By Mark A. Gannaway, CEO of Arcana Insurance
The life of a real estate investor is far more complicated than what’s advertised on popular television “rehab” shows.
Real estate investors have many potential liability issues to navigate, such as bed bug exposure, mold, tenant and vendor service issues, tenants without insurance, vetting contractors, insurance claims, property inspections, tax authorities and much, much more.
Whether your real estate investment is inside or outside of your IRA, unwelcome surprises could cause financial damage. Ensuring you have the appropriate insurance coverage might help protect your investment.
False sense of security from a general policy
Some investors assume a Homeowner’s policy is all one needs to cover their investment property, especially on smaller portfolios.
But a typical Homeowner’s policy requires the property to be occupied. Occupied means more than just a table and chairs and a few pieces of furniture. If the property has been vacant at least 30 or 60 days, depending on the insurance company’s policy, and they prove the claim occurred when nobody was living in the property, there is a high probability they will deny the claim.
What if the property is vacant while you “rehab” the building? Does the Homeowner’s policy cover the vacancy period and the “builder’s risk exposures” associated with your construction project? Many policies exclude this type of risk potential.
Beyond the rehabbing process, for people investing in rental properties, only having Homeowner’s coverage could introduce additional issues. From a property risk analysis exposure, if the insurance company can prove the tenant caused the damage in question, the Homeowner’s policy may have an Intentional Acts clause giving the insurance company reason to deny a claim.
From a liability risk analysis exposure, does the Homeowner’s policy afford you third-party coverage in the event a tenant’s guest is hurt while visiting your investment property? What if your tenant has a service animal at your location, does your policy afford you coverage?
Additional Insurance Coverage Real Estate Investors Might Consider
If a general, all-encompassing Homeowner’s policy isn’t comprehensive enough, real estate investors can make sure other items are included. Here are some additional coverages that might appeal to investors:
All risk insurance coverages with normal exclusions
Wind and hail coverages
Liability coverages in the event of a third-party injury or someone claiming to be injured on your investment property
In addition, it might be appropriate to include flood insurance, even if the property is not in a national flood zone. Five out of six flood losses experienced in Hurricane Harvey did not have flood insurance and many were not located in a nationally defined flood zone.
Here are a couple other considerations when seeking insurance:
You get what you pay for. Investors are sometimes finding that an extremely low rate, quoted outside the industry norm guidelines is not always accompanied by swift and accommodating claim payment. Do your homework and check references with your industry associates and leaders of any association of which you’re a member. This additional step will pay significant dividends in the long term.
About Mark A. Gannaway
Arcana Insurance Services is an all-lines property and casualty managing agency that’s been working with real estate investors since it began in 2005. Long before that, founder and CEO, Mark Gannaway, served as President, Chief Marketing Officer, and Executive Vice President for several other well-known agencies and brokerages. With over 35 years of experience behind him, including 20 with Lloyd’s of London as a U.S. Coverholder; one of only a select few in the United States.
Mark A. Gannaway is not an employee of Equity Trust Company. Opinions or ideas expressed by Mark are not necessarily those of Equity Trust Company nor do they reflect their views or endorsement. These materials are for informational purposes only. Equity Trust Company, Equity University and their affiliates, representatives and officers do not provide legal or tax advice. Investing involves risk, including possible loss of principal.
Equity Trust is a passive custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.
Not all insurance providers are the same. Choose an insurance agent who knows your business and the market segment in which you are working. The risks you face in the future will continue to evolve and you need a knowledgeable source who will put your best interest before the mere selling of a low-cost policy. Understanding your financial exposures will go a long way in saving your real estate investments and possibly your business.