NUTS & BOLTS
THINGS TO CONSIDER WHEN DECIDING ON AN ACV OR RC POLICY
1 CONSIDER WHAT YOUR PLAN WOULD BE IN THE EVENT OF A TOTAL LOSS. Would you rebuild the property or would you sell the land and move on to another property? If you would not rebuild the prop- erty, then choose Actual Cash Value (ACV) because with RC you will be paying more to the insurance company than you will ever recover. Remember, you have to actually make the repairs at the property to be able to recover your depreciation. There are two reasons you must concern yourself with what your plan would be in the event of a total loss and not so much a partial loss: a. You most likely can make the repairs (or have access to someone who can) for substantially less than what your insurance carrier thinks you can. b. 60-65 percent of the investors insured with us that suffer a partial loss and are on Replacement Cost, never come back and recoup any depreciation. Not because they don’t want to, but because the ACV set- tlement was more than enough to make them whole again. 2 FACTOR IN YOUR LEVERAGE SITUATION. If you have a loan on the property, most likely your lender is going to have a set of insurance lending requirements you will have to meet or exceed. Often times, they require Replacement Cost coverage.
All Insurance Policies and Coverage are Not Created Equal DEBUNKING INSURANCE “MYTH #7.”
specifically excluded in the policy. There are six standard exclusions that come on every Special form policy: Mold and Fungus, Wear and Tear, Sewer and Drain Back-up, Earth- quake, Flood and Intentional Tenant Damage. Some of these “exclusions” can be purchased as an endorse- ment or stand-alone policy and others cannot. Furthermore, if your location falls in a tier 1 or 2 county (meaning a county that touches coastal waters or one county removed), Named Windstorm or Hurricane coverage, may also be excluded. Be sure to review your exclusions and endorsements pages to make sure no other exclusions have been “slipped in” your policy. One common coverage exclusion that is added is theft. Basic Form coverage is the second coverage form most carri- ers offer to investors. Basic form coverage can save you approx- imately 25-30 percent per year (depending on the carrier), but comes with some additional exclusions to ones listed above, that you will need to consider. Basic comes with additional exclusions: Collapse, Falling Objects, Theft of property owner’s possessions (such as copper pipes or air conditioning units), Weight of Ice, Sleet or Snow damage and Water damage. With Basic Form coverage, the burden of proof falls to the investor rather than to the insurance carrier to prove that the loss was caused by “included peril,” meaning something that is covered by the policy.
ne of the biggest mistakes a real estate investor can make is to assume that all types of property insurance are created equal. Make sure you learn and understand the difference between Basic, Broad and Special form coverages as well as the difference between Actual Cash Value vs. Re- placement Cost before making coverage decisions.
coverage. There can be up to a 30 percent difference between these policy forms, and it is up to you as the investor to deter- mine if the additional exclusions associated with the cheaper coverage forms is really worth the risk for you. After all, that is exactly what insurance is: a game of risk, both by the carrier and the investor. Perhaps not surprisingly, Special Form Coverage is the best and in turn, the most expensive coverage form an investor can purchase. It is considered “All-Risk” coverage, meaning that unless there are specific exclusions listed within the policy, then coverage is afforded to you in the event that any loss occurs. The burden of proof falls on the insurance company to prove that the peril (or problem) that caused the loss is
BASIC, BROAD AND SPECIAL FORM COVERAGES
There are three industry-wide property coverage forms available to real estate investors: Basic, Broad and Special
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