The KM Insurance Real Estate Coverage Guide
Part 1: Basics
By Parker Cox
Disclaimer – The information contained in this writing is not guaranteed to be accurate. The information provided is general in nature, broad in scope, attributed solely to its individual author’s personal understanding, and cannot be relied upon to substitute for specialized consultation or legal advice pertaining to any particular situation or type of situation. We urge you to consult your own agents and attorneys in determining what is best for your particular needs and interests.
Most wise real estate investors operate under a Limited Liability Company (LLC), reducing liability exposure to those assets contained within the LLC. As a risk manager, I suggest all investors consult an attorney and consider this structure.
If the venture has a brick and mortar location (which could mean a home office), you will want a Business Owner’s Policy (BOP), which is a package policy providing both Business Property Coverage as well as Liability Coverage. Most commercial landlords will request at least liability coverage and typically will want your on-site property covered as well. If you have a small home office, the average homeowner’s policy provides $1,000-$2,500 in property coverage for your business property (desk, computer, printer, etc…) If you have any client traffic at your home office, or an employee on site, your homeowner’s policy would not cover the extra liability therein, and you will need a separate BOP policy.
The basic insurance coverages for business owners and real estate investors are as follows:
- Property Coverage: Typically required by lenders on mortgaged properties. All of these normally (but ask your insurance agent about your specific policy details) are covered against Fire, Theft, Vandalism, Wind/Storm Damage, but they will not be protected against Earthquake or Flood, which require separate policies.
Building – This is protection for the building itself, including outbuildings, meaning the walls, roof, floors, foundation, and anything permanently attached to any of those things: chimney, cabinets, plumbing, electrical…etc. There are also things, such as appliances, that intuitively fall under this broad category, yet which, for insurance purposes, are considered personal property or “Contents of the Building” and are subject to different coverage limits than the structures.
Contents – “Personal Property Coverage” has a separate, typically much lower, coverage limit than the Building Property Coverage and may also require specific documentation, independent valuation, and separate riders, particularly for valuables like jewelry, artwork, antiques, electronics, and other particular items.
- Liability Coverage: This is coverage for the liability exposure as a property owner. This will cover “Property Liability” as well as “Personal Injury Liability.”
Property Liability covers you if a covered loss leads to the damage of another person’s property.
Personal Injury Liability cover’s you in the event of someone injuring themselves on your property/finding your property responsible.
- Umbrella Policies: Helps extend liability coverage for certain types of risks. If your LLC contains a greater value of assets than the liability limit in your BOP policy, you may need an Umbrella Policy—the Umbrella is coverage “over and above” the liability limit of your base policy.
For example, if you have $1million in liability coverage within your BOP, but your property is worth $6million, you may want another $5million Umbrella, which would pay out only in the event of the initial $1million being already paid to settle a claim. Umbrellas are a fantastic value for the amount of coverage they provide, typically costing as low as $500-$1000 dollars annually for $3-5million in coverage.
The benefits of the Umbrella to the real estate investor can be even greater, as it is also possible to add an Umbrella onto the liability coverage of any property that you own, which allows greater protection due to the greater exposure at each property.
- Professional Liability: Coverage that protects individuals who give advice in exchange for pay, and are thus susceptible for lawsuits due to negligent advice, is called Errors and Omissions Insurance (E&O). Doctors, Lawyers, Insurance agents, Real Estate agents, and other professionals all have Professional Liability risk and need coverage. There are two types:
“Legal-in”: your defense costs against the lawsuit and any settlement share a single limit, typically $1million
“Legal-out”: your defense costs against the lawsuit will have in most cases no dollar limit, allowing your $1million in professional liability coverage to go exclusively to a settlement if your case is lost. For this reason, I highly suggest you make sure you have “legal-out.”
Umbrellas don’t extend to coverage for professional liabilities.
Find a good agent, build a good relationship by including him or her in your business and projects so they can learn about and understand what you are doing to find the best coverage for your needs. It is important that they can access the brokers and carriers that can provide the protection you require. Most importantly, make sure you’ve found someone who will bend over backwards for you every single day and jump through hoops of fire in a pinch. At KM Insurance, we’re here to do just that. We know REI. Give us a call at (619) 667-2880, and we’ll get you covered.