Property Insurance Overview
Properly protecting your real estate investment can be confusing even for the most seasoned investor. This overview will provide a basic outline of the different coverage options. However, we recommend consulting with a licensed insurance professional to ensure you have the right coverage in place.
As a real estate investor, understanding the different types of property insurance is crucial to protecting your investment. The 3 primary types of insurance coverage include:
· Builder’s Risk Insurance
· Landlord Insurance
· Vacant Property Insurance
Builder’s Risk Insurance
Purpose: The purpose of Builder’s Risk is to protect the property during the renovation (rehab) or construction phase and is most commonly used for both new builds and fix and flips.
Coverage: Typically covers materials, supplies, equipment, and the building structure itself (fire, lightning, vandalism, windstorm/hail, theft, etc).
Term: Temporary coverage only during the renovation/construction period. Upon the completion of the renovation/construction, it may be necessary to transition to vacant property insurance while the property is being marketed to sell.
Liability: A builder’s risk policy does not usually provide liability coverage to protect the owner/real estate investor from liability claims (such as bodily injury or property damage suffered by 3rd parties). Liability insurance should be purchased separately from a builder’s risk policy.
Landlord Insurance
Purpose: The purpose of Landlord Insurance is to protect the Landlord’s interest in the property while it is occupied by tenants.
Coverage: Typically covers the property structure, liability, and loss of rental income.
Term: Policies are often written for a one year team.
Exclusions: The policy may contain some exclusions if the property sits vacant for an extended period of time between tenants (usually greater than 30 days).
Vacant Property Insurance
Purpose: As the name indicates, this type of insurance protects unoccupied properties.
Coverage: Similar to landlord insurance with specific provisions for vacant property and should have a vandalism rider.
Term: Varies based on the vacancy period.
Higher Risk: Vacant property is deemed to have higher risks since nobody is usually present to catch early signs of trouble (water leaks, storm damage, etc) or to deter vandalism, theft, and unauthorized access to the property. Understandably, vacant property insurance usually has a higher premium than landlord insurance.
Additional Considerations
RCV vs ACV: RCV (Replacement Cost Value) and ACV (Actual Cash Value) are terms used to describe the amount of money that will be paid to repair or replace damaged property. Replacement Cost provides for the replacement of damaged property without accounting for depreciation. Conversely, ACV will adjust the payment for depreciation based on the age and the condition of the damaged property.
Windstorm: In coastal areas (such as counties along the Gulf Coast), windstorm coverage will often be excluded from coverage and require a separate rider/policy at a significant expense. Most lenders will require this coverage.
Flood Insurance: Coverage for flooding usually requires an additional rider/policy and may be required by the lender if the property is in an area subject to flooding. Check the FEMA map to determine if the property is in a flood zone.
Mortgagee Clause: Your lender will require to be listed as the Mortgagee on the policy. This clause protects the lender if a related insurance claim is filed. The Mortgagee Clause instructs the insurance company to pay the lender for losses.
It's essential to work closely with a property insurance professional to provide expert advice on how to adequately cover your investment property. You may want to seek out those agents that specialize in working with real estate investors (vs standard homeowner policies). It is critical to address insurance coverage well ahead of the expected close date; otherwise, unnecessary delays in closing could occur.