Insight 44

Insure Your Investment

Canadian real estate investors have to take property insurance seriously if they buy a personal residence or investment property in the United States. But how do you know that you're working with a reputable insurance agent and that you are carrying enough insurance? Here are a series of factors to consider to ensure you properly and adequately insure your real estate investments.

Find an Agent Who Can Shop Around

Ask the insurance agent questions about his or her history insuring investment properties or second homes for Canadians. There are some real advantages to working with an insurance agent who is capable of writing policies through several different insurance companies. Since different companies offer different insurance packages, this type of agent may be more familiar with market options and is in a better position to review several insurance options before making a recommendation.

The agent should also have experience writing policies for the type of home you need to insure. If you are dealing with single-family homes or multi-family homes, make sure the agent knows what you really need. He or she should be able to anticipate your questions—and present options and scenarios you haven't even considered.


Home Warranty Insurance
Before we talk about insurance generally, you should be aware of the home warranty program readily available in the United States. This program covers repairs to the house and repairs or replacement for appliances and air conditioners. If you buy an investment property or second home that is new or just renovated, you should consider this. It is not costly—normally less than $500 per year. For investors, this can be part of the repair and maintenance allowance.

Areas of Coverage

For rent-and-hold investments and for second homes that are vacant part of the year, you need to focus on the following coverage areas:

Dwelling

This aspect of the insurance applies to “permanently attached” items, so it typically covers your house and the attached structures and fixtures in the house, such as built-in appliances, plumbing, heating, permanently installed air conditioning systems, and electrical wiring. Some appliances, such as a dishwasher, are considered to be “hardwired” to the property and are therefore included under this coverage. Using the same rationale, a refrigerator would not be covered because it is not permanently attached to the property.

Other Structures

“Other structures” are detached structures such as garages, storage sheds, and fences. If your property has a storage shed, you need to make sure that your policy covers it. This is an area where the wrong assumption can cost you a whole lot of money. Make sure the agent you're talking to has all the necessary information.

Personal Property

This part of your policy typically covers personal property, including the contents of your home and other personal items owned by you or the family members who live with you. This protection can be based on actual cash value or replacement cost. If you are the landlord, you should strongly encourage your tenants to get renter's insurance. Without it, their personal property will not be covered in the event of insurable property loss.

Loss of Use

This covers loss of rental income because of an insurable loss. Let's say your tenant starts a kitchen fire while cooking and the property sustains extensive damage such that the home is no longer habitable. The loss of use coverage will cover the loss of rent while the property is being renovated. This sustains your cash flow.

Should the fire occur in your personal second home, loss of use coverage will cover the cost of additional living expenses for you and your family while the property is being renovated.

Liability

Personal liability coverage protects you against a claim or lawsuit resulting from bodily injury or property damage caused to others by an accident on your property. Canadians who own rental property or a second home in the United States must take this coverage seriously. Liability insurance is a critical part of your asset protection plan. See Part 5 for more information on personal liability.

Medical Payments to Others

This pays medical expenses for persons accidentally injured on your property. Considering you now own property in the world's most litigious society, medical payment coverage is another very important way to protect your business.


Key Insight
Property insurance is one area where cheaper is definitely not better. Some states set relatively low limits for insurance coverage. Don't be taken in. You need good advice about how much insurance is enough. Ask if an umbrella policy makes sense. This is in addition to other insurance and goes “over top” property, automobile insurance, and workers' compensation insurance, for example.


A Note about the Second Home
Insurance insiders say that a second home typically can be insured under a standard homeowner's policy, which generally offers the best coverage at the best rate. But if you own a second home that you live in for several months of the year and then decide to rent it during the other months, you must notify your agent. The minute you have a tenant in your property, your homeowner's policy will not cover you completely should you have a loss.

Replacement Cost Value and Actual Cash Value

When buying insurance, it is important to understand the difference between replacement cost value and actual cash value. Replacement cost value (RCV) is the actual cost to replace an item or structure at its pre-loss condition, while actual cash value (ACV) is computed by subtracting depreciation from the replacement cost. Costly mistakes often are made if investors fail to ascertain with clarity the terms of their insurance policy with respect to RCV and ACV, so be careful. Let's take a look at an example of what could happen.

Say a windstorm or hurricane destroys the roof on your property. The roof was ten years old and cost $8,000 when it was originally installed. It's going to cost $10,000 to have a new roof installed with roofing material of like kind and quality, such as three-table shingles with a twenty-year life expectancy.

Under an ACV policy, the insurance company is going to determine the depreciation that has occurred to the roof already and subtract it from the replacement cost. Using an industry standard calculation that says three-tab shingles depreciate 5 percent a year, the insurance company will pay out $5,000 for a new roof.


Replacing those Shingles
10-year-old roof that depreciates 5% a year 5 50% depreciation withheld
$10,000 cost of new roof 2 $5,000 depreciation 5 $5,000 ACV to be paid by insurance company

Under an RCV policy, the insurance company would compensate you the full $10,000 for the new roof. Of course, opting for RCV coverage will increase the cost of your insurance policy, but if you ever need to file a claim, you'll be glad you chose this option. That peace of mind is even more important when your investment property or second home is located a long way away—and in a different country, to boot!

Read Your Policy

Make insurance a cornerstone of your due diligence. Too many people do not read their policies until after they have a loss and need to make a claim. Do your homework up front and avoid nasty surprises!

Making a Claim

To understand the value of a good insurance policy, it's helpful to look at what happens when you need to make a claim. Here's a quick checklist of what you need to do:

img Notify your agent immediately. You will want to call and put the agent on notice even if you are unsure if you will make a claim.
img Take pictures and/or video to document all damages.
img If at any time you need to undertake any temporary repairs so that you don't incur additional damages, do them.
img Be sure to take pictures of the temporary repairs and keep all of your receipts.
img An adjustor from the insurance company will contact you and arrange to inspect the damage. After the adjustor inspects the damages, he will determine what he believes to be the cost of the repairs.
img Get three independent bids for the repairs, and compare them to the insurance company estimate.
img If the insurance adjustor estimated the repairs accurately, you will get a settlement to complete the repairs.

The Settlement

The insurance company generally will issue a settlement in one of two ways. The company will either give you a check in the amount they believe the repairs will cost, or will send you their estimate with a sworn proof of loss statement that you will have to sign, have notarized, and send back to the insurance company before you are issued any payment for the loss.


Key Insight
Be careful what you sign. When you sign this sworn proof of loss statement, you acknowledge that the repairs will cost no more than the insurance company's original estimate. You therefore have no recourse if the repairs cost more or if any additional damage is found.

If your estimates are higher than the estimate used by the insurance company, do not sign the sworn proof of loss statement, which is your prerogative. Instead, submit the three estimates with a letter to the insurance company. The letter should state that the insurance company's estimate is low given your own estimates. Ask the company to review the three estimates you have obtained, and to issue settlement based on the actual costs found in the three estimates. Insurers will typically settle based on the lowest of the three submitted estimates.

Location, Location, Location!

Like automobile insurance the price of property insurance is determined largely by where you live. Hence, the insurance premium for a $150,000 home in one city in Florida will not be the same as a house in another city, let alone another state.

Some of this is because of severe weather like hurricanes, tornadoes, and earthquakes. For example, hurricanes are a reality in Florida and premiums will be higher depending on your property's proximity to the coast. The US Weather Service estimates Jacksonville to be the least likely coastal city to experience hurricane-force winds in any given year with a probability of one in 50. In Miami, it's one in seven thanks to its proximity to the Gulf Stream, which obviously means a higher premium. In California, insurance is affected by the potential for earthquakes.


Myth: Insurance in Florida is far higher than in most states in the United States.
Fact: This is not the case. Insurance in southern Florida is higher because of the increased risk of hurricanes, but that's not an issue in the northern part of the state.

Insurance premiums can affect your investment's cash flow. Since insurance is one area with few “global” truths, get your information from knowledgeable local agents.