A frequent question of property investors and home flippers is what insurance to carry for a dwelling they recently purchased. Let’s first address the dwelling/structure itself, which depends on whether the insurance policy you are purchasing has a REPLACEMENT COST provision or an ACTUAL CASH VALUE provision.
If the policy is providing replacement cost, the insurance value scheduled must be sufficient to REBUILD the home, with “like kind and quality” materials. This value will often be higher than the current real estate market value if the home was a rehab property or required updating. If the policy is an actual cash value (ACV) policy, the insurable amount will be significantly less, based on the value of the home. This would be similar to the market value or purchase price of the home.
A word of caution, in the event of a claim, if the policy is an ACV form, the loss will be depreciated. For example, if you suffer a $50,000 loss, the actual cash value settlement could be depreciated by as much as 60% or a net claim of $30,000. You will not receive a settlement equal to the cost of the repairs after a claim unless you insure the home at the full replacement cost value.
If your investment property suffers a loss and you are unable to collect rent from your tenants, as part of the Property Claim, you suffered a loss of income. This portion of the coverage will reimburse you those rents the tenant would have paid you, subject to the limit scheduled on the declaration, while the property is being repaired.
The last critical piece is the Liability Insurance Limit. This is your protection in the event there is a loss on the property that you as the landlord are responsible for. Many unforeseen events can occur at a rental property that you as the property owner can be held responsible for. The liability coverage provides legal defense and coverage in the event you are sued for damages that occur on your property. Many times, the cost to defend a lawsuit can be as much as the damages awarded to the injured party. This is one area you do not want to underestimate… choose your limit carefully!
Stephen M Yeity, CPCU CIC
CrossKeys Insurance, Inc.