When we consult with people about property management, one of the first items we ask about is insurance. When we started investing in real estate we were way under insured. We did not realize until one night I was at a real estate meet up and the guest speaker was a commercial insurance broker. What he said that night scared me, educated me, and forced me to seek out the right broker that helped us. The broker who was referred to me by another investor, was able to provide us with the right insurance, for not very much more.
I am going to tell you my story and what I have learned about rental property insurance. I do want to point out that I am not in the insurance industry, and also anyone reading this may feel I am over or still under insured. I do realize that some insurance coverage is based on opinion or risk adversity.
Here is our story:
We had a house, motorcycle, boat, and a couple of cars insured before we got into the rental property business. When we bought our first property and I needed confirmation of insurance for the lender, I called our regular broker (that we had dealt with for years) and had the person that answered the phone insure our new duplex. I did not know what I did not know, and the insurance I bought fit the profile of what the lender was looking for, so I did not question it.
I thought I was insured. We ended up buying another four properties all in a corporate name over the next twenty four months. I had this same agent keep adding them to our file. Me, my wife and our partner had to sign all the mortgage documents, and the agent never talked about a commercial policy.
I was shocked the night I heard the guest speaker at the real estate meet up talk about the type of coverage available for rental properties, and what kind of coverage property owners should have.
I often find that our story is similar to other investors. I know different provinces, states and countries have different insurance coverage available, however, when it comes to rental properties, they need to be insured like a business not a personal residence. I am not going to talk about hurricane, tornado, flood or earth quake insurance, but if they are risks in your area, it would be worth investigating coverage for those items.
Make sure to get a professional commercial insurance broker to review your policy and make recommendations.
Here are some of the coverage’s we lacked:
Rental income replacement – this will basically pay you the rent while your property is being repaired after a you have a fire or a covered problem that makes the property uninhabitable.
Sewer back up insurance – this covers the repairs required if the sewer backs up.
Market value of buildings – you need to figure out the cost to rebuild per square foot and make sure you have enough coverage to realistically rebuild your property if all or part of it burns up, in Nova Scotia most regular owner occupied residential policies have guaranteed replacement coverage, however, commercial rental property policies do not have this coverage.
Oil tank leak coverage – commercial policies in Nova Scotia do not cover oil tanks. You need to get additional insurance to cover damage caused by oil leaks. Regular owner occupied residential policies in Nova Scotia will usually cover damage caused by oil leaks.
Two million dollars in general liability insurance – we did have general liability insurance, but it was only for one million. The reality is that it does not cost very much more to increase it to two million.
We did have a regular policy, it is just that when you go from a regular residential policy to a commercial policy, you get a lot of business related coverage’s, that you do not get from a regular residential policy.
If you want to manage properties that do not belong to you, you will need to get error and omissions insurance just like a real estate agent, home inspector or other professional’s, that can cause a financial burden to a client based on mistakes.
If you want to manage a couple properties outside your portfolio, you can often get your general liability insurance extended to cover you. You will need to check with your insurance provider, and if you are going to start a full time property management company, you will need to get a separate policy. You will need both general liability and errors and omissions insurance.
If you invest in condominiums, you need to be aware of how insurance works. The condo corporation will have coverage to rebuild in the event of a fire, however, the insurance company will only rebuild to original specifications.
Here is an example of how this may affect you:
You buy a condo that was built in 1985. It came originally with a laminate kitchen counter top and plain melamine cabinets. It may currently have granite counter tops and cherry wood cabinets, unfortunately if the condo building burns down, the condo corporation insurance is only required to replace the kitchen with what was originally in place. You need to get additional insurance to cover the upgrades. Even if you have purchased the condo after the upgrades were completed.
I hope this over view helps you get properly insured. The point I want to make, is that if you own, manage or both residential real estate you need to discuss your insurance requirements with a commercial insurance broker who has experience in residential real estate.
Michael P Currie