Why can’t I insure my rental properties at what I paid for them?

By Ken Kukral

For Rent sign in front of new home. Dramatic Blue Sky and clouds

This is a question we are asked all the time.  Rental property investors tend to have one mind set and are looking to keep their insurance costs minimal in order to have the maximum positive cash flow on their properties.  I have even see situations where each property has their own spreadsheet and expenses are allocated per property.

So why can’t they insure them at what they paid for them?  Let me start off, that they can.  Not with every program out there, but with some like our MVP Investor Program they can.  This may not be the BEST solution for every account but with a client who insists, it IS an option.  Let me take you through a conversation you need to have with them:

Valuation – There are usually three options, Replacement Cost, Actual Cash Value and Market Value/Agreed Amount (What they paid for them).  If there is a total loss, what do they plan to do?  If they want the property completely rebuilt, then most likely they will consider Replacement Cost.  If they are just looking to get paid the actual cash value and will plan to sell off the lot, they may consider this option.  And if they are just looking to get paid off for what they paid for the property, then they will most likely want the agreed amount option.  I think if they are dead set from the beginning on insuring the properties for what they paid for them, you still need to have this conversation.

Coinsurance – Here is where they can get tripped up.  If they do not take the no-coinsurance option, they can run into valuation problems.  You would need to do a cost estimator for all three options.  I would think you would also want to do a cost estimator on properties at the no-coinsurance replacement cost and actual cash value options so they are in line with what those actual values are.  If they truly want to insured the properties at what they paid for them, then you need to look at the no-coinsurance option.  Keep in mind the rate will be surcharged but it will provide the solution your client is looking for.  Many times they will go in and do the repairs themselves and keep the costs down so this is a very inviting valuation solution for them.

Having been the business almost 30 years, the valuation discussion can get “old”.  It always feels like we have to “talk the clients into” the proper valuation and many times it comes off like we are trying to “sell them something”.  Ultimately, we don’t want any surprises at the time of a loss when they can be emotional, in shock and can’t think straight.  When we are talking about their owner occupied dwelling, they will usually want it rebuilt and replacement cost is the only real option.  But they have a different mentality when they are talking about rental properties.  They just want to get the money out they have invested and sell the lot off and walk away.

Just keep in mind that satisfying the clients wish for insuring their properties at what they paid for them, does not relieve you of the duty to discuss and consider the other valuation options.  Clients may “want something” (in their minds) and it may not be what they “truly want”.  The only way you can know for sure is to take them through the valuation and coinsurance discussion.

As a side note, property investors like to talk about their properties.  They tend to congregate with other property investors and referrals can be plentiful if you take care of them and help them out.  Many are a part of local investment groups or online groups and trade of referrals for everything from contractors, financial institutions and insurance agents.  Don’t be afraid to ask for referrals.

Happy hunting!

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