Congratulations, you’ve just purchased your first investment property. Or, maybe you’re a seasoned investor with a large portfolio of properties. Or, maybe you don’t even think of yourself as a real estate investor – just someone who rents out the apartment you inherited from your uncle last year. Regardless, you own valuable investment property which requires the appropriate insurance coverage.
What unique requirements of investment properties warrant your attention? A few of the key items are discussed below:
Rental Income Protection:
If my property is damaged, how will I pay the mortgage without a tenant to pay rent?
Coverage is available to protect you against the loss of rental income, when your property is damaged by an insured peril that prohibits tenants from continuing to occupy the unit. This rental income coverage enables you to still meet your mortgage or other financial obligations, despite the loss of rental income.
What happens if a pipe bursts while my rental suite is unoccupied?
It is very important to become familiar with the vacancy protection provision in your insurance policy. Most policies allow for a 30-day vacancy period. If the rental property is going to remain unoccupied longer than the specified period, you need to arrange for additional coverage. In addition, most policies exclude water damage and vandalism that occurs when a property is vacant. A vacant property may require daily inspection or need to have the water turned off and the pipes drained for your coverage to remain valid. Be sure to become familiar with the specific vacancy terms in your policy to ensure that your investment properties stay covered.
Level of Coverage:
If construction costs spike will my current coverage still be adequate?
It depends on the level of coverage you have purchased. Insurance is typically available at three different coverage levels.
Actual Cash Value pays to repair damages or replace your building or your possessions—minus a deduction for depreciation. It is often offered at a lower price, but is a poor choice because construction expenses continually rise, and the ACV value of your property will be lower than its replacement cost, requiring you to pay the difference, which could be a substantial amount.
Replacement Cost coverage ensures that your rental building is repaired or rebuilt at the actual cost to replace it. However, it is important to note that the repairs or rebuilding costs are covered only up the amount of insurance purchased. For example, if your policy limit is $200,000, but at today’s construction prices it may cost $300,000 to rebuild your building, the maximum payout would be $200,000. In addition, when only a portion of a building is damaged by an insured loss, and your building is not insured to the full replacement value, the insurer will apply a financial penalty against your claim. This is known as a co-insurance clause. A simple way to describe this penalty is if you are only insured for half the replacement value, the insurance company will only pay half of the cost to make repairs and you will have to pay the difference yourself. To protect yourself against such an event you can increase the value of your coverage or buy a Guaranteed Replacement Cost policy.
Guaranteed Replacement Cost offers the highest level of protection as it pays whatever it costs to rebuild your building as it was before the loss or damage—even if it exceeds the total sum of the policy limit. This gives you protection against increases in construction costs.
Investment Condo & Townhouse Units:
Isn’t my property already covered under the Strata/Condo Corporation’s Master Insurance Policy?
Insuring an investment condominium unit is complicated by the fact that there are three parties involved—the owner of the unit, the tenant and the strata/condo corporation. As a result many condo owners mistakenly do not obtain coverage for their unit. A condo insurance policy fills the many gaps in coverage that exist when relying exclusively on the Strata/Condo Corporation’s Master Insurance policy. As an investor, you require your own coverage for appliances, personal liability, rental income protection, betterments and improvements, and loss assessments. The article Don’t Just Rely On The Condo Corporation’s Policy addresses this issue from the perspective of the resident condo owner and provides relevant details on some of the important coverages outlined above.
At Park Insurance, we believe in offering our customers more than just insurance policies, we offer our customers insurance expertise. We encourage you to call or visit us with all your investment property insurance questions, we are here to help.