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Investment Property Insurance- Actual Cash Value vs. Replacement Cost

As a landlord and property manager with over 15 years of experience, I just was surprised with a recent insurance claim I made on five of my rental properties. The agency I was doing business with no longer had a relationship with ASI Lloyds. They sent me non-renewal notices for five of my rental properties. I knew all of my homes had hail damage. All homes were all in the Cedar Park and Leander area, and we had some pretty bad hail/wind storms in spring of 2009.

I had not planned on filing an insurance claim until years later. My strategy was to wait until the roofs were much older and file a claim with a future hail storm in the next 5-7 years. I contacted my agent who handles all of my commercial insurance. He recommended I file claims on all homes since they were not renewing the policies. It was better to start with a clean slate when starting a new policy for each home.

That is when my surprise came. In the past, USAA handled the claims on my other properties (they only will cover five properties), and I had full replacement coverage with USAA. It turns out that only property of the five properties with ASI Lloyds had replacement coverage, and I used the same insurance agency. I thought it was odd that one had replacement coverage and the other four did not. Four of the five properties only had actual cash value.

There is a huge difference between actual cash value and replacement cost insurance coverage. Most policy holders like myself are not educated and don’t ask the correct questions when purchasing insurance. Actual cash value is the amount it would take to repair or replace damage to your home after depreciation. For example, if your roof is damaged in a hail storm, the insurance company will pay for the roof using this calculation: cost to replace roof less the deductible less the age of the roof. So, for a roof that is 10 years old the calculation would look like this: $5000 for the new roof – $1000 deductible – 10 years of depreciation= $2000 payment to you the roof. (Note: Depreciation is the decrease in home or property value since the time it was built or purchased because of age or wear and tear.)

I budgeted to pay a 1% deductible which averaged $1,200 per property. Four of the properties had extensive damage and warranted a roof shingle replace. The fifth property had only minor damage. However, instead of expecting a $4,800 to replace the roof on four homes, my out of pocket costs were over $8,000 since the depreciation was not refunded after replacing the roof. Had I only filed a single claim, another $1,200 would not have been a big deal. I was not expecting to pay almost $8,000 out of pocket to replace the roofs.

Fortunately, I was able to pool my roof jobs with other clients, and we were able to get a large discount on the roof jobs from one of our preferred roofer vendors. All owners saved about $1,000 per roof. So, I was fortunate to cover most of the depreciation loss on my claims.

In summary, make sure you know what insurance coverage you have on your rental property policy. You may discover you are paying too much for a policy that does not provide adequate coverage. In Texas, many investors purchased a TDP-1 policy. This is the coverage I had on my five rental properties insured with ASI Lloyds, and the policy only covered the dwelling and roof for actual cash value. Research the costs of purchasing a TDP-3 policy. A TDP-3 policy includes water damage, tenant caused damaged, and replacement cost. This additional coverage is only about $150 per policy. You may find you can upgrade your insurance with a different vendor and pay the same premium.

I recommend Cary Smith with Treaty Oak Insurance Partners. His office number is 210.698.8133. He wrote my new policies and assists me with all of my commercial insurance. He has helped me and many of my clients obtain better investment property policies at very reasonable prices.

If you have any questions, please call us at 512-257-9836. Our office provides sales, leasing, property management, and mortgage services.

Posted by: smartsourcerealty on April 7, 2013
Posted in: Uncategorized