Insurance Information for Real Estate Investors

Jan 05, 2010 Comments Off by

In our risk averse culture, we insure everything – almost…
As investors we attempt to insure against bad tenants, plaintiff attorneys and others seeking deep pockets. We use creative entity structuring and trusts to hide ownership of our assets. But one thing we fail to do is completely understand the first line of defense… our insurance.

Biggest Insurance Mistake…
The biggest insurance mistake I see with residential investors is with their subject-to deals. Upon taking over the obligations (assuming a non-assumable mortgage), they tend to leave the previous homeowner’s policy in place. Or they get a dwelling (fire & hazard policy) with the previous owners as insured. Both are a mistake. Yes, I know you’re going to argue, “We added the Land Trust & trustee as additional insured”. But it’s still isn’t good enough.

For 5 years, I owned a corporate and insurance investigative agency. We worked closely with the SIU (Special Investigative Unit) in the regional claims office of the major underwriters. The claim managers did everything to ensure the coverage was valid and the insured were the owners of the property. Sure, there will be adjusters and claims offices that will not even verify the insured are the legal owners but they should.

What if I sold you my truck and I left the policy in place but conveyed the title to you? Now you’re the legal owner and the listed insured is me.

And you have a wreck.

Even though you may be listed as “additional insured” as another driver, the claim should be denied because the ‘insured’, me, is no longer the legal owner of the truck. The same can happen with real property.

Add this to your to-do list….
Ensure that all your policies are correct. The listed insured on your policies should be the legal title owner. For a land trust, it is the trustee – not the trust itself. Also, if you conveyed any property from your personal name into an entity, change it as well.

An Overlooked Policy that you should have…
If you buy and sell real estate, you should consider getting quotes on disability policy. Especially if you’re a full-time investor. This is the most overlooked policy by flippers, rehabbers, and developers. There are plenty of major carriers that can offer you a reasonable quote on a disability policy. If you don’t have one, get quotes next week and get insured.

One Policy that may not cover you as well as you think…
Each time I talk insurance someone brings up an umbrella policy. Two common misconceptions about umbrella policies are that it covers anything your other policies do not and it covers your business activities.

Umbrella policies only ‘extend’ your current coverage and personal umbrella policies may ‘not’ cover your business activities. In fact, most do not. Rest assured you can get a business umbrella policy. Check with your agent and make sure you understand the coverage before you buy.

Last tip…
As much as we rely on our insurance agents, someone in the claims department of your underwriter will have a much better understanding of the actual coverage. Sometimes, our agents will get it wrong but hopefully it won’t be on our property.

Recently, one of my agents (State Farm) verbally verified to another customer that he had motorcycle coverage if he left his Harley with a automobile dealer to sell on consignment. But he didn’t and guess what… yep, someone totaled it. No coverage even though the agent committed to it. I didn’t hear how they settled it but I’m sure someone was lighter in the wallet… and it wasn’t the insurance company.

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