All Forum Posts by: Tim Norris

It is really not an issue of "either/or" as an umbrella and an LLC are/could be created for different reasons. Think of the LLC and other work you may do with legal and financial advisers (such as attorneys and accountants) as your "castle walls and moat" around your assets, personal and otherwise. Think of the insurance you secure as an "archer in the watchtower". In other words, the walls and moat should be your foundation as it pertains to protecting you/your assets. The archer (insurance) won't pick off every bad guy that tries to get in, so having the walls and moat is vital. Think of them working together not in lieu of each other. Hopefully this helps!

Consider the method by which you structure the ownership of assets as your "castle walls and moat" around what you want to protect. Think of insurance as the "archer in the watchtower"...two different mechanisms that function together.

Bienes' post is correct regarding the cost increase between insurance for LLCs and personally-owned properties--when dealing with the "traditional" insurance markets. However, there are programs and policies available that do not factor the ownership into the cost calculation. By the way, it shouldn't as "the risk is the risk" regardless of who owns it. That stated, I had written this piece a few years ago to address some of the insurance "basics" for a new investor: http://www.nreinsurance.com/RE-Insurance-Issues.pdf

Hope it helps.

Tim

I agree with Brian...self-insure as much property coverage as you can, but liability is a different. Too many unknowns there. He is also spot on about the availability of the coverage for the tenant's "exit damage".

This may help as well:

Replacement Cost (RC):

Replacement Cost coverage allows partial loss claims to be settled without depreciation.

EXAMPLE – The cost to repair damage of a partial loss is determined to be $40,000.
The deductible is $ 3,000.
The insurance company will pay no more than $37,000. Realize that initial settlement is made with depreciation levied. As repairs are made, the insured
_______________________________________________________________

Actual Cash Value (ACV):

Actual Cash Value settles losses with depreciation levied against the damaged items/portion of the property. Depreciation varies relative to the remaining useful life of that which was damaged.

EXAMPLE – The value of the damage is determined to be $40,000. The damage is determined to be depreciated by 20% (used to simplify the example. Many depreciation reports are lengthy and laborious)...

The deductible is $ 3,000

Step (1): 20% of $40,000 = $8,000 (Depreciation levied)
Step (2): $40,000 - $ 8,000 = $32,000 (Depreciated value)
Step (3): $32,000 - $ 3,000 = $29,000 (Settlement less deductible)

The net settlement is $29,000...

ACV, for many RE investors, could be the most cost-effective option, believe it or not. As most insurers settle claims at "retail" costs, many times even depreciated settlements are sufficient to make repairs due to the ability of most of us to garner labor and materials at less than "retail" costs...something to consider when making the choice between ACV and RC...

A little late to the party, but this may help. A greater concern most investors should have relative to insurance is that of "co-insurance". 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.

Hi Eddie!

Good update for you---we do/can offer wind and "Named Storm" coverage now...contact us for details.

Tim

Steve, Jack---thanks for the referral(s). FYI, National Real Estate Insurance Group is the exclusive insurance broker for Affinity Group Management (AGM). AGM offers a national insurance Program for residential RE-investors. As to which Steve alluded, some of our folks are BP members and do a pretty good job of contributing without "pitching". We are happy to address and share relevant information as much as we can.

You're welcome. Don't hesitate to ever contact me with concerns, etc. Thanks!

Hi all,

To clarify the communications recently from Affinity/National Real Estate Insurance Group, I will elaborate as briefly as possible.

We are one of the few insurers to still offer theft on vacant/rehab locations in the industry. The coverage we purchase and rate we pay from insurers is based upon their ability to create profit. Theft claims in our industry (per the insurance industry) are up over 250% in the last 1-2 years, as compared to a much longer historical period. Bottom line is that theft is becoming less of an insurable risk (on vacants, especially) and more of a "cost of doing business". If any risk becomes less of an unforeseen event and more of an inevitable one, the insurance industry will no longer cover it (think asbestos, black mold, etc...)

Bear in mind, I am not trying to defend or justify the insurance industry's actions, however, if they don't profit, they simply raise rates, or drop coverages. If we can't get it (the coverage) to offer to our clients, we can't sell it, frankly. Or if the rate is higher when we do, we have to charge accordingly.

We have secured discounts through a variety of vendors (AC Bandit, security/protection companies, etc...) and will continue to assist our clients by sharing info and knowledge to help them mitigate/diminish these types of risk exposures. (Contact us for info on any of these, if interested).

Remember, too, we have a variety of carriers and Programs for Real Estate investors, backed by different insurers. As such, we are continually "shopping" the market for the best value. Best value doesn't necessarily mean cheapest rate. Some things to consider when "comparing":

1. Does your policy insure Basic, Broad, or Special form? Do you know what is and isn't inured/covered?
2. Would a co-insurance penalty apply, in the event of a partial loss?
3. Does the insurer really know the location is vacant, or does the agent simply say so? (Most standard carriers do not offer vacant/rehab coverage).
4. Is the premium they charge fully earned (you don't get anything back if you don't need the coverage for the entire period)?

Our Programs address these issues and more. Not trying to pitch here, but just wanted to address these recent rumblings.

Best regards,

Tim Norris
President
Affinity Group Management
National Real Estate Insurance Group