Why Insurance Matters
When tackling a real estate investment project, it’s critical to consider worst case scenarios and prepare to reduce the potential financial impact of risks. Possible risks include losses resulting from common perils such as fire, water, and wind. Theft and vandalism can and should also be indemnified through proper insurance coverage.
Property insurance is one safety net Crowdcopia requires for all properties to ensure our collective investment is secure, and it’s important to understand your insurance policy and what it is doing to protect you and your investment.
While we are not insurance agents, Crowdcopia does all it can to ensure our collective investment is secured through these insurance requirements and has insurance agencies we have found to be well-suited for investment property insurance.
Types of Policies
It’s critical to find the right type of dwelling insurance policy that will effectively cover a loss. Types of policies are largely determined by the nature of renovations and the occupancy status of the property, with some commonalities between all policies.
One standard requirement for all policies for a Crowdcopia loan is that the policy is Replacement Cost Value (RCV) insurance coverage. Replacement Cost Value coverage ensures that the insurance reimbursement amount for a loss is not subject to something called depreciation. Depreciation is a reduction in the potential payout for a loss, and can be up to 20% of the payout amount in some cases.
Non-RCV types of insurance policies, such as Actual Cash Value (ACV) policies, are typically subject to depreciation, which means that a payout for a loss can be significantly reduced and funds already paid for the construction will not be recouped after a loss.
“Builder’s Risk” policies are typically bound for ground up new construction or renovations involving the foundational or load bearing structural components (ex: joists, beams, posts, columns, adding walls, square footage, and stories).
Builders Risk coverages vary from policy to policy, but valuable endorsements include coverage for soft costs, materials, supplies, and equipment that are onsite, in transit, and temporarily at other locations.
Builder’s Risk policies do not typically come with general liability coverage (additional expense) and usually have a 100% minimum earned premium (No reimbursement for unused coverage).
Also, keep in mind, existing structure coverage on a Builders Risk policy typically comes in ACV, but RCV can be requested if it is an option with the carrier.
General liability covers expenses related to physical injury (ex: slip and fall) to an invitee on the premise of the property or project site.
Determining whether to bind a Builders Risk versus a Vacant with Renovations policy for a non-structural/foundational renovation will be based upon a number of factors.
It’s important to assess each project on an individual basis to determine what coverage, in addition to common perils, you may need. Then compare the premiums in relation to the additional coverage endorsements, coverage exclusions and other very important coverage details that will be outlined in this article.
It is also favorable to keep the deductible low, no greater than $2,500, as that will impact your loss recovery.
Another available coverage option is a Rental Dwelling policy (Landlords policy). Based on the time frame (typically up to 6 months) and scope of the renovations (cosmetic/minor non-load bearing), this policy can be bound in substitute of a Vacant with Renovations policy, regardless of current occupancy status (with the intent to occupy post renovations). Loss of rents endorsement is recommended as that will cover potential rent lost from covered loss project delays.
Identifying the correct type of policy is one piece of the puzzle, and it may be your agent’s responsibility to do so, but it’s beneficial to review your options with some understanding.
For example, a property that is vacant and undergoing cosmetic or non-load bearing alterations will typically be insured by a “Vacant with Renovations” policy. This dwelling’s fire coverage usually comes in basic form (DP1). This generally covers fire/smoke, lightening, wind/hail, explosion, vehicles/aircraft, riot/vandalism and excludes coverage for common perils like water damage and theft.
Special form (DP3) or open-perils provides coverage for a broader spectrum of common perils, including, but not limited to, water, weight of snow/ice and theft. It will exclude anything listed as an exclusion. Exclusions are listed in the body of the policy and will tell what is not covered.