All Forum Posts by: Derek Lacy

@David Schmid

Quick question, do you add them as "additional insureds" or do you add them as additional "named insureds."  Seems like a silly distinction, but in insurance there is a difference between the two.  You want all the entities you own as Named Insured, not Additional Insured.  Named insureds have full rights to the policy, additional insureds have carve out rights as defined by the additional insured endorsement.  Small difference in name, big difference in coverage.  Many agents make the mistake of just adding as an additional insured, not realizing the carve-out.  

It's free to add as many named insured's as you want.  

@Steve Babiak

Absolutely, co-insurance is a bit built into my explanation, as in the results end up being the same.  But for all those concerned a HUGE gotcha in a property policy is co-insurance, which is an under insurance penalty.  In reality the scenario I gave above would be both depreciation and co-insurance penalties applied to get that lower amount, but I kept it simple.

Remember underwriters wrote the insurance policy, so the under insurance penalty is based of a valuation that is in the sole discretion of the underwriter.  Not your agent, not your realtor, not your contractor, not your property manager, the underwriter.  

Basically co-insurance is if you insure under a certain threshold, commonly 80% of their calculated value, but can be up to 125% depending on coverage form, you then become a co-insurer on the property.  To use the 50k/200k example above, let's use a 1k deductible and 80% coinsurance.  Lets again assume 50k in damage.

Step one depreciate, so that 50k is now 25k (most, but not all, insurers max out depreciation at 50%).

Step two determine underinsurance, you should have insured at $100k (remember depreciation maxes out at 50%, meaning 200k at 50% depreciation is $100k).  Now bottom dollar you should have insured at $80k (80% of value).  $50/$80 is 0.625.  So apply that factor to the depreciated claim amount of $25k.  

That gives us $15,625.  Now take out the $1,000 deductible, your at $14,625.  Which is right there on my off the cuff somewhere between $12,500 and $20k payout.  

This is the most correct, but I feel if most people just view the number they insure the house for $50k in this example, they need to look at that number as to mean if 50% of the house burns down, you will get half that amount, so $25k payout.  If they look at it that way, they will get a better idea.

Though again, if you're buying historic homes, that are not in historic districts, and are okay if it is replaced with less than historic items, go functional value, that get's rid of coinsurance complete.  At minimum do agreed value to again delete coinsurance.  

Don't believe State Farm agents when they say our policies don't have coinsurance.  They can legally say that because they call it an "Insurance to Value" clause, but when you put the standard coinsurance clause next to their "Insurance to Value" clause, you end up with the same concept different name.  

Thanks for the call out, it's storming here in Indy, the kids and wife are resting, so a perfect time to BP.

You can place as many LLC's and/or properties on a general liability policy as you see fit. We have an institutional investor with over 10,000 properties and about 100 named insureds all on the same policy.

Now, I highly disagree with the one llc per property, it never achieves what it is intended to do, because if you have 100 properties with 100 llcs, that means 100 meetings with mintues, 100 tax returns, 100 other issues.  If you only plan on buying 4 properties, it might work, but it still seems your 4x's your problems for little in return of actual protection.

We can help with your issue at my office, but just happy to help with your understanding.

@Dave G.

Or just do functional replacement value.  You want walls, you probably don't care if they are plaster replaced, the cheapest method that get's you walls is probably what you want.  In that case you are good.  Now I'm an independent agent, so we have insurers that offer that, but a USAA or other big name brands will not.  That's not to say we don't represent name brands (travelers, hartford, liberty mutual, etc) but they just don't offer that.

@Bill Bodziak

I know, your agent knows and more importantly the underwriter on the policy and the adjuster that will adjust the claim will know, that most people do not read their policy, and even if they do, they do not understand it.  Caveat Emptor applies in the insurance purchase world, meaning let the buyer beware, which is good and bad.  Good, you can ask for anything, someone will try to translate as close as possible and you can get that policy, Bad, you have a policy that will only pay out what it says it will pay out, you didn't read all the details nor understand all of the details.  

Actual Cash Value is what you probably chose.  This means two things.  One the value of the property is replacement cost minus depreciation.  If you had one place tell you replacement would be $200k, you then insure for $50 on ACV.  You just declared how much you depreciate the property as a whole.  Since you just said that the property as a whole was only worth $50k.  

So the claim payout follows the same formula, you are paid out replacement cost minus depreciation.  

Luckily claims adjusters don't always take that depreciation level literally and will give some wiggle room, but don't expect to receive full damages either.  

All of you are correct, if the place burns all the way down, who cares, take the money and reinvest.  What happens if it partially burns down?  By the way total losses only account for 2% of claims paid, it makes me wonder why real estate investors always prepare for the 2% occurrence and not the 98% occurrence.  

So that property that was determined to be replacement cost of $200k (what replacement cost tells us is what a qualified licensed contractor would charge to replace the full house today), is insured for $50k.  The fire does $50k of damage (acording to the contractor).  That means only 25% of the home burnt, so you should only expect about 25% of your policy to pay out.  So about $12,500 if I'm doing my math right.  With the fudge factor I would imagine the adjuster would use, you would actually be paid about $20k for the $50k of damage.

So now you have a partially burnt property, $20k in cash, $40k in fixes (once you cut all the corners you can).

Insurance is something you get EXACTLY what you pay for, for good or bad.  

There are no such things as a market value policy.  I have been told many times, by clients outside the industry that there is, I have not seen that policy ever presented.  They may have used a term "Actual Cash Value" which is not market value.  Actual Cash Value is defined as replacement cost minus depreciation.  So in your scenario @Bill Bodziak you just told the insurer you are cool with 75% depreciation on all claims.  Meaning $40,000 fire occurs (remember a contractor can only speak in new building value, replacement cost) will pay out about $10,000 before application of deductible.  

So to get to the OP, @Dave G.'s question.  

Imagine two identical houses built in 1950 on opposite sides of town.  In the 65 years following, one house is in the neighborhood with great schools, great city services, etc.  The other house is in the neighborhood that is consistently on the 11 O Clock news.  

Which house will cost more replace?  They should be identical as they are identical houses.  Which has the higher market value?  Well the better neighborhood.

So how does an insurer level that issue.  Well you have to not care about market value, again, I have seen no insurance policy ever issued on a "market value" policy.  

If you only want to replace the function of a home if it were to be hit by a claim, you may want to look into functional value (replaces the function of the home, but not necessarily the home).  

Dave, I am literally sitting 1 block off of Mass Ave in Indianapolis enjoying a coffee and know our market very well, many investors on this board will even refer me.  Let me know if I can help with your confusion.  Though our independent agency (2nd largest privately held agency in the US per Insurance Journal) is licensed in all 50 states, this is really easy to do in my own back yard.  Thanks!

Standalone umbrellas are easy on both personal and commercial lines.  It takes a lot of information (need copies of all underlying policies), but they are common and not very expensive.  You can always contact me for a personal consultation, but almost any independent insurance broker should be able to help.

The $150's are not in Florida.  But $1000 or $700 seems a bit high too.  I would need more information, but with a duplex in West Palm for GL only, I'm seeing an indication of $296 for a duplex, subject to a minimum premium of $550 ($50 of which is in a fee).  What that means is you could have 1 duplex for $550, but adding another duplex would only be about $642.

Other states about $80 would be a normal pricing.  But FL it is not.

AAIC should have no problem insuring it if you go through the right agent.  As other agents suggested they will write up to 30 habitational units.  If you were above that, then the big dogs will kick in and do the umbrella, Market, AIG, Chubb, etc.  

If you need help with your pursuit, my contact info is below.

The only underwriter I know on that type of coverage requires pre-approval of credit on the tenant, meaning, your prospective tenant will probably be found ineligible for that coverage due to their financial problems.  Rent Guarantee Insurance is sort of a sham, you have to have a tenant with good rental history, very good credit, etc and they pay $250 for the policy.  Then if the tenant does not pay you assign the collections and assign the new tenant search to the insurer and they will pay you for up to 6 months or when they find an acceptable tenant (to them, not necessarily to you).

Basically it's like building a fire proof home and then insuring it for fire, IMHO.