shopping for insurance for a rental property (in this case, long term buy and hold strategy on 3 bed 2 bath), what sort of things I should be expecting from a good insurance company?
What are some pitfalls or fine print language to avoid?
The biggest thing is deciding if you want full replacement cost (what it costs to rebuild brand new), or if you want to take an actual cash value approach (depreciated values). From there it would be about optional coverages, and deductibles in my opinion.
First advise is to seek out agents before you purchase. Get Recommendations from current investors, your attorney or CPA, etc. If that is not available, look for Independent Agents that insure Real Estate properties, Developers, Contractors, Builders. Contact them and let them know what you are planning. Find out if they have markets, want to work with you, are willing to give advise. Then when you have a property, have several of them quote on it.
Some things to watch out for are:
1. What are the covered Perils (what causes of loss are included). The special form is the most coverage. Named Perils coverage is a lesser coverage (which perils are included can also vary from Basic to Broad)
2. As Tony Indicated, how is the loss valued is important. Replacement Cost (RC) is better than Actual Cash Value (ACV = RC minus depreciation). This is important in both a total loss but also on a partial loss. If the bldg has a $100,000 RC and $25,000 of depreciation it would have a ACV of $75,000. On a $10,000 partial loss you would only receive $7500 if you had an ACV policy
3. Coinsurance: Policy requirement used by companies to get the insured to cover the property to the full value. Most common is 80% Coinsurance. That means that, at the time of loss, the coverage puchased is compared to the value that should have been insured. If the value insured is at least 80% of the value that should have been insured there is no penalty. If the coverage is less than 80% the claim is reduced by the percentage that the limit on the policy compares to what should have been insured. If the building should have been insured to $100,000 and has a loss of $50,000. If the coverage is $80,000 or higher the claim should be paid at $50,000. If the coverage is $70,000 the claim payment is reduced. The claim payment will be $50,000 x $70,000/$100,000 = $50,000 x .7 = $35,000.
4. Admitted carrier vs Non-admitted (aka Excess/Surplus). If you receive a quote for a policy that is excess or Surplus lines (Lloyds of London is the most common entity people think of) it has disadvantages vs. an admitted policy. Most states have Guarantee Funds (for insurer becoming insolvent) that apply to Admitted policies only. In CT our fund is $250,00 and applies to lost premium or claims payments.
5. Exclusions and Endorsements: these change the coverage under the policy. Look to see what is being excluded when comparing policies.
The above are just some things that you should be looking at. Good luck on your project
When buying a close to new property or fully rehab property, is one policy type better than the other?
This was an amazing breakdown. Exactly what I was looking for.
Thank you so much!
If the property is new or fully rehabbed it is always up for you to decide, but the cost for full replacement of a new property is fairly inexpensive. The problem usually occurs when someone buys an older property for 1/3 the cost of what it would be to rebuild brand new. This makes the replacement cost amount MUCH higher than what was paid and can cause the insurance to be higher than what people are wanting for cash flow.
Tony is correct. The situations I see clients considering only Insuring to the Actual Cash Value is where the local rental market leads to prices on the properties that are far less than the cost of rebuilding. The risk they are taking is in a partial loss they will have to come out of pocket for the depreciation.