You Got Insurance, Don’t You?

I was recently watching the 1980s cult classic Roadhouse (listed as one of “The 100 Most Enjoyably Bad Movies Ever Made”) on TV with a couple of friends and there was a scene in which the typical rich evil businessman antagonist sets one of the character’s properties on fire. One of my friends joked that it wasn’t such a big deal since it should be covered by insurance. Later in the movie, one of the characters actually said “you got insurance, don’t you?” after another similar incident.

Last week, I wrote about how real estate investors can do well in a variety of different economic environments. But as the movie illustrated, real estate owners have their own set of unique risks. In addition to wealthy arsonists, natural disasters like floods, earthquakes, tornadoes, hurricanes, and fires can all wreak havoc on your property and it’s much harder to diversify this catastrophic risk with direct ownership of rental properties than it is with stocks.

Fortunately, as my friend pointed out, that’s where homeowner’s insurance comes in. Not all insurance is created equal though. Here are some tips to make sure you’re protected without overpaying:

Shop around.  15 minutes can save you 15% or more but don’t just look at price. A cheap homeowner’s insurance policy won’t do you much good if it doesn’t actually pay claims in a timely fashion. In my case, I chose Amica because of their stellar ratings with Consumer Reports and other third party reviewers. They were also able to get me the lowest rates by extending my renter’s liability insurance to cover my rental properties and as a mutual company, they pay dividends that result in a lower net premium.

See if you can get a discount by consolidating multiple policies with one company. If you have your homeowner’s and car insurance with the same company, they can often give you a discount. Amica offered me a 15% discount for transferring my auto insurance policy to them but it didn’t save me much since the discount would only apply to my already really low cost renter’s policy.

Consider adding additional coverage. Things like water backup (covers damage caused by overflowing water and sewage pipes) may require an additional endorsement. Earthquakes and floods are generally not covered by homeowner’s insurance at all so you’ll want to see if your property is in an area prone to those disasters.  You can check with your state’s department of insurance for info on earthquake insurance and learn whether you need flood insurance and shop for a policy through the National Flood Insurance Program.

Drop coverage for medical payments and personal property. You don’t need to pay to insure your tenants and their property. Let them purchase their own renter’s insurance.

Get as high a deductible as you can afford. Choosing a deductible of $1k or more is another way to reduce your premiums. Yes, it means having to pay more out-of-pocket but that’s why you should have sufficient cash reserves. You also want to avoid making claims anyway since they increase your future premiums. That can be especially costly if you’re insuring more than one property. Remember, insurance policies are priced to collect more in premiums than they pay out (otherwise, they’d be out of business) so it generally only makes sense to insure those expenses you otherwise couldn’t afford.

While often overlooked, homeowner’s insurance is a crucial part of real estate investing. Taking just a few minutes to make sure you have adequate coverage can make all the difference. After all, when a natural disaster or the local tycoon strikes, you want to have a good answer if someone asks “you got insurance, don’t you?”

 

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