provides you with the opportunity to recover all depreciation that was initially levied against you.
The only part that is not recoverable to you on an RC policy is your deductible.
As a side note, depreciation is extremely difficult to determine until the loss occurs. It is taken off of the date of the last updates, not the original year built. Everything depreciates at a different rate, but the average is about one percent per year. Roofs deteriorate much more quickly, how- ever, due to the exposure to the weather. In the next issue, this series will continue with a full review of the concept of co-insurance and why you should avoid it at all costs. • Shawn Woedl is the senior vice president of REIGuard and an industry-recognized speaker and educator with an emphasis on commercial property and premises liability. Over the last nine years, he has studied extensively on these lines of coverage to bring to you the publication, “Debunking the 13 Insurance Myths for the Real Estate Investor.” He may be reached at Shawn@NREIG.com or 816-398-4096. View the NREIG website www.NREIG.com
EXAMPLE: Let’s say you suffer a partial loss at your property, a kitchen fire that causes $30,000 of damage. The assigned claims ad- juster will visit the property and determine how much useful life was left in what was damaged. For a nice, round number let’s say they depreciate the loss at 40 percent, meaning 12,000 will be depreciated from the $30,000 loss. That leaves you with a payout of $18,000. Let’s say you have a $3,000 deductible. Then they will take your $3,000 deductible out of the settlement, leaving you with an Actual Cash Value settlement of $15,000 to cover your $30,000 fire loss. If you are on an Actual Cash Value policy, this is all you can recover. If you are on Replacement Cost, you can go back to the carrier and recoup some or all of the depreciation that was taken from you. The way you do this is to first exhaust the initial ACV payment of $15,000 on repairs, make the remain- ing repairs out of pocket, submit the receipts to your insur- ance carrier and they will reimburse you for up to $12,000.
THINGS TO CONSIDER WHEN DECIDING ON A SPECIAL OR BASIC FORM POLICY
THERE’S AGUARD FOR YOU
1 IS MY PROPERTY IN AN AREA WHERE WEIGHT OF ICE, SLEET OR SNOW AND WATER DAMAGE IS HIGH RISK TO ME? If not, then Basic form might be a better option. 2 IF MY LOCATION IS A FLIP, WILL THE PROPERTY STILL BE IN MY POSSESSION WHEN THE TEMPERATURES GET COLD? If not, then Basic form might be a better option. 3 IS THEFT COVERAGE A CONCERN? If the location is occupied, then the threat of theft damage should be diminished. As you can probably imagine, theft most often occurs at vacant locations. If the location is a flip or undergoing renovation, ask yourself if there will be enough owned materials and appliances at the location to make sense carrying theft coverage? Keeping in mind that your general contractor’s tools and materials are NOT covered under your policy.
Broad Form Coverage is the form coverage that falls in between Special form and Basic form. It is basically Special form minus theft coverage. It typically saves you 10 percent from a Special form policy. For the additional 10 percent, most investors and insurers agree that it is a better option to simply purchase Special form coverage. The next piece of the puzzle for you to consider is wheth- er you want to be insured on Actual Cash Value (ACV) or Replacement Cost (RC). Actual Cash Value is typically 20-25 percent cheaper than a Replacement Cost policy and allows you to be insured to a lower value per square foot but does figure depreciation into the settlement of your claim. Replacement Cost requires you to be insured to a higher valuation per square foot but
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