For the vast majority of rental property owners, insurance is absolutely necessary. While insurance companies are great at taking premiums, they do offer valuable services to limit your risk as a property/business owner and aid the overall success of your business.
Why a Good Insurance Agent Is Critical:
1. Insurance protects you as a property/business owner.
If somebody falls on a perfectly smooth surface on your property and breaks their arm, you’re liable to be sued. Insurance can protect you against potentially catastrophic circumstances. Additionally, if you face a frivolous claim, most insurance companies will defend your interests in court, and/or put forth enough due diligence to find out whether or not the other party is faking a claim.
2. A bank requires you to have insurance on your rental properties.
For the bank, an insurance policy hedges their liability in case something happens on the insured property. With insurance, you are protected as a property owner, which then protects the property, which in turn protects the bank.
3. Insurance agencies can insure raw land.
If you own raw land and are trying to decide when (or if) to build on it, it’s a good idea to insure the property in case anyone gets injured on site.
Understanding Your Insurance Needs:
Before you meet with an insurance agent, it’s important to know what your risk tolerance is and the amount you feel comfortable self-insuring (whether it’s $1,000 or $10,000) when you get your insurance policy. The lower your deductible, the more you’re going to pay for insurance. The higher your deductible, the less you’re going to pay for insurance. Either way, you need to feel like you’re getting a fair value for what you’re paying.
For our properties, I carry the highest deductible that I can possibly carry, and I keep a reserve account. Since our highest deductible is $10,000, I keep that much on hand in an emergency fund so I can self-insure the first $10,000 of any potential claim. With such a high deductible, our premiums are kept at the best possible value.
Another important consideration is whether or not you qualify for commercial insurance policies rather than consumer insurance policies. Once you get enough size and scale (usually around 12 or so properties), you can move from a consumer policy to a commercial policy, which is much more competitive on rates and can get you a much better deal. I also think commercial insurance agents tend to be more proactive than consumer agents and will often give you information on things like rate changes as soon as possible.
Finding an Insurance Agent:
Once you assess your insurance needs, it’s time to find an insurance agent. I think a great place to look for recommendations is the HBA (Home Builders Association). It’s also a good idea to look at insurance companies that have professional experience and/or specialization in real estate.
Personally, I have used the insurance underwriters Cincinnati and Auto-Owners, which both do a great job with professional landlords.
Choosing an Insurance Agent:
As you shop around for different insurance policies and agents, it’s important to ask potential agents the following questions:
- What’s the maximum deductible I can have?
- Do you have commercial policies for people who have more than one rental property?
- Do you have any carriers (or markets) that you prefer to work with for rental property?
- Are there any age restrictions or age discounts on rental properties?
Side note: The answer to this question will often play a role when you build your pro forma. For example, if an older property’s insurance is more expensive, you’ll need to account for that cost in your financial breakdown.
- What kind of notification and lead time do you give on rate changes? (a 60-day lead time is optimal, but it’s typically only 30 days)
- How can you give me the most insurance for the best value?
When Working With an Insurance Agent:
1. Limit risk.
If you limit the risk of your rental properties, you limit the risk of the insurance company. In lowering the risk, you’re likely to get a better premium, which will help you at the end of the day.
2. If your company is growing, set up regular touchpoints with your agent(s).
Twice a year, we have a conference call with our insurance agents. Our agents will email us ahead of time with a list of our insured properties, which we will review. Together, we will make sure that everything is up to speed and there are no questions from either party. If you’re buying or selling property, it’s surprisingly easy to forget to insure new properties, so these touchpoints become especially helpful to make sure everything is in order.
3. Ask your agent(s) for a running insurance report.
It’s a great idea to ask your agent for a list of all insured properties. This list should also include the insured entities, policy numbers, premiums, and everything else that has to do with your insurance. This list can help you answer questions and maintain an awareness of each property’s insurance.
In Summary:
- An insurance agent is necessary if you’re going to own rental property. Insurance protects your property, you as a property owner, and the bank loaning you money. You can also insure raw land while you decide whether or not to build on it.
- Before you choose an insurance agent and policy, make sure you understand your deductible and risk expectations. You also need to be aware of whether or not you qualify for a commercial policy rather than a consumer policy.
- Ask the HBA for insurance company/agent recommendations and visit insurance companies that focus on real estate.
- Ask potential insurance agents a series of questions to make sure you get the best bang for your buck with the policy/agent you end up choosing.
- To have a good relationship with your agent, work to limit risk, set up touchpoints, and ask for a running insurance report. This will help you stay on top of your insurance policies.