Property Insurance coverage—we often don’t give it enough thought until we need it. I recommend my clients do a yearly check-in with their insurance agent, and of course you want to require your tenants to carry proper coverage as well.
Property Insurance, You Don’t Need It until You Need It
This recently hit home when one of my clients had a fire in his building, and it wiped him out. An electrical fire started in the middle of the night as a result of a compressor failing in one of the coolers. The building was a total loss that required gutting the building and putting on a new roof. My client’s share of that loss was $498,000. That’s right—a half million dollars.
But there is good news! My client had a national tenant in the building. They had great coverage, and the tenant had named my client as an additional insured on their policy, which was required upfront in the sales contract. This means my client is in control of how the property gets restored because it really is his building. The building is brick, so once the work is done, absolutely everything will be brand new except the brick structure.
It is the client’s policy that is paying for the damage. The insurance makes the rent payment. The monthly rent is $3,500 and my client’s mortgage payment is $1,800. The insurance also covers lost sales for six months. The restoration company required $50,000 down, but that was covered by the insurance policy. Imagine a bill for $498,000 that ultimately doesn’t cost you a dime. For national tenants, this type of agreement is standard, and it’s what you should require.
Needless to say, my client is now taking a second look at the properties he owns to make sure he’s named as an additional insured. He’s also making sure he has the right coverage and enough coverage. Think about it this way: Many people don’t have earthquake insurance, but if you don’t have it and your building is damaged in an earthquake, then you will lose that rent.
Replacement value refers to the amount that an insurance company would have to pay to replace an asset at the present time, according to its current worth. In the insurance industry, “replacement cost” is one of several methods of determining the value of an insured item. Actual cash value is the depreciated value of an item of property at the time of the loss. This type of settlement does not allow you to replace what you’ve lost. It basically values the items as if being sold at a garage sale.
Be a savvy investor. Talk with your insurer to confirm you have the coverage you need. If you need guidance, I’m here to help. You can reach me at 541-912-6583.