To Insure or Not to Insure?

21 Replies

Hello fellow BP friends,

I am frustrated with my property insurance and was hoping someone could guide me in the right direction.  I bought 8 out of state rental properties within the last year and have insurance on all of them.  I had two frozen pipes that caused substantial damage this last month and neither were covered under my insurance.  Since I paid cash for these properties, I'm not required to have insurance.  I'm considering letting it expire when it's up for renewal and just getting a liability policy or umbrella policy.  I've been taught to always insure but if it's costly and doesn't cover claims, what is the point?  Does anyone have advice on this?  Thank you.

@Linda Pasas I'm really sorry to hear about your situation, sadly that happens way too often in my opinion. Insurance is a sucky thing and I hate it. It seems like you feel the exact same way I do about it, the insurance company only helps themselves not you. I would try and find a good insurance broker in the market you bought in. For many people that I've spoken to, that's been the solution for them. Being cheap is very expensive and it's best to really do some digging and due diligence on what insurance you find to be honest and is a quality company even if they cost more. It's very risky doing things without it, but if it is like you say you are right there is no point in wasting that money if you've are paying for the damage, claim or whatever else anyways.

You’ll want insurance but I’d find a new broker and get a new policy.

@Linda Pasas ,

I understand your frustration.  However, I do not recommend self insuring.  You may be able to cover the cost of the burst pipes and the repairs that go along with it.  But what if a property burns down completely?  Do you really want to be responsible for paying the cost of cleaning up that mess?  Just demolishing what's left and cleaning up the lot can cost thousands of dollars.  And even if you do have the cash to cover that, do you really want to?

I agree with the two previous comments - you should find an independent agent who can get you a policy that makes sense and explains what's covered and what's not.

Hey @Linda Pasas I am sorry to hear about your losses. I had this happen myself on a rehab I purchased, sellers turned off the gas before we closed. I'm not sure what type of policy you have but freezing pipes is almost never covered. Maintaining heat in the property is a condition of any insurance policy. I say almost because if you have an actual claim that causes you to loose power and you cannot heat your property then it would be covered. That being said, in most cases this is a property management/owner mistake. I live in Cleveland and we know that space heaters are a must own item as a landlord. It sucks because you are out of state and your PM company should have got some sort of heat source into those properties. 

A suggestion about your insurance is to buy the better policy it will be the cheapest $2-300 extra dollars when something major happens. Insurance is not meant for small claims once you reach a certain size portfolio. You can increase all of your deductibles to 5k or 10k and with 8 properties the savings will be enough to justify going from 1k to 5k deductible if you save $100-200+ per property and maybe have a claim happen once every 3-5 years. If your willing to take on more risk do not get rid of the insurance policy just greatly increase your deductible that way your still covered for the large claims. 

Linda,

Regardless of whether or not you want to insure the Property exposure of the rentals, you will want to have Liability coverage.   Often, the rates for just Liabity are a substantial portion of what the full Dwelling Fire Policy would cost so you may find that its not saving as much as you would expect.  Rather than taking the coverage for the Buildings off all together you could increase the deductible to save some money and still keep the coverage for the big losses.

I echo the others who advised you to shop the coverage.  The Dwelling Fire Policies (I am assuming that is what you are insuring the 8 properties under) have different levels of coverage.  Here in CT/NY area, we have Dwelling Fire policies that could cover frozen pipe bursting.   You may be able to get suggestions for Independent Agents who know the rental property market from Bigger Pockets or from your Atty or Accountant

This is horrible to hear, but unfortunately, insurance doesn't cover that kind of thing.  You should never go without insurance.  What a costly mistake that could be.  However, you should know what IS covered under the policy so that you can adjust your expectations.

@Cara Lonsdale insurance absolutely covers that type of thing. Cut-rate coverage does not.

@Linda Pasas

What did your broker say when you asked why it as not covered. Was it a choice you made? That’s easily coverable.

Originally posted by @Derek Lacy :

Cara Lonsdale insurance absolutely covers that type of thing. Cut-rate coverage does not.

 For clarification, are you saying that pipes that burst due to the negligence of a tenant and/or owner who doesn't winterize before turning down/off the thermostat to leave the premises are covered under your policies?  What happens if the pipes are galvenized?

If I had no mortgages I’d carry liability only. I also have 8 properties and the insurance premium total adds up to about 10% of the value of one property. I never use it for small claims so it’s for the proverbial burn down scenario. Now if one property burns down every 10 years I break even. Less than that I come out ahead. I think chances of having multiple properties burn down in 10 years is small enough that I can take the risk!

@Linda Pasas It sounds like there was not much of a consultation on the front end of the insurance purchase.

Did the agent discuss what Basic form covers? Were you offered a secondary option? If not, you may have a claim against the agent's E&O insurance policy.

If your current policies are not a correct fit, no reason to wait until renewal. 

We insure several investors who self insure Property coverage and only have Liability coverage.  It's easy to do.

@Linda Pasas you'll want to look in to it yourself but my understanding is that an umbrella policy kicks in after your primary policy is exhausted. 

Originally posted by @Cara Lonsdale :
Originally posted by @Derek Lacy:

Cara Lonsdale insurance absolutely covers that type of thing. Cut-rate coverage does not.

 For clarification, are you saying that pipes that burst due to the negligence of a tenant and/or owner who doesn't winterize before turning down/off the thermostat to leave the premises are covered under your policies?  What happens if the pipes are galvenized?

 I have never seen a galvanized pipe exclusion, so I’m unsure what you mean by that. Are houses with galvanized pipes harder to insure, yep. But not impossible. 

And yes you can get coverage for freeze on pipes in unoccupied homes. I basically require it on my clients north of the mason-Dixon. 

Are these endorsements or acceptances on every policy. Nope. Are they readily available for my clients. Yes. 

Originally posted by @Derek Lacy :
Originally posted by @Cara Lonsdale:
Originally posted by @Derek Lacy:

Cara Lonsdale insurance absolutely covers that type of thing. Cut-rate coverage does not.

 For clarification, are you saying that pipes that burst due to the negligence of a tenant and/or owner who doesn't winterize before turning down/off the thermostat to leave the premises are covered under your policies?  What happens if the pipes are galvenized?

 I have never seen a galvanized pipe exclusion, so I’m unsure what you mean by that. Are houses with galvanized pipes harder to insure, yep. But not impossible. 

And yes you can get coverage for freeze on pipes in unoccupied homes. I basically require it on my clients north of the mason-Dixon. 

Are these endorsements or acceptances on every policy. Nope. Are they readily available for my clients. Yes. 

 So, if it's an unoccupied property, it's covered.  So, I am assuming it's a vacancy policy?  What about an occupied property where the tenant just went on vacation and turned off the heat, thus causing the pipes to burst.  Covered?

@Linda Pasas self insurance can be a good option if you own hundreds of properties. Let's say you own 300 properties that are all worth around $100,000. If you are paying $300 per year to insure these properties, you are paying $90K per year. At that point the financials may work out better to self insure. Many larger operators will chose to do this.

Another situation may be if the properties are so run down that insurance may be useless. Maybe you purchased a house for $15K and made your money back in rents after three years. At that point, if it burns to the ground, sell the lot for $8K and move on. 

In general for properties of decent value, I would always recommend insurance with the highest deductible. The purpose is just to cover catastrophic loss like fire, tornadoes, etc. It is worth it to me to spend $300 a year to avoid a $100K loss.

Like every question, there is no one-size-fits-all answer. It just depends on your situation and risk tolerance.

Originally posted by @Cara Lonsdale :
Originally posted by @Derek Lacy:
Originally posted by @Cara Lonsdale:
Originally posted by @Derek Lacy:

Cara Lonsdale insurance absolutely covers that type of thing. Cut-rate coverage does not.

 For clarification, are you saying that pipes that burst due to the negligence of a tenant and/or owner who doesn't winterize before turning down/off the thermostat to leave the premises are covered under your policies?  What happens if the pipes are galvenized?

 I have never seen a galvanized pipe exclusion, so I’m unsure what you mean by that. Are houses with galvanized pipes harder to insure, yep. But not impossible. 

And yes you can get coverage for freeze on pipes in unoccupied homes. I basically require it on my clients north of the mason-Dixon. 

Are these endorsements or acceptances on every policy. Nope. Are they readily available for my clients. Yes. 

 So, if it's an unoccupied property, it's covered.  So, I am assuming it's a vacancy policy?  What about an occupied property where the tenant just went on vacation and turned off the heat, thus causing the pipes to burst.  

Yes easily coverable.  Usually in a “standard” policy.  

Here’s something to remember on what is covered, whatever is between the cover pages of the policy. 

100% of policies issued today have endorsements adding or subtracting coverage from the ISO standard (if they are not already on their own non-ISO form).  There is no “standard.”

If you own 50+ Sfh properties and are not discussing what you want and not want covered. I don’t know what to say.  It’s all or none coverable. 

I have a policy we rep that eliminates the vacancy clause (coverage applies if vacant or if occupied), covers freeze for unoccupied (occupied is usually covered under the standard policy), covers flood in all flood zones, cover EQ in all states but CA, and is month to month on the properties. $1,000,000 liability per occurrence. Even allows multiple named insureds. 

Need EQ in CA, there’s a policy for that. Need 25,000,000 in Liability?  Umbrellas all day for that. 

But starting price is about $50,000 for that base policy. Which at a $2,500 deductible would cover a little over $9,000,000 in property values.  So it’s not a policy for every investor. But a big thank you to the 53 investors I now have in that product. 

Generally if it’s accidental, sudden and direct it can be covered by insurance. 

Or you can buy a basic form policy on $60,000 value because it was cheap and pay $10,000-40,000 per popped pipe. 

So we have gone over it’s coverable. I just don’t understand why one would think it’s covered and then it’s not covered. My guess is the phrase “I’ll take the lower cost one” entered the conversation.  But if it didn’t. Then it’s possible there is an agent error here. 

Originally posted by @Derek Lacy :
Originally posted by @Cara Lonsdale:
Originally posted by @Derek Lacy:
Originally posted by @Cara Lonsdale:
Originally posted by @Derek Lacy:

Cara Lonsdale insurance absolutely covers that type of thing. Cut-rate coverage does not.

 For clarification, are you saying that pipes that burst due to the negligence of a tenant and/or owner who doesn't winterize before turning down/off the thermostat to leave the premises are covered under your policies?  What happens if the pipes are galvenized?

 I have never seen a galvanized pipe exclusion, so I’m unsure what you mean by that. Are houses with galvanized pipes harder to insure, yep. But not impossible. 

And yes you can get coverage for freeze on pipes in unoccupied homes. I basically require it on my clients north of the mason-Dixon. 

Are these endorsements or acceptances on every policy. Nope. Are they readily available for my clients. Yes. 

 So, if it's an unoccupied property, it's covered.  So, I am assuming it's a vacancy policy?  What about an occupied property where the tenant just went on vacation and turned off the heat, thus causing the pipes to burst.  

Yes easily coverable.  Usually in a “standard” policy.  

Here’s something to remember on what is covered, whatever is between the cover pages of the policy. 

100% of policies issued today have endorsements adding or subtracting coverage from the ISO standard (if they are not already on their own non-ISO form).  There is no “standard.”

If you own 50+ Sfh properties and are not discussing what you want and not want covered. I don’t know what to say.  It’s all or none coverable. 

I have a policy we rep that eliminates the vacancy clause (coverage applies if vacant or if occupied), covers freeze for unoccupied (occupied is usually covered under the standard policy), covers flood in all flood zones, cover EQ in all states but CA, and is month to month on the properties. $1,000,000 liability per occurrence. Even allows multiple named insureds. 

Need EQ in CA, there’s a policy for that. Need 25,000,000 in Liability?  Umbrellas all day for that. 

But starting price is about $50,000 for that base policy. Which at a $2,500 deductible would cover a little over $9,000,000 in property values.  So it’s not a policy for every investor. But a big thank you to the 53 investors I now have in that product. 

Generally if it’s accidental, sudden and direct it can be covered by insurance. 

Or you can buy a basic form policy on $60,000 value because it was cheap and pay $10,000-40,000 per popped pipe. 

So we have gone over it’s coverable. I just don’t understand why one would think it’s covered and then it’s not covered. My guess is the phrase “I’ll take the lower cost one” entered the conversation.  But if it didn’t. Then it’s possible there is an agent error here. 

 So then my question to you (knowing full well that you are not the OP's insurer, so just looking for understanding here) is...

If pipes freezing is standard coverage, then why is OP stating that after a pipe burst, her insurance is telling her that it isn't covered?

@Cara Lonsdale  

I answered that 2 days ago. Standard insurance coverage should cover it. Cut-rate coverage does not. 

Basically if you call a broker and say I want the cheapest insurance, you end up with an adjuster that gives the cheapest of settlements.

OR... the broker assumed she wanted the cheapest and sold that with no consultation on the coverage. 

Again there is no “standard,” insurance is not a commodity.  My guess is she was on a basic form. That is the lowest coverage form readily available and is not considered “standard” coverage. The rate is usually 10-20% lower though. 

@Linda Pasas let's dig in a little deeper to get to the bottom of why your policy didn't cover it as apparently, a standard policy would cover it.

Can you tell us what kind of policy your rep got you into?  Did you ask for a cut-rate policy?

One of the members at my local REIA is a public adjuster; and he offers a free service to all members. He will review insurance policies and suggest any riders, and explain coverages that might not be there, and also gives info on the insurance company rating from sources who perform those ratings. He also advised as to whether that insurer is difficult in handling claims. This is good for us because that removes any biases that an agent or broker might have (they get commission); he does it so that if a member (or friend) happens to have an unfortunate event that leads to an insurance claim, that they remember him as the helpful public adjuster. You then act upon those suggestions as you see fit.

Perhaps you can find another such good-hearted public adjuster at your REIA.

Thanks all for the knowledge and information.  Both properties were properly winterized and the heat was on.  One was vacant with a vacant policy the other was tenant occupied.  Most of the investors with multiple properties that I work with seem to be going with liability only.  

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