Insuring a home is not always as simple as purchasing home insurance. The type of insurance needed depends on the purpose of the property. Home insurance is the best type of policy for a primary home that you own, live in, and are financially responsible for. This can mean either a standard single-family home, a duplex, 4-plex, or even a townhome under some arrangements. Insurance can be more complex if you rent the property, are renovating it, holding it for appreciation or using it for business purposes. This article is written to discuss these situations.
First things first, who owns this property? It could be you and/or your spouse, someone else you lease from, a trust, an LLC or corporation. Is there a mortgage? All parties with ownership interest need to be accounted for. This will be important in the event of a claim. The claim payment will be made to each party as is their financial interest at the time of loss. A common mistake is leaving out an entity thinking “the property is insured, what’s the matter?”. The problem could be that a claim check is not claimable by someone with an interest in the property. This could cause further, possibly legal, disputes. It could be that a guest injury resulting in a lawsuit, jointly naming all owners, is brought, and one or more entities are not provided defense and liability coverage. For example, if you have an LLC with an ownership interest that holds other assets or properties, but you only have your name listed on the policy for the property where an injury occurs, the remaining assets of the LLC could be exposed if not setup properly. In other words, you have coverage, but your LLC does not.
What is the purpose of the property? Who is occupying it? Is it a rental, a fix n’ flip, is it vacant? Are the occupants personal or business occupants? Is the occupant a relative? Are they a true tenant with a lease, or is this a contract-for-deed arrangement in which they will ultimately become the owner? Is there farming conducted at the property? All of these factors determine what type of policy is needed. A personal landlord policy is often needed for a single family home rented to a personal tenant. However, a home-owners policy may be able to accommodate this if you live there too. A condo unit-owner rental policy is needed if it’s a condominium owned; a Farm owners policy for farm use; a vacant dwelling policy for a vacant home; a builders-risk policy (often) for a fix ‘n flip; and a lessors-risk policy for commercial space rented. It’s important there is a clear purpose for the structure. Insurance can be more difficult to locate if the property has mixed purpose. Some common, mixed-purpose situations are easier to insure, such as a restaurant with living space above. Be sure to be clear with your agent who will occupy the space, and what types of activities will be conducted at the location. Providing your agent with a copy of a lease agreement and any other relevant documentation is also helpful to ensure the coverage matches the reality.
There are two primary types of valuation used with most properties: replacement cost, and “actual cash value” (ACV). Replacement cost is concerned with the cost it would take to re-build the property. ACV polices insured commonly for market-value minus land, and will take depreciation into account. ACV is commonly used for older properties, in which the reconstruction cost far exceeds the market value. With ACV, the goal is to re-coup the market value of the property, sell the land, and purchase a different property should it be deemed a total loss. It’s important to understand the method used to value the property. Sometimes, this is not a choice, due to age, condition, or availability of insurance. However, it’s best to know what type of insurance is being purchased. Under both methods, it is also important to make sure they are adequately insured. Some people may be inclined to insure a $1M building for only $300k if the perception was it was purchased at a discount, inherited, or if it would be unlikely a fire would affect the entire structure. However this would result in the insurance company being equally responsible for a partial loss after collecting a substantially reduced premium. To combat this, insurance companies will impose a “coinsurance penalty” which is a percentage of what the property was insured for, divided by what it should have been insured for. A coinsurance penalty in this example would result in roughly, only 1/3 of the loss being covered. Everyone is looking to save money, but shorting the property valuation is not the place to look for savings. Your agent can help estimate the value with various software, but on occasion, experts or appraisals may be needed.
Other Structures, appurtenant Structures, and farm Structures are common names for similar coverage on most policies. These are structures other than the main building that will also need to be insured. This could be a detached garage or carport, a deck, a fence, a guest-house, a barn or a pool house for example. Maybe you own and live in the main home, but rent the guest-house. Maybe you live on a farm, but lease the farming to a full-time farmer. Be sure to let your agent know about ALL the structures at the location and their purpose. This could impact the type of insurance that is needed.
Depending on the type of policy this may be referred to as personal property, household furnishings, business personal property, or farm property and varies based on the type of policy. You may need a lot of coverage, or none at all. A single-family long-term rental property for example may have no personal property or household furnishings owned by the owner at all, but may have kitchen and laundry appliances that need accounted for. Or, it could be fully furnished, commonly if used as a short-term rental or home-sharing program. Farm leases may have a substantial amount equipment that needs to be covered in various ways. Fix ‘n flips may have building materials to account for. It’s important to discuss all property that will be kept at the location with your agent, who owns it, what the value is, and who is responsible to cover it to make sure there are no loose ends.
Loss of Use
Loss of use, Additional living expense, loss of rental income, or business and farm income coverage are generally in the same family of coverage. This covers the financial loss sustained if the property is damaged or another policy trigger is met, and loss of income or additional expenses are sustained due to the loss. If you are renting part of your home, you will likely need both additional living expense, and loss or rental income. If you have a rental, loss of rental income needs to be adequate to cover the lease agreement. A fix’ n flip may not have loss of rental income, but may incur soft-costs if damage was sustained to the building, such as additional construction loan interest, property taxes, engineering and permit fees, etc. Think about what would happen if the property was damaged and unfit for it’s purpose? What type of loss would be sustained. Work with your agent to make sure this amount is understood and covered properly.
One of the most important coverages on the policy. Liability insurance covers claims of bodily injury and property damage by a third party. “Personal Injury” and “Landlord liability” can be added to cover other types of claims such as libel, slander, defamation, wrongful arrest, wrongful eviction, and invasion of privacy. Most policies will provide “premise liability”, which covers these claims at the location-only. Premise liability typically excludes business and farm risks. General liability will be needed for business related risks, and for risks outside of the location. and Farm liability will be needed for farm risks. If you own many properties, and you want coverage at all of them- even at properties you are considering purchasing- a general liability policy may be best. If you just have a few rentals premise liability with personal injury may suffice. If you are renting to businesses, you’ll want to make sure your insurance company is aware of what the business tenants are doing, and would be willing to cover your vicarious risk. A standard lessors-risk policy may not cover premise liability if rented to a hazardous tenant. Lawsuits are expensive; that’s the main point of the coverage- to potentially survive one. This can’t be stressed enough, work with your agent to make sure everyone knows what is going on, what could be going on in the future, and what the limitations of the policy are.
There are numerous other considerations as well. No two policies are the same. Some insurance companies will write one property, but not another. Working with an independent insurance agent- who represents multiple insurance companies- can broaden your options, and provide you with invaluable insight on how to best cover your risk. Don’t hesitate to contact one of our independent agents today!
Aspire Insurance Agency