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Understanding Real Estate Insurance: Essential Insights for Investors

Welcome to another insightful episode of Propelio TV’s “Pain & Gainz” show. I’m TJ Cozens, and I’m joined by my magnificent co-host Kelly Smith. Today, we’re diving deep into a vital topic for anyone in the real estate, personal, or automotive business: insurance. When things go wrong, who’re you gonna call? Let’s break down the first line of defense and why you should never skip out on having proper insurance coverage.

Types of Insurance for Real Estate Investors

Builders Risk Policy

What it Covers Builders risk insurance is essential for any investor engaged in new construction or substantial renovations. This policy protects against damages related to construction activities, such as theft, vandalism, and certain weather events.

When It’s Needed Anytime there’s active construction on your property, builders risk insurance is a must. Using a standard vacant policy when construction is ongoing is a common but costly mistake. The builders risk policy covers specific construction risks that a vacant policy does not.

General Liability Insurance

Importance for Contractors/Subcontractors Whether you’re the property owner acting as your own general contractor (GC) or hiring one, general liability insurance is crucial. This coverage protects against lawsuits and claims arising from accidents or damage during the construction process.

Additional Insured Endorsements Always require contractors and subs to add you as an additional insured under their policy. This protects you if their actions lead to a claim. Don’t rely solely on the contractor’s policy—ensure you have your own coverage as well.

Ongoing and Completed Operations Coverage General liability should include both ongoing and completed operations coverage. Ongoing protects you while work is underway, whereas completed operations cover you for issues that arise after the project is finished.

Landlord/Rental Property Insurance

Vacant vs. Unoccupied Property Understanding the difference between vacant and unoccupied status is critical. Vacant means no one is on the property, activating the vacancy clause that reduces coverage. Unoccupied means the property is empty but under supervision, typically with active maintenance or renovations ongoing.

Master Policies for Portfolios If you own multiple properties, consider a master policy. This simplifies insurance management and can be more cost-effective, covering all properties under one umbrella.

Special Form vs. Basic Form Cause of Loss Special form provides more comprehensive coverage than basic, especially for water damage claims not included under basic. While special form costs a bit more, it protects against a wider range of potential issues, making it a worthwhile investment.

Owner Finance Insurance

Owner-financed properties have unique risks. Ensuring both property and liability insurance is critical to protect yourself from claims related to the property you financed.

Insurance Claims Horror Stories

Not Having Proper Coverage

San Diego House Fire Example Imagine having a half-million-dollar house burn down and discovering you don’t have insurance. This happened to a family in San Diego, illustrating why it’s essential to maintain proper coverage at all times.

Basic vs. Special Form Cause of Loss

Water Damage Example A common pitfall is opting for a basic form policy to save money, only to be denied a water damage claim that would have been covered under a special form policy. The slight cost increase of special form is nothing compared to the potential out-of-pocket expenses when claims get denied.

Lack of Communication with Insurance Agent

The Breaking Bad Claim A property owner failed to report water damage, resulting in rotted flooring that collapsed under the weight of residents. Without proper communication and an appropriate policy, the owner faced a $100,000 loss not covered by insurance.

Dealing with Insurance Adjusters

Roof Replacement Claim Even when policies are in place, claims can be contentious. One property owner faced disputes over a roof replacement when the insurance adjuster argued it was heat damage, not hail damage. Eventually, the owner had to cover most costs out-of-pocket despite having insurance.

Choosing the Right Insurance Advisor

Understanding Real Estate Investor Needs

Select an insurance advisor who specializes in real estate investing. They need to understand the unique risks and requirements of your investment strategy.

Asking the Right Questions

Probe your advisor’s understanding of your business by asking about contractual risk transfer and their approach to protecting investments. If they can’t explain it clearly, keep looking.

Advocate During Claims Process

A competent advisor should not only secure the right policies but also act as an ally when filing claims. They need to fight on your behalf and guide you through the complexities of the process.

Contractual Risk Transfer Expertise

Ensure your advisor knows how to manage contractual risk transfer effectively, safeguarding you against liability through wise policy choices and diligent contractor management.

Key Questions to Ask Your Insurance Agent

To determine if your insurance agent is the right fit, ask them:

  1. Explain contractual risk transfer and its importance for my investments.
  2. What’s the difference between vacant and unoccupied property in terms of coverage?
  3. How should I adjust my coverage when transitioning from construction to rental?
  4. What are the benefits of a master policy for my portfolio?
  5. Can you provide examples of how you’ve helped clients during claims?

Final Five Questions

Dream Job if Money Was No Object

If money weren’t an issue, I’d love to be a travel and food host. Picture Anthony Bourdain—traveling the world, sampling amazing food, and meeting fascinating people.

What You’re Not Very Good At

I’m terrible at empty small talk. I prefer meaningful conversations over idle chit-chat any day.

Dream Home Location and Type

I dream of having two homes: one secluded on a mountaintop accessible only by helicopter, and another on a beautiful, serene beach.

Extravagant Purchase for a Goal

When I meet my business goals, I plan to purchase an obscenely expensive watch—something in the $5,000 to $10,000 range.

What God Would Say at Heaven’s Gate

I hope he says, “Well done, good and faithful servant. Enter into the joy of your Lord.”

Final Thoughts

Insurance isn’t a commodity; it’s your first line of defense against significant financial losses. From builders risk to general liability and beyond, understanding and securing the right coverage is crucial. Choose an advisor who gets your business, asks insightful questions, and stands by you during claims. Protect your investments with informed decisions, and you’ll navigate the real estate landscape with greater confidence and security.

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