Real estate insurance is too often seen by landlords as an unnecessary expense. That’s a huge mistake that can cause problems with your wealth and retirement plan and can even lead to financial distress.
Having insurance for your real estate investment is of paramount importance. Here’s an overview of what good real estate insurance should cover, and some best practices we recommend applying when buying and renewing your policy. Of course if you have any questions about your insurance coverage, we’re always here to help.
What Does a Real Estate Insurance Have to Cover?
A standard real estate insurance policy must cover property and casualty, liability, and a series of other items that will vary according to the property’s needs. Some of the major concerns addressed are property damage that may be caused by fire, flood, and other natural events.
In addition, when you have an incident that renders the property un-rentable, you may face revenue loss. This scenario should be insured too, so that when the rental income is abruptly stopped, your revenue continues due to good insurance. Liability insurance protects other people from harm on your property. For example, if a tenant gets sick due to the presence of black mould or asbestos in your property, liability insurance will cover potential claims from the tenant.
How to Get The Perfect Real Estate Insurance Coverage
When you are dealing with real estate insurance, you must be thorough. These are some of the best practices we recommend landlords to follow when they buy and update their insurance policy.
- Whether you’re insuring a single home, a multi-family complex or a small apartment building, you need to make sure that you have had a fire insurance appraisal done. In larger revenue properties, this needs to be done annually to ensure that the replacement value has been certified. That satisfies insurance companies and you that you are neither under-insured nor over-insured for any losses.
Often owners do not address this issue and find, over time, that they may be grossly under-insured for the value of the loss or the actual appreciated value of their property and assets. If you make a claim in this situation, you may be reimbursed for only a portion of the claim.
- When needed, inform rent variations: Owners tend to forget to inform their insurance broker when the rent has increased. When you are insured for less than the current replacement value, you will only get paid out some of the loss, because you were under-insured. This error can be very expensive and the final responsibility rests with you.
- When in doubt, seek professional advice: A qualified insurance broker can advise of the insurance that suits your property needs. Also, professionally-trained property managers understand real estate insurance coverage and can give you good insights as well.
Tenant Insurance: A Key Piece for a Protected Property
Another area of concern is tenant insurance. Landlords should expect their tenants to carry insurance, so include this requirement in your lease. Damage can occur while your tenant is in place, specifically fire and flood. If the damage that has occurred affects you, such as loss of revenue, you’ll want to lean on their tenants . We ensure this item is addressed in all our clients’ leases.
A Heads-Up About Contractors
Did you know that when you hire contractors to work on either a major project on your property or items like snow removal and landscaping, they need to carry their own liability insurance that covers you and your property while they work there?
This covers you in the event their work causes harm to anyone on your property. A competent property manager engages trusted contractors that carry this coverage. If you’re sued for a snow-related trip-and-fall on your sidewalk, the snow removal company is legally liable for any claim and their insurance should be expected to step in and mitigate the loss.
Use Your Real Estate Insurance Wisely
When you do have an incident that may be insurable, you need to ascertain whether there is merit in paying it out of pocket or making a claim on the insurance. A qualified property manager can help you make that decision.
Remember, some incidents may just not be worth claiming on the insurance.
A Cautionary Tale
Being thorough with your property insurance is key, and failing to do so can be very expensive. We know of an owner who self-managed his property, never checked his insurance and just renewed annually. One year, his caretaker claimed that he was robbed at month end, when he had just collected all the rental payments.
Only then, the owner realized that he had no fidelity insurance, which is what protects you when an employee steals from you. He also didn’t have adequate burglary insurance. On top of that, he had an inadequate loss of revenue insurance too, because he was insured for less monthly rent than the actual rent that was lost.
On all counts, this was a case of lack of attention to detail that could have been easily prevented by just re-reading the insurance and updating the policy.
Better Safe Than Sorry
Having the right real estate insurance is key to your success as an investor: it will give you peace of mind knowing that in the event of an incident, your cash flow will continue. If you’ve been neglecting your property insurance, or have doubts on how the insurance coverage for your property should be, we can help.
