Insurance: The Necessary Evil. Or Is It?
As consumers, let alone real estate investors, we tend to flinch whenever the insurance bill arrives. Many times, for good reason: rates are higher, coverages seem to diminish, and for what? We have never even filed a claim! However, if we stop thinking of our insurance policies as just another drain on our cash-flow, and more as a legitimate part of our business plan, that premium notice may be a little bit easier to open...
Most of us consider insurance as a “purchasing endeavor”. That is, we either buy it, or it is sold to us. Therein, in my opinion, is the foundational fault of the process. The misconception is still prevalent: insurance is mysterious, difficult to understand, and, at best we hope we can trust the person that is selling it to us. We buy it, because we “have to have it”:... As a licensed “agent” in over 40 states, I cringe whenever I hear the word “quote”. Not that getting the best rate for appropriate coverage shouldn't be our goal, but “quoting” tends to lead to, in many situations, an inadequate transaction between seller (the agent) and end-user (the policyholder). Inadequate, because the agenda for the agent may not fit the needs of the customer (or, as I prefer, client). Please do not misconstrue this as a generalization that all insurance agents are inherently indifferent, or less than legitimate. The attitude that insurance should be treated as a commodity can be blamed on the industry itself, who, as a kneejerk reaction and effort to grow market share, seem to not really understand the needs of the public.
They Contact us to save $XXX on your Coverage advertising campaigns reinforce the public attitude that insurance is a “one size fits all” industry and getting the lowest rate makes the most sense. Unfortunately, when you really need it, this planning, or lack thereof, has hurt more consumers than it has ever helped.
Too many of us, when building our real estate investing portfolios, consider our insurance program an afterthought. Those of us who do understand some of it's value, may not fully comprehend it's place in our business plan/model. I consistently receive calls and emails from people who ask if I think an LLC, an S-Corporation, a Land Trust, or any other entity created to buy/own real estate is the best option over another for them. These bevy of inquiries bolster my theory that the right advice is still not promulgated in our industries (insurance AND real estate investing) to a sufficient degree. Contrary to most opinion, insurance should not be the foundation of an asset protection strategy. Think of your assets, whether personal or business, as the items within your castle that you desire to protect. The legal entities that you create, with the advice and assistance of a legal professional, are the castle walls, the moat, and the watchtower you build to help protect them. What you choose to create is a summation of the needs and issues in which tax, financial, and even estate planning must be taken into consideration. Acknowledge that insurance is the archer in the watch tower, or the knights with the boiling oil, that attempt to keep nasty things like liability claims, fire, windstorms and other catastrophes at bay. We all know insurance does not cover everything. The list of exclusions in most policies is more than a paragraph. Likewise, the archer does not hit every target. That stated, the archer and knights (insurance) need to work in conjunction the walls and the moats legal entities) to appropriately protect your “stuff”. Protecting your assets is more complex than simply finding the cheapest insurance rate.
“That is a nice explanation, and worth consideration, but how does that help me when my next premium comes due”, you may be thinking... Inadequate coverage, whether relating to your property or liability, may be just as damaging to your business model as no coverage at all. There are many cost-saving mechanisms that you can employ, far short of short-changing coverage.
These are but a few:
Higher deductibles---Take a glance at the deductible you have on all your insurance policies. Chances are, if you increase each of them to the next higher incremental level, the premium savings generated will more than offset the difference. A solid rule-of-thumb is to take the minimum claim you would file, double it, and use that as your preferred deductible on any policy. If you would never file a $1000 claim, then certainly don't carry a $500 deductible. Besides, as real estate investors, we typically don't pay “retail” for supplies or labor when it comes to construction/rehab/repair...A deductible is, by definition, “self-insurance”. I am an advocate of self-insuring that which you can control or is of a known amount (a deductible, or even the vacant property you got at a tax sale for $10,000). However, self-insuring unknown risk, such as liability, even with an asset-protection strategy in place, is rarely a good idea.
Combining coverages---The more opportunity you have to combine coverages on either the same
policy, or with the same carrier, usually the better rate you get. If you have 6 rental properties on 6 different policies, not only are you potentially paying a higher rate due to internal policy fees, etc... on each, you may end up paying far more than you think in the event of a catastrophe, such as a wind or hailstorm. On separate policies, you have separate deductibles...If multiple locations are damaged, your deductible will apply per location. On a master, or “blanket”-type policy, where all properties are combined, the deductible usually applies per occurrence. Knowing this, and choosing a deductible that is appropriate for your business, goes a long way in helping you when you really need it...In the recent windstorms as a result of Hurricane Ike, I had one client that had over 150 properties damaged. She had a $5000 deductible. Thank goodness she only had to deal with it once, because her properties were combined on one policy. Otherwise, her 10 years of building a large portfolio of properties may have been wasted...
Dropping coverages you do not need---A quick review of a policy will usually indicate how much you are paying for unnecessary coverages. As real estate investors, many of us have been financially blessed, even in the current economic turmoil. With multiple vehicles at home, do we really need to pay for the “rental car coverage”? If our vehicles are newer, many times “Roadside Assistance” is built in to our purchase or lease. If you are still paying for “Towing” coverage on your auto insurance policy, it's probably a waste of a few dollars. I realize that many of these items are “nickels and dimes”. However, they are yours, and you should spend them on things that you need. Consider reallocating these premium dollars into higher liability limits, for instance.
Find an insurance “Advisor” that understands what it is you need/desire to protect. Let them work with appropriate advice from all of your business team members (attorney, CPA, and financial planner) to develop a fluid adaptable model that makes sense for you. As part of your business plan, insurance can help you when you need it, but not drain you when you do not.