All Forum Posts by: Tim Norris

It is likely best to turn it over to your insurer and let them "battle" the other company. If your tenant actually caused the damage (I didn't note the actual cause of the leak), they may technically be the responsible party. That stated, 60% of property claims are caused by tenant negligence. So, requiring and enforcing the tenant to carry renter's insurance is a very good idea...

By no stretch is this legal advice, but handling the insurance is, as you know, a different animal relative to subject-to acquisitions. Hopefully this helps, at least relative to that piece:

It is a commonly misunderstood challenge: clarifying the timeless issue of how to properly insure a “subject
to" property. The obvious dilemma is the "Due on Sale" (DOS) clause being invoked and the mortgage
company calling the note. Though seemingly complex, some common sense rules-of-thumb usually apply.
If you (or your entity) own, or have a financial “stake” in the property, be the “first named insured”. The first
named insured is the primary recipient of any potential claim benefit or liability protection. An “additional
insured” will garner liability protection only. A “loss payee” will have its interests protected in the event the
property itself is damaged. (A mortgagee is inherently BOTH). If you decide to keep the “homeowner’s” policy
in place and be named as the additional insured, be advised. If it is discovered that the ex-owner, the first-named insured in this case, no longer owns the property, expect the insurer to deny based upon the fact the
policyholder no longer owns the property. Even if you manage the claim to be paid, you are not the entity to
receive the proceeds, as you are not the first-named insured. If you did attempt to be added as a loss payee
as well, chances are the insurer will question the necessity for you being named as such. When the insurer
discovers you now own the property, they will need to write a new policy.
The proper way to insure the property, once you (or your entity) own it is to have a non-owner occupied
“landlord” policy, with you as the new first named insured. The bank/mortgage company is named, as normal,
as mortgagee. The prior owner should be named as the additional insured ONLY. Naming the prior owner as
additional insured will usually keep the mortgage company happy. But, you may ask, why not keep the ex-owner's policy in place? One concern of carrying 2 policies on the same property is that most policies have
“excess” clauses. In other words, the policy will pay only excess amounts, if any other policy exists. If each of
the 2 policies have such a clause it will create havoc in getting a loss paid...
To further clarify the scenario here is a hypothetical example: Property has a “homeowner” and a “landlord”
policy (both) on it. Fire occurs. Owner files a claim under the landlord policy. So far, so good. However,
“tenant” (prior owner, or new occupant), has personal property damage. He must also file claim, but against
his “homeowners” or tenants policy. The respective insurance company on each claim is bound to find out of
the other policy’s existence and could (more than likely would) attempt to invoke the “excess” clause of it’s
own contract, potentially leaving the owner waiting for courts/arbitration to settle... I wouldn’t take the chance
with 2 policies. If an insurer has an opportunity to mitigate, or deny, a loss if there are contractual issue s, be
sure they’ll try!
(As an added note, if the prior owner moves out, the “homeowners” policy is no longer valid as the property is
now “non-owner-occupied”). Bottom line: if you own it, you insure it. If the fact that a DOS clause is/would be
invoked if the insurance policy changes, I would walk away before potentially diminishing or even sacrificing
coverage by trying to “skirt” the correct way to insure the property. In 12 years, we have yet to have a loan
called (knock wood) by insuring the new owner on a “landlord” policy and naming the bank (and the old
owner) as mortgagee and additional insured respectively.

Hey Anish,

This is pretty standard for the "big box" insurers...It may make the most sense to have them all together (with one carrier), so splitting them between insurers may create more administrative havoc than you'd like...

Tim

The owner of the property should be the first named insured. My experience is that the carrier with whom the agent wrote the policy has certain underwriting guidelines that may not allow for the LLC to be the sole named insured. As to which you alluded, check with your attorney, but be prepared to have your agent find a carrier that can accommodate appropriately.

From threads suggested:

Which option you take should be based upon your strategy for the individual property. Replacement Cost (RC) coverage allows you to recoup the depreciation that is initially levied against the claim settlement. Actual Cash Value (ACV) coverage does not. However, most of us in RE do not pay "retail" for labor/materials. Accordingly, many times the initial settlement, with depreciation levied) is still enough to repair damages. "Reconstruction Cost" is not Replacement Cost. It should indicate the value it would take to rebuild the property in the event of a catastrophic/large loss. If your strategy in the event of such a scenario is to pay off whatever debt may exist, then raze and sell the lot, then an insured value that is of "reconstruction cost" may be costing you too much premium. In other words, if you ultimately would repair partial losses, but sell in a "total" loss (after garnering the insurance benefit), then "over-insuring" doesn't make much sense. You should really address this issue at the "business model level", so you don't end up giving the insurance company more than the need to cover what you really have at risk. Keep in mind, the co-insurance requirement may hold you to certain levels of insured value, whether you like it or not (with many/most insurers). As such, we use the policies without such "co-insurance requirements" when applicable.

Coinsurance is imposed on the insured by the insurance carrier for under reporting/declaring/insuring the value of the property. The penalty is based on a percentage stated within the policy and the amount under reported. As an example (assuming policy is written on a Replacement Cost basis, also):

The reconstruction value of the property (as determined by the insurer) is: $250,000
The Coinsurance percentage requirement is: 80 %
The Limit of Insurance for the home is: $ 100,000
The Deductible is: $3,000
The amount of loss is: $40,000

Step (1): $250,000 x 80% = $200,000
(The minimum amount of insurance to meet your insurance requirements - assuming the policy required 80% co-insurance)
Step (2): $100,000 ÷ $200,000 = .50
Step (3): $40,000 x .50 = $20,000
Step (4): $20,000 - $3,000 = $17,000

The insurance company will pay no more than $17,000.

The most commonly issued coinsurance percentage is 80%. For this reason, with "traditional" companies, like State Farm, it is vital that values of property are accurately reported and updated annually to reflect inflation and other increases in cost.

I like Jack's advice, as well. The point is not as much requiring it, but enforcing, verifying, and "tracking" that they keep it. May seem like a pain, but well worth it, if/when they or their negligence is the cause of your property loss.

As to which David just alluded, "co-insurance" and whether a policy requires it. Is just as important when evaluating ACV versus RC. On policies that offer RC and without a co-insurance requirement, you have a lot more flexibility in how much coverage you can carry.

However you phrase it, be sure to enforce it! We've seen statistics that indicate 60% of property claims are caused by tenant negligence...

What caused the fire at the neighbor's? If they weren't negligent, your subrogation efforts will likely be for naught. If a negligent party exists, that is where the effort to subrogate/file liability claim needs to be made.

Happy to help. Get to us via our website or give us a call...been a crazy day or two with about 15 inches of snow in KC!