Insuring Investment Property
Properly insuring investment property will make a difference at the time of a claim. The type of property you choose to invest in will dictate the type of insurance you should purchase. Unlike your homeowner’s policy that comes with lots of extra coverages bundled into it, you must choose the coverages you want when purchasing a commercial policy. Your policy should be customized to reflect the coverages you need. One size does not fit all.
Commercial Package Policies
Standard types of Commercial Package Policies (CPP) are known as Basic, Broad and Special Form. Basic, being the least costly, has minimal coverage and is not usually recommended. However, this is often used for older buildings that have old utilities and do not qualify for better coverage. The Broad form contains better coverage but is also limited. The Special Form provides the best coverage. However, it is still necessary to know what you need to be insured for, such as; loss of rents, ordinance or law compliance, earthquake, etc. Policies are issued using either Actual Cash Value (ACV) or Replacement Cost Coverage (RC). Premises Liability is also necessary to protect you if you are sued because someone is hurt on the premises. Also, all tenants should be required to have liability coverage.
If you invest in a commercial building with commercial tenants, some of the features you may want to be insured for include but are not limited to: Loss of Earnings, Ordinance or Law coverage, earthquake, terrorism and possibly Steam Boiler Coverage, Mechanical Breakdown and even off premises power loss. Theft coverage can usually be added.
The type of tenant can affect your cost of insurance. Allowing a restaurant to open in a wood frame building can cause an increase in the insurance due to the potential fire risk. Any business that increases the likelihood of a fire will affect the insurance.
If you own a building with commercial tenants, you want your lease to dictate that you, the owner, are named as an Additional Insured and that you should be provided with a Certificate of Insurance. This is important because, if someone from the public is hurt inside your tenant’s business, you can be sued along with the tenant. By being named an Additional Insured, your tenant’s policy would respond to defend you in the lawsuit and you would not have to use your insurance policy. You only want to file a claim against your policy if it is absolutely necessary. Anything small should be dealt with because you should have a deductible of $1,000 to $5,000 depending on the property type and coverage. You might have a small building with a smaller deductible but a large building should have a larger deductible.
Loss of Earnings Coverage
The Loss of Earnings coverage (based on your annual rent receipts) reimburses you for the lost income if the building is damaged by an insured loss and your tenants are not there to pay rent. You still have expenses that must be met but without income you can go bankrupt! Ordinance or Law coverage can respond in a situation where the city or town requires that you rebuild an older multi-unit dwelling and include a sprinkler system that was not there before. The building code, in existence at the time of loss, is what you are required to follow. Debris removal can also be costly. The insurance company will never pay to replace or add an item that was not in the original structure at the time of a loss, even if it is required by the city. This coverage can also respond if your property is in a “historical district” and certain types of materials or paint must be used for rebuilding. These are often more costly than regular materials so the extra expense may be borne by the owner if the proper coverage is not on the policy. The code may also require that you tear the remaining structure down before rebuilding based on the severity of damage.
Earthquake coverage may be required by your lender if you are in an area prone to earthquakes. Flood insurance may be required if you are in a FEMA established flood zone. Terrorism coverage may be required if you are in a financial district and your lender requires it. Be informed before investing!
Workers Compensation is needed if you have an employee, to service your property. This provides coverage for their medical bills as well as their lost wages.
If you invest in a business venture but not the building, your insurance needs depend on the type of business. You should properly insure your contents, electronics, loss of earnings and possibly Tenant’s Improvements and Betterments if you change the physical building to accommodate your business. If you add walls, wall to wall carpets, or make other physical changes, the landlord’s insurance will not replace those items after a fire but your policy can respond. It may be necessary to have a central station burglar alarm before theft coverage can be purchased. A restaurant would need coverage for food that is eaten on or off the property. Each business is unique.
A Business Owners Policy (BOP) is often available for many types of businesses but most mercantile and industrial businesses do not qualify.
Residential Investment Property
Residential buildings up to four units can often be insured with a Dwelling Fire, Special Form policy. This policy often provides more comprehensive coverage than a commercial package but only certain property qualifies. Liability can usually be added to this type of policy. Separate liability is also available. Be sure that the policy contains coverage for your particular needs.
Liability is very important on any residential rental property. All tenants should be required to purchase “renters” insurance because that provides them with coverage to relocate after a fire and it also includes “liability” coverage. If a tenant owns an animal or dog and that animal injures someone, the building owner may be sued if the animal owner does not have insurance. The lawsuit will indicate that the owner was aware or should have been aware that this animal was allowed to live on the property. Make sure your tenant is insured so they will be responsible for their actions.
Much more can be written about the different coverages for different businesses. Be sure to fully disclose what the use of a property will be so the proper insurance is provided. All companies require building inspections and that may cause your policy to be changed.
The money you pay for insurance is tax deductible as a business expense. Do not skimp on insurance or your investment may turn into a nightmare. Proper insurance is considered Asset Protection!
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DISCLAIMER: All policies have terms, conditions, limitations and exclusions. You must refer to your policy and to your company to find out exactly how you are insured. States regulate the insurance companies in their jurisdictions and policies can fluctuate from one company to another. This is particularly true for commercial insurance. You must be vigilant and review your policy and ask questions of your agent. Always ask for written responses to be sure there is no misunderstanding.