with “first dollar” coverage. Your underly- ing liability policy limits would have to be exhausted in order for your umbrella policy to provide coverage. In addition, do not purchase a liability policy that could have exclusions. Common exclusions that can do more harm than good are pollution and coverage for dog bites. Your umbrella policy will not save you if coverage is excluded on your underlying liability policy. Your umbrella policy almost always “follows” your underlying liability policy, meaning if something is excluded on your under- lying liability policy, your umbrella policy excludes it as well. In more than nine years, we have only seen one umbrella carrier will- ing to drop down and provide first-dollar coverage for a limited number of excluded coverages on the underlying liability policy. The kickers to this are: 1 These options are much more expen- sive, and you are better off just purchasing a more comprehensive underlying policy. 2 These also come with a $10,000—at minimum—self-insured retention for any loss excluded by the underlying liability policy being picked up by the umbrella policy. Last point on the umbrella policies: Your underlying liability and umbrella policies need to be the same type of policy in order for them to work together. A commercial umbrella policy will not go over a person- al-line liability policy, and vice versa. MYTH #6 A CLAIM THAT OCCURRED BEFORE I OWNED THE PROPERTY SHOULDN’T AFFECT MY INSURANCE RATE How great would this be? Not having to pay for the “sins” of the past owner. Well, believe it or not, up until about five years ago, this was the case. Anyone could pur- chase a new investment property without having to research or provide any details regarding past insurance claims to the new insurance company. Unfortunately, for ev- eryone, insurance carriers are all becoming
like Big Brother and are sharing informa- tion. It is now on you, as the potential buyer, to complete your due diligence and provide accurate loss information to your insurer for the past three to five years, depending on the specific carrier requirements. LET’STAKEALOOK So, you are picking up your first invest- ment property, and you call your agent, get a quote and bind coverage prior to closing. You think you are all squared away, until 30 days down the road, you receive a notice from your insurance carrier stating either: 1 Your policy is being canceled because previous loss history was not disclosed to them. 2 They will agree to keep you, but your annual premium is increasing from $500 to $1,500 due to the increased exposure. The point of the example is this: Do your due diligence before purchasing any property so you know exactly what you are purchasing. How do we go about obtaining prior insurance loss history on a location I am considering purchasing? If you are buying the property from the current homeowner, you will need to obtain a C.L.U.E. (Comprehensive Loss Underwriting Exchange) report. You can purchase one of these reports from LexisNexis, a data collection company, for $10 to $12 per report. This report will provide you with the prior insurance claims filed at the property, the type of claim and approximate total payout. If you are purchasing the property from another investor, and the property is already being used as an investment property, you need to ask the seller to obtain a Loss Run report from the insurance carrier on risk. The seller will have to get this report from his insur- ance agent or current insurance carrier. This typically takes two to four days.
The report shows the same loss infor- mation as a C.L.U.E. report does. It also will give you a great idea of the prop- erty’s history and what you can expect moving forward. Things to look for on C.L.U.E. and Loss Run reports are: 1 Both frequency and severity of losses are looked at the same by most carriers. Several nickel-and-dime-type losses or one catastrophic loss could both be looked at as high risk. 2 Controllable losses are looked at very differently from “Acts of God.” Fires, specifically tenant-caused fires, theft and water damage are viewed more negative- ly than a wind or hail loss or even a lightning strike. 3 Look carefully at locations that have suffered flood losses. These locations are prone to suffering those types of losses again. And once a flood occurs and a claim is paid, it is both difficult and expensive to obtain this coverage on future properties. It also makes it much more difficult to sell the property in the future if there is a history of flood losses. 4 If liability losses are present, look at the cause of loss and see if the same tenant who caused the claim is still living at the property. These are just a few of the items you need to strongly consider when reviewing the loss history at a location in question. If you are still sold on purchasing a location that has some negative loss history and you are experiencing difficulties with purchasing affordable insurance coverage, consider requesting a higher deductible for your
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ShawnWoedl is Vice President of National Real Estate Insurance Group, one of a group of entities, including Think Realty Magazine, under the umbrella of parent company Affinity Enterprise Group.
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