Property insurance is perhaps one of the most confounding aspects of the real estate business. It is something that investors will want or be required to purchase. But how it is calculated, the amount you need to purchase and the setting of rates can be quite mysterious. Plus, insurance companies seem to be able to make up the rules as they go along. They can raise your rates, change what is covered or just outright drop your coverage at almost any time.
Having been a real estate investor for about a dozen years now, I have been through several insurance companies. I have had rates raised, conditions imposed, and I have been dropped several times — once just a few weeks after I closed on a property. Being dropped and losing coverage may be disconcerting, but it is not the end of the world and definitely not the end of your business. By being dropped you might actually come out ahead.
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What Does it Mean to Be Dropped?
Being dropped simply means the insurance company has decided not to renew or to discontinue your insurance coverage. Dropping is usually done when your insurance policy comes up for annual renewal, but it is possible to be dropped at any time.
As I said above, I was dropped only a couple of weeks after I closed on a duplex. The company said that they just did not want to insure that type of property. Of course I was left wondering why they let me get that far in the first place, but as I said, insurance is one of the most confounding aspects of this business.
Why Do Insurance Companies Drop Coverages?
Some individuals are dropped because they have made a large claim or too many small claims. (Always remember that every claim is a strike against you in the insurance business. Thus, I do not make claims unless it is absolutely necessary.) Other individuals may have acquired too many properties or have gone into too much debt and no longer fit into the insurance company’s risk model. So while you are growing and expanding your business, you may cross some sort of risk threshold with a particular company. Or the company may have simply adjusted their threshold and drop you. The actual reasoning can be hard to discern.
Being dropped could also be the result of being a part of a particular class or group. Insurance companies may just want to get out of a particular market. It may be the Gulf Coast after a Katrina, or it could simply be the Memphis rental housing market. Regardless, the reasoning behind any drop like this comes down to one thing: the insurance company is losing money and is pulling out. Does it matter if you have been a loyal customer for years? Nope, not at all.
What Happens When You Are Dropped?
Most insurance companies will not just drop your coverage without telling you. You will usually receive a letter telling you that your coverage has been dropped or will not be renewed. Furthermore, they will tell you in that letter the exact date and time your coverage will end. Most of the time, insurance companies will give you a few weeks to find new coverage, but they may not. Read any letter you get from your insurance company very, very carefully.
What Should You Do?
First of all, do not panic. There are plenty of companies out there; one of them will likely give you new insurance. This is because for every company that might be getting out of a particular market, there is usually another one getting in. You will find insurance to replace the coverage you lost. That does not mean, however, that you should sit around and wait until the last minute.
Once you receive your drop letter, it is like you have a slowly ticking time bomb. Your coverage will lapse if you do not do something about it, and your lenders, if you have any, are going to be pretty upset about that. You may have to work at it a bit, especially if you have made a few claims, but do not worry about finding coverage; someone will likely cover you.
What Are Your Options?
Your options will depend on a lot of factors. These factors can include: the types of properties you are trying to insure, the number of properties you are trying to insure, their location, your background and credit history, along with the number of claims you have had.
As stated above, do not wait around. You should start looking and shopping around for new insurance almost immediately. And I do mean shop around. See this as an opportunity to meet a new insurance team member who can potentially increase your coverage while decreasing your costs. Yes, you might have been paying too much, and you may actually increase your cash flow.
Where should you look? If you are new to real estate investing or just have a small amount of properties, some of the household names may be the best place for you. State Farm, Nationwide, Allstate, Farmer’s, etc., all have programs for rental properties, and for the smaller business, their rates can be quite competitive.
For those of you who are like me and have larger portfolios, you can skip those named above. They will not even look at you, or their coverage will be outrageously expensive. Your best bet is to talk to several different insurance brokers and let them shop around amongst the many companies out there. Just do shop around. I have received quotes that have varied by several thousands of dollars for very similar types of coverage.
Insurance is one of those things that I think I will never fully understand. That being the case, I have explained my thoughts on insurance here. But receiving the drop letter for the first time (or even the tenth time) can be quite scary. Unfortunately getting dropped happens quite often as you progress in the real estate business. It is often just a part of the business that we all need to learn to deal with.
Have you ever lost insurance coverage? Why? How did you deal with the situation?
Please share with your comments.