Choosing insurance to protect your investments
Choosing insurance to protect your investment projects can be tricky – after all, you don’t plan to own this for long, so why opt for additional coverage? Read below for some of the common “cost–saving” insurance missteps:
- Inadequate Coverage Amounts
One of the most common mistakes when selecting an insurance policy is not carrying enough coverage on the property. Frequently, policies are only written with enough coverage to protect the total monetary investment into a project. However, that won’t account for your time and labor. While a total loss could be covered in this case, you will be left with nothing to show for the time invested or the profits lost.
Pay attention to your estimated replacement costs. All insurance companies are going to pay claims based on their value calculations. When evaluating a property, the replacement cost of a home will be assessed on the cost if you were to knock down, excavate, and rebuild. If you choose to under–insure a property, you could face coinsurance penalties and shorted or denied claims if you fall below the standard 80 percent coinsurance clause. While not all coinsurance is 80/20, this is the most common, and the penalty will apply for any under–insured property, regardless.
- Specifying the Type of Coverage
Another common misstep when choosing insurance is not specifying that there will be renovations made to the property. A vacant homeowner’s policy will protect the property only as it currently sits. Any policy you take out should include a builder’s risk endorsement or language stating that the building improvements are covered.
- Special Form vs. Broad/Basic Form
This might be less common knowledge, but the form your policy is written on matters. Special Form should always be the top choice so long as it is available. If your agent says that Special Form is not available, shop your options.
- Carrying General Liability in Addition to Property Coverage
General liability coverage tends to be the less expensive portion of a premium, but often there are questions on why having this additional coverage is necessary. Generally, property coverage relates to the physical property, while liability relates to unforeseen events that leave the property owner open to risk.
Your contractor likely carries general liability, but you still need the coverage individually and in the name of your LLC. This coverage only extends to bodily injury or property damage caused by their trade work. It does not insure the property you own and any claims that arise that are not directly related to them.
While it can be tricky, choosing the insurance plan that best fits your real estate goals is important. It is essential to understand the different options available to you and which ones make sense for your business. Having insurance partners that you can trust to align your needs with the best plan, rather than just the most expensive one will be helpful. Still, understanding insurance coverage yourself is a must.