How do we figure out insurance limits?

8 Replies

I'm interested in starting a discussion on easy ways to figure out appropriate amounts of dwelling and liability coverage to purchase for a rental property in a given area. I don't see a lot in terms of resources for helping consumers do this, other than "use the numbers that insurance companies hand you", which seems like a poor idea. As investors branch out into different regions, it can be difficult to figure out what's needed in a new locality.

What strategies has this community found?

  • Liability Coverage
    • The liability section of insurance is fairly similar across the entire country.  100k is the minimum required on a policy, 300k is recommended, and 500k is preferred.  Normally the difference in premium between 300 and 500k is only a few dollars a year
  • Dwelling Coverage
    • This depends on the zip code of the house.  To find the "correct" amount of replacement cost coverage needed, ask to see a replacement cost estimate of the house (often times called an MSB as well). 
    • There are 2 different dwelling coverages you can add on your policy, Replacement Cost (RCV) and ACV (Actual Cash Value - also known as the Market value of the house).  RCV is when you would want to ask for the replacement cost estimate of the house.

Please message me directly if you would like any further explanations of how brokers find numbers for policies.

What you're looking for is an "insurance to value" calculation.  I've done about 2,000 of them in my career.  It's not a market valuation so it does not rely on your zip code except to the extent that the region of your country may have slightly different labor rates which affects the actual cost replacement value.  MSB is not this report, it's just the acronym of a former company that used to be one of the databases for cost replacement data.  There is more than one database you can use.  I performed cost replacement valuations for a couple clients down here in Florida to show that they were being overinsured for what the policy actually covers (i.e. policies do not cover foundations) and was able to get their rate reduced by giving them their own ITV they could present and negotiate appropriate coverage for.  If you rely on the insurance company to tell you how much insurance you need to buy you may as well go to a listing realtor and ask them how much you should pay for their listings.

@James Free If you don’t trust insurance companies (who will be on the hook to pay for the damages of something occurs) then ask a couple local contractors to give an estimate to scrape a half burned house off its foundation and rebuild it.

Demo expense can be $12k to $60k.

Then hire an architect and get permits. Re-frame, plumb, and wire it. Roof, doors & windows. Insulate and drywall. Flooring, trim and paint. Bathrooms and kitchen, HVAC.

You won’t get the volume pricing on materials new home builders get so factor in Home Depot retail pricing on everything too.

A half burned down house will cost more to repair than building a brand new house from scratch.

@Michael Norris It's not so much that I don't trust them up front (though they could easily sell me more insurance than I need), it's that I don't trust them to update the numbers over time as I hold the rental and the market changes.

As far as liability insurance is concerned, I would recommend the highest limits offered. Liability insurance is cheap and it can go a long way towards protecting the financial standing of you and/or your business. 

I would also recommend adding an umbrella on top of this liability limits-- especially as you build a sizable portfolio. 

@James Free i agree with what others have said about liability coverage. its not that expensive to get 500k or more on your properties. Your biggest risk is getting sued. 

in regards to the appropriate dwelling coverage amount, its partially up to you. If you dont trust your insurance agent, find one you can trust. They can be a valuable partner in your REI business. I try to meet with my investor clients once a year or at least every other year to make sure the coverages are still correct on their properties. I go through all the details of the property with my clients, and my system will give me replacement cost amount based on the details i input regarding the building. I personally would want full replacement cost coverage for the full value of the property, so if there is a total loss i would be able to rebuild. Some investors i work with, only want enough coverage to protect the money they have invested.

For example, a house has a replacement cost of $150k, but you only purchased and rehabbed it for a total of 80k cash. Some investors would only want 80k dwelling coverage so that their cash investment is protected, others would want the full 150k so they could fully rebuild in the event of a loss. With State Farm, if you choose to lower the coverage to less than 80% of the determined replacement cost, your policy will switch over to ACV (actual cash value - aka depreciated value)

in summary, just go find an insurance agent you can trust and make sure you give them very detailed info about the property so that you have an accurate replacement value. then you can make your decision on how much coverage you want from there.