.

Cost per sq/ft -

with a building @ 7600 sq/ft, and an insured value of $1.11M, your rebuild cost is $146 a sq/ft.  You can probably get an insurance carrier to insure for $100-$110 per sq/ft

Insurance rate per $100 of building value -

Take the insurance premium of $4,124 divide by building value, $1,110,00= $0.37 rate.

The rate is competitive, but you may want to see if you can get the same rate applied to a building cost of the purchase price, removing 80% co - insurance or $760,000.

@ $760,000 X rate of $0.37 your annual premium would be $2,812.

Hope this helps.

Lumi Ispas · Answer

@Matt Lowery , the rental prices depend on a lot of things primarily condition of the property, zip code, and your credit score. IF you want to lower it, raising your deductible is the easiest way. Just make sure you are comfortable with that number.

Also, make sure you let the insurance agent know of any improvements to the property, as the rates will drop when you have a new roof, new appliances, plumbing, electric, etc.

Brett Coryell · Answer

I just got a quote today for my first REI purchase.  It's an 8-unit on the southeast side of Chicago valued at $525k.  The finished area is 7600 sf and there is another 5000 sf of unfinished basement area.  The policy came in at $4124.

I let the broker pick what he thought was reasonable as a starting point and it looks like $2M in General Aggregate, 2M in Products and Completed Operations, $1M each occurrence, $1M personal and advertising injury, $500k damage to rented premises, $10k medical expenses, a line that says $1.11M as the limit on the building, 80% co-insurance, $5k wind deductible, $5k AOP deductible, and a property enhancement endorsement.

Clearly I need to have him walk me through this, but are there any good self-study resources AND any good rules of thumb I could apply to see whether this is reasonable?  Just seeing that the insurable value of my $525k building is $1.11M is an eye-opener.

Thanks,

Brett

Johnny Hastings · Answer

If you're working with an insurance agent, you're probably doing as good as you're going to. I've been awed at the cost of insurance on my smaller rentals also.

I have a 3 unit, built in the eary 1900s, all brick, very sound structure, I paid $99K for it; the premium is $1535.88 annually.

I have a 2 unit, built int he 80s, in immaculate condition, I paid $129K for it; the annual premium is: $1518.72.

Seems like you're not terribly far off that. Perhaps it's not the structure parts of the coverage that makes up the bulk of the premium? I can't read that attachment too well.

It's weird how much the insurance on larger structures comes down in price fast. I have a 12 unit, paid $420K, it's in great condition; annual premium is $2667. Go figure that one!

If you're concerned about it, call another local insurance agent. Tell them who you're working with, what you're paying, and they'll tell you if it's worth your time (and theirs) to have them shop it around or not.

How Is My Insurance Policy Compared To Yours?

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