Should Insurance Be This Puzzling?

As consumers, let alone real estate investors, we tend to flinch when the insurance bill arrives. Many times, for good reason. Rates are higher, coverage seems to diminish, and for what? We never even filed a claim! However, if we stop thinking of our insurance policies as just another drain on our cash flow, and more as a legitimate part of our business plan, that premium notice may be a little easier to open.

Most of us consider insurance as a “purchase.” That is, we buy it because we “have to have it.” The pursuit of rock-bottom insurance rates has hurt more investors than it has helped. That’s because the agenda for the agent may not fit the needs of the investor. Protecting our assets is more complex than simply finding the cheapest insurance rate.

Higher Deductibles

Take a look at the deductible you have on all your insurance policies. Chances are, if you increase each of them to the next higher level, the premium savings generated will more than offset the difference. A solid rule-of-thumb is to take the minimum claim you would file, double it, and use that as your preferred deductible on any policy.

If you would never file a $1,000 claim, then it doesn’t make much sense to carry a $500 deductible. A deductible is, by definition, “self-insurance.” I am an advocate of self-insuring that which you can control or is of a known amount. However, self-insuring unknown risk, such as liability, even with an asset protection strategy in place, is rarely a good idea.

Combining Coverage

The more opportunity you have to combine coverage on either the same policy, or with the same carrier, usually gets you a better rate. If you have six rental properties on six different policies you have separate deductibles. If multiple locations are damaged, your deductible will apply per location. On a master, or “blanket”-type policy, where all properties are combined, the deductible usually applies per occurrence. Knowing this, and choosing a deductible that is appropriate for your business, goes a long way in helping you when you really need it.

Using the “Best” Insurance Company

The insurance company (or companies) you use should be one with the financial strength to deliver on their contractual obligation when a claim occurs. AM Best and other company rating services are good places to “investigate” insurance carriers. That stated, some of the best companies available are ones you may never have heard about.

Always work with an agent you trust, regardless if they are “captive,” or “independent.” Find an agent that is familiar with real estate investing and willing to take the time to explain the protection you need for your situation, even if they can’t offer the policy themselves.

We all like to save money, but you purchase insurance for protection. Make sure you understand how it works before you need it. Basic insurance terminology and issues apply to many types of businesses and scenarios. A deductible is a deductible, for instance. However, in the world of real estate investing, some of the creativity that is required to make a deal happen can throw many insurance agents and companies for a loop. Lease-options, land contracts and other acquisition strategies are common for us as real estate professionals, but not so common are the people we look to for proper advice and policy structure.

-Tim Norris, President, REIGuard*

*REIGuard is the brand name for the residential real estate insurance program offered by National Real Estate Insurance Group, serviced by Affinity Group Management.