Property Insurance Explained for Property Investors

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Property Insurance Explained for Property Investors

As an investor, your primary concern is maximizing cash flow on each owned and/or managed property. Investors typically view insurance as the necessary evil required by the mortgage company and which premiums are collected year after year and rarely, if ever, file claims. However, investors who feel the lowest premium is the best insurance find that come claim time, they are not getting what they feel they paid for. That feeling comes from a false sense of insurance security. The lowest premium is not always the best policy.

Property insurance for investment property is written on Dwelling Property (DP) insurance forms. They are standardized across the country and insurance carriers to make selling, knowing and purchasing easier for all involved. DP policy forms for residential SFR are quoted and issued under two types, DP-1 and DP-3. The following is a brief explanation of the differences between the two policy forms.

DP-1 is a Basic Form named peril policy. Named peril means the insurance company will list in the insuring agreement what specific losses are covered. If a loss is not listed then it is NOT covered, hence the term Basic Form. The typical named perils are: fire and lighting; sudden and accidental smoke damage; windstorm, hurricane and hail; explosion; aircraft and vehicles; Riot and civil commotion; and vandalism and malicious mischief. That's it. If the property experiences any other type of loss then the insurance company is not required to pay a claim.
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DP-1 policy forms do not include liability. This is the protection against slip and falls and bodily injury to someone NOT related the insured or living in the property. This is the portion of insurance that protects your assets from claims against you personally for acts of wrong doing. For usage with rental properties, the coverage is typically thought of as protection when the tenant or someone invited by the tenant is hurt due to poor maintenance of the property. Liability can either be added by endorsement for a premium (usually higher than liability within a DP-3) or, if your homeowners' insurer offers, liability can be extended from your primary residence to cover a rental property. Most carriers have strict limitations on how many properties liability can be extended to. Personal umbrellas do not cover claims on investment property if underlying liability does not exist on the property at the time of loss.

DP-3 policy forms are Broad Form named peril policies. The named peril definition expands to include the following perils, in addition to the perils listed under DP-1: theft; sudden and accidental discharge of hot water or steam; falling objects; collapse; freezing; and loss of use. The most concerning to investors is Loss of Use coverage. This affords the insured/property owner actual sustained loss of rents for a maximum of one year. Example, a property earns $1,000 month in rent and sustains a covered named peril loss forcing the tenant to move away from the property, the property owner/insured is entitled to $1,000 for every month the property is undergoing renovation until rented. The coverage is actual sustained up to policy limits for no more that 12 months. If this example takes 8 moths before the property is rented, the property owner is entitled to $8,000 loss of rent reimbursement. This is not offered in DP-1 policy forms.
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DP-3 policy forms DO include liability. Typically, insurers will include $100,000 for no additional premium with maximum liability limits of $500,000 for nominal premium increases. Liability plus loss of use/rents are the two biggest protections for an investor for the following reasons. Liability is the least expensive coverage in relation to dollar limits. Typical limit increase to $500,000 creates less than $70 per year increased premium. Loss of Use/Rents is actual money-out-of-pocket the property owner loses while the property is being reconstructed.

Best options to save money, insurance premiums using the above information: raise deductibles to the investors maximum out-of-pocket amount without causing hardship; do not increase liability beyond the standard amount included in the base policy (DP-3) and list the property insurance on an umbrella policy; make sure the agent inputs property characteristics correctly (builder's grade, economy grade, standard grade) to keep the replacement cost at lowest acceptable value; keep the property in good working condition/maintenance.

As a real estate investor, the primary concern is cash flow of each property owned and managed. Consider saving $85 per year per each 10 owned properties: Annual Increased Cash Flow $850! All without sacrificing coverage and protection.

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