The KM Insurance Real Estate Coverage Guide
Part 3: Buy and Hold
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.
For the buy-and-hold investor/property manager who is managing their own properties, a commercial Non-Owner Occupied Property Policy, also known as a Landlord Fire Policy is needed. It is also a package policy.
Building Property Coverage: Includes “all items that would NOT fall out if the property was turned upside down and shaken” and will be valued at the replacement cost (rebuilding cost of construction.) Also included, unless otherwise stated, is Contents/Business Personal Property Coverage, which means all of the OWNER’S items (not the tenants) “that would fall out if the house was turned upside down and shaken,” including furniture and appliances in the units/on the property. The Contents coverage CAN be removed.
Equipment Breakdown Coverage: aka Boiler Coverage is coverage for your heavy equipment that is permanent at the property, most commonly heating and cooling systems, HVAC, Forced Air, Boiler…etc. This coverage CAN be removed.
Business Income Coverage: In the event of a covered loss occurring in one of the units or on the property that results in a loss of income, this coverage will pay the lost rental income during the time it takes to fix the unit/property and get it re-rented (typically for up to a year). This coverage CAN be removed.
Ordinance and Law Coverage: aka Extra Expense Coverage is an extension of the original replacement cost limit to allow the property to be built up to current zoning and code requirements in the event of a covered loss leading to a rebuilding. This coverage CANNOT be removed.
This will be the same $1million/$2million or $2million/$4million standard policy with the option of adding an umbrella.
Policy Features –
In a perfect world, your policy would be a single master policy with all properties owned by a single entity included. If there are multiple entities, with shared ownership of at least 50%, combining insurance of the various entities is possible. But, often a large portfolio will require at least 2 policies/carriers because of appetite differences between each carrier—those appetite differences could range from property type, location, age of the structures, values and more.
Your coverage should offer a Shared Liability Limit. A single liability coverage limit i.e. $1million/$2million can be shared among some or all of your properties as long as they are all under a single/shared ownership entity.
Depending on the risk associated with each individual policy, this MAY or MAY NOT be beneficial to you as an owner.
Shared Liability Limit allows you to have only a single liability policy and premium for multiple properties under single entity ownership, saving paperwork and money.
This system is also fully interchangeable for both primary liability and Umbrellas:
For example, if you have 5 properties under one LLC, you can have all 5 share the liability limit or just 3 share the limit on one policy and the other 2 could have a separate shared limit and policy (or their own individual policies. It is the same with Umbrella policies.
To guarantee the ability to share your liability limits, check with your insurance agent to make sure you have a master policy for each LLC/ownership entity for your property groups, which will allow you to share liability as well as add and remove properties in the master policy at no extra cost.
Lenders/Notes/Subject To & Creative Financing:
Lenders: Make sure whomever you lend money to has properly insured the property that your investment is insured against. Also require that they have listed you as the Loss Payee on the policy so that the insurance company will pay you, and not them, in the event of a loss.
Note Investors: You need to make sure the property is properly insured to help mitigate risk. You NEED Investment Advisor/Asset Management E&O Insurance. This will protect you in the event that you promise an investor a certain return on the notes you provide and they decide to sue you in the event they are unsatisfied with their results.
Subject To/Creative Financing: Much like many wholesalers you may never own the home so you may not have any risk associated with the property itself. But, if you do own it, for any length of time, you will want to make sure the property is properly covered, including:
If vacant, you need proper coverage for vacancy—property and liability suited to vacancy – some policies will allow vacancy for 90 days but require specific vacancy coverage for periods longer than that.
If it’s rented, you need a non-owner occupied policy…etc.
New Construction (including teardown flips)/New Development:
Unlike most of what you see above, insurance for new builds and development is NOT provided by a property and liability package policy. Instead, these scenarios require two separate policies – Builder’s Risk and Liability
Builder’s Risk/Course of Construction:
This is Building Property Coverage ONLY and it extends to all property that is part of the project to build the structure during all stages up until it’s finished. This policy would also be used to cover an additional square footage being added to an existing building, such as a second story or master suite.
Included in this policy is Property in Transit Coverage, which property that is going to be part of the building, such as a sink or granite counter tops, that is damaged en route to the project is covered.
Your Builder’s Risk Policy will also include Ordinance and Law Coverage that will protect you in the event of a covered loss leading to you being required to rebuild to code.
As soon as the project is finished you will need to get a policy suited to its situation, such as whether or not it’s a rental, a vacant property about to be sold, or your primary residence…etc. There are a few carriers whose policies allow for coverage to extend to the point of purchase if the property is being built to be sold.
With a Builder’s Risk policy there is pro-rating. With the same 25% minimum earned (at minimum 3 months paid).
It does not provide liability coverage, though multiple carriers will offer a package with liability included as an endorsement.
Course of Construction policies are outlined exactly like Builder’s Risk except apply to any situation in which a new (not connected to existing) structure is created—new foundation…etc
Liability Coverage for Construction:
If a would be homeowner acquires land to build a new home, the first thing he buys is insurance to provide liability coverage, even before there is a structure present.
If one buys a piece of land and have no IMMEDIATE intention to build a property, you will start with Vacant Land Liability, which will cover liability stemming from someone being injured on your land.
But, if an investor knows at some point in the not distant future that he/she is planning on building a property of some kind, the investor will want to ask the agent to provide a Vacant Land Liability policy that is adaptable to a General Liability policy. That means that instead of extra paperwork and extra cost to get a new policy later, he/she can simply inform the agent and start building at a very minimal extra cost.
Now, in the event that you buy land and immediately start building you will need a General Liability Policy to partner your Builder’s Risk Policy. The General Liability is a very basic liability coverage that will give you the same $1million/$2million limits that can be raised to $2million/$4million and would also allow you to add an Umbrella if you choose.
General Insurance Concepts and Logistics:
Types of Insurance Agents –
Independent agents have multiple carrier options. Often, referred to as brokers (though technically they are not), when it comes to Real Estate Investing (REI), the independent agent will have more options to cover the wide array of real estate associated risks.
Direct/Captive: (Think State Farm, Farmers, AAA…etc) These are agents who have an exclusive relationship with their company and their company alone. This can be an advantage in certain cases where the carrier has unbelievable rates for their bread and butter risks, for example, AAA is phenomenal for the Auto rates; however, they tend much less competitive for their homeowners. In the world of REI, unless you are very specific and singular with your investing, it is likely that a direct writer agent will have a hard time covering the dynamic risks included with the multiple avenues of investing.
Brokers: An insurance broker is NOT an agent, and cannot sell directly to clients. Brokers are middlemen between agents and certain more specialized carriers. Another reason for working with independent agents over direct (in most cases) is that direct/captive agents may have only one broker (if any at all) for certain things they can’t cover themselves. Most independent agents have between 5 and 10 brokers for highly broad forms of coverage.
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 backward 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.