As a real estate investor, navigating the insurance market can be a daunting task. There are different ways to organize your insurance programs, several carrier and program options, and coverage choices that must be made… all with loan requirements in mind. Without proper guidance, investors can miss out on important coverages and end up paying more than they need to for sub-par coverage.
Often, we come across investors with multiple properties in their portfolio, each insured on its own individual policies, all with varying expiration dates. This creates an administrative burden, as investors are forced to juggle their normal responsibilities, plus handle insurance renewals on a monthly (or even weekly) basis. We can typically attribute this to a lack of sophistication in their insurance products, and an inability to find a single insurance carrier that is willing to take on all of their properties. Additionally, all of these factors can also create a need for multiple liability policies and even multiple umbrella policies. In a combined plan, all locations could be on one liability policy and one umbrella policy.
Blanket Limits of Insurance
When each property is insured individually – or a few on each policy – it prevents investors from taking advantage of economies of scale and increased buyer power. By leveraging an entire portfolio to negotiate with an insurance carrier, we are often able to drive down price and achieve more comprehensive coverage all at once. Investors can put their properties in one program with a blanket limit of insurance. A blanket limit of insurance, unlike an individual limit for each building, allows investors to utilize their portfolio’s total value when rebuilding after a loss.
Take for example an investor with ten (10) $1,000,000 properties. If each is insured by itself, a building that burns down will have up to $1,000,000 to rebuild. If the building is underinsured, the investor could face a large deficit in their replacement, the cost for which will have to come “out of pocket.” If we look at the same example but on a blanket basis, the investor will have up to $10,000,000 to rebuild their property, more than enough to cover any increased costs of construction.
Loss of Rental Income
Even with a blanket limit of insurance, investors need to look for other red flags in their policies. As an investor, there is generally only one source of principal cash flow: rents. At the time of loss, does the investor have a plan to ensure they receive their lost income so they are able to achieve the types of return they expect? Many policies offer up to 12 months of rental income loss on an actual loss sustained basis. While a year may seem like a long time to receive loss of rents, the red tape that many cities have in place around rebuilding can make the process much longer than expected. It’s typically recommended to have coverage for 18 to 24 months of loss of rents, as it provides a much greater window of time to get a property up and running again.
Ordinance or Law Coverage
Lastly, investors should be extremely diligent when reviewing their Ordinance or Law coverage. While there are 4 parts to Ordinance or Law coverage, the one most real estate professionals are familiar with is coverage C – increased Cost of Construction. This provides the funds to bring a building up to code that has been previously grandfathered. This can include Americans with Disabilities Act (ADA) compliance, sprinkler installation, impact glass installs and more. Especially in the Northeast and New England, where we have older buildings that have been grandfathered for decades, these changes at the time of loss can inflate the cost to rebuild exponentially. Fannie Mae guidelines suggest that investors should carry at least 10% of their properties insurable value for code upgrades, and most other lenders follow these guidelines.
Real estate investors are inundated with many moving parts in managing their properties, acquiring new ones, selling off old ones, and insurance is often an afterthought. We utilize real estate specific programs to provide investors with the best coverage available, the ability to consolidate all of their policies into one, and reduce their premium and administrative costs.
When looking for insurance, as an investor, always utilize your entire portfolio to increase buying power and negotiating leverage with carriers, look for blanket coverage, long term rental income coverage, and the correct ordinance or law to ensure that, at the time of loss, you are fully indemnified.
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