Insurance for rental property

8 Replies

Hi, I need help with different type of insurance. I think I heard on a podcast that you can insure only the value of the mortgage for a rental. For example,

1. The building is bought for $200 000. 

2. The mortgage is $160 000

3. Reconstruction cost estimated by insurance cie $600 000

Can I get insurance for only $160 000 or $200 000 instead of $600 000? Or can I get something in between? The idea here is to save on insurance cost and if something happens we would just put the money in another deal instead of building it back. On a small scale it might not seam like a good idea but on a big picture a lot of insurance cost could be saved and the risk to lose everything is not that big. I tried to find info on BP but I don't remember on which podcast I heard something like that or where I read it. Insurance cie seems to say there is no other way to set the insurance than the $600 000 value.


Jonathan, There are 3 types of valuation typically used by Insurance companies: Replacement Cost (cost to rebuild with the same kind & quality), Actual Cash Value (replacement cost minus depreciation), and Agreed Value (an agreed amount of coverage between Ins Company and Insured - rarely used). It sounds like you are looking to insure the Actual Cash Value (ACV). That value should be close to the market value of the property minus the land and foundations market value. One thing to be aware of is, if you insure based on ACV, a partial loss will have a deduction for depreciation. If the RC of the building is $600.000 and the ACV is say $150,000, the depreciation could be as much as 75% of the the loss.

Thanks, I think they spoke about it in show 64. I'll listen to this one again. Thanks for your time. It makes a lot of sense. It all comes down to a risk tolerance question issue. I'll try to connect with insurance broker in the Albany Ny region to figure it out.

Insurance costs are generally minimal.  Barring some exceptional facts, this is not the area you need to focus on cost control.  Being under insured is usually penny wise pound foolish.  Just my two cents.  

@Jonathan Leblond be aware of the Coinsurance clause and have the agent run claim examples for you.

If you insure for $200k and the rebuild is $600k, a policy with a Coinsurance clause could potentially only pay out 33% of the claim.  You would need to be able to fix a $100k kitchen fire with $33k.

Bottom line, make sure the premium savings is worth the risk.