Let’s debunk one of the trickiest myths in property insurance: Self-insurance is too risky. This is one of the trickier myths we discuss because everything depends on what line of coverage we are talking about. Let’s debunk the main myth first.
When I am speaking to different groups across the country, the first thing I ask is, “Who in the room self-insures their property?” Rarely does anyone raise their hand. My next question is, “How many of us have a deductible on our property policy?” All the hands in the room go up.
Reality: When dealing with property coverage, the deductible you carry is the amount you are “self-insuring” at the property whether you think of it as self-insurance or not.
More importantly, the property rate that your carrier gives you is directly affected by the deductible you carry. Simply put, the higher the deductible, the lower the property rate and cheaper the premium. You should be able to decide what deductible you want to carry, not just be assigned one. (See sidebar for a simple exercise to determine the right size property deductible for you.)
While you should self-insure to the extent that you can by personally defining your deductible, self-insuring or neglecting to purchase liability coverage for even one day is entirely too risky! Even if you are immediately flipping a property and plan to own it for only a matter of days, buy liability coverage for that property. It likely will only cost you about $10 a month and that coverage will eliminate any exposure you have for the short time the property is in your possession. In the insurance industry, we say liability is truly the unknown. It “has a tail on it.” That means you might not know of a liability loss until a year or more after it happened.
For example, if Jane Doe alleges that she tripped and injured herself on your property around the time you had ownership interest in that property and hires an attorney to represent her, the attorney is going to send out letters to every party that has ownership in the property around the time the loss occurred. That population will include you. If they determine the loss occurred during the time you were the owner and you didn’t have liability coverage, watch out! The judge may throw the book at you. It’s better to spend $10 for peace of mind. You’ll know you’re covered if the one-in-a-million chance occurs and someone is injured during the brief period you owned that property.
Not only do we recommend always carrying liability insurance, but also keeping your carrier in the loop in the event of any potential liability losses.
Here’s an example: One day you receive a call from your tenant who has lived at your property for a year. We’ll call her Mrs. Jones. She recently fell down the steps and hurt her hip, but money is tight and she can’t afford to go to the doctor. Being the good landlord you are and appreciating the fact she is such a good tenant, you agree to pay her deductible so she can go to the doctor.
About two weeks later, Mrs. Jones calls you again complaining that she isn’t feeling any better and wants to go back to the doctor. You agree to pay the deductible for the second visit. The third time you hear from Mrs. Jones, you actually hear from her grandson, who just happens to be an attorney. He informs you that his grandma still isn’t feeling any better and recommends you turn the incident in to your liability insurance. You contact your agent and let them know what happened and your carrier comes back and declines the claim!
How can they do that? Easy. The second you decided to pay Mrs. Jones’ deductible, you diminished your carrier’s ability to defend or settle the claim. You should have called your carrier at the first word of a potential liability loss because you have an obligation to your carrier to put them on notice. Liability insurance carriers have full defense teams in their arsenal to defend you, and those teams are part of your annual liability cost. Use them and never attempt to settle a liability loss on your own.
What Property Deductible Should I Carry?
Here’s a good way to decide what property deductible you should carry:
Think about the minimum claim you would ever turn in (this could be a different answer for each of your locations), double it, and that is about the property deductible you should carry. Now look at your current policy and refer to your deductible. Most likely it is $500 or $1,000. If the number you just came up with in your head is higher than what’s listed on your policy, you’re paying the insurance company more than you should!
I urge you to contact your agent and ask them how much you would save by increasing your deductible to the number you came up with. Consider a higher deductible to save on your insurance premiums longer term. Turning in a property claim of any size can increase your property premium for up to five years following the loss. Over time, you will pay more in increased insurance premiums than you would by just paying for that $500 or $1,000 loss out of pocket.