As part of the terms of a mortgage loan, most lenders require borrowers to carry property insurance. But simply meeting the requirements of your lenders does not necessarily mean that you are adequately insured. To be sure that your real estate investment business is properly covered, understand what your risks are, how much liability you are able to accept, and what types of policies are available.
The basic types of business insurance include:
– General liability and property coverage. Liability insurance protects you if someone is injured while on your property. The insurer not only pays the damages, but also funds and handles your legal defense. Property insurance covers your physical assets–building, equipment, furnishings you own, fixtures, etc. In most cases, your property insurance will not cover the tenant-owned contents of a rental unit; your lease should clearly state that tenants are responsible for insuring their own belongings.
– Umbrella policy. Umbrella policies provide additional liability coverage after the limits of your underlying policy are reached. For example, if someone was injured on your property and required $300,000 in medical treatment but the liability limit of your underlying policy is $250,000, your umbrella policy will pay the additional $50,000 (provided, of course, the limit of your umbrella policy is at least that amount).
– Automobile. If your company owns vehicles or if you use your personal car for business purposes, you need appropriate coverage. Such insurance typically includes bodily injury liability for injuries you or another authorized driver cause someone else; medical coverage for treatment of injuries to the driver and passengers in your vehicle; property damage liability; collision (damage to your car from a crash); comprehensive (damage to your car not resulting from a crash); and uninsured motorists coverage. Be sure your vehicle insurance complies with the laws of your state and offers you sufficient coverage to protect you financially–which means you may want higher limits than the law requires.
– Life. Various types of life insurance can be designed to protect your company, investments, and family in the event of your death. Life insurance is often part of buy/sell agreements in partnerships, where the insurance is used to buy out the interest of the deceased.
– Workers compensation. If you have three or more employees, you are probably required by law to provide workers compensation insurance. Laws regarding this coverage vary by state; check with your insurance agent and state insurance department to find out exactly what you need and how it is purchased.
– Business interruption. This coverage is designed to replace lost income, pay ongoing expenses, and cover the costs of setting up in a temporary facility if necessary when a business is unable to operate due to a covered peril (such as fire, storm damage, vandalism, etc.). If you have rental units that cannot be occupied due to a covered peril, business interruption insurance may replace the lost rent revenue.
– Destroyed or damaged records. If your business records are destroyed or damaged by a covered peril, this insurance will compensate for the inability to collect income and the cost of reproducing the records.
Beyond the traditional types of insurance are a variety of specialty policies offering coverage you may or may not need, such as flood, earthquake, and terrorism insurance. If you work from home, be sure your business equipment is covered and that you are protected for business-related liability. Most homeowner policies provide only nominal coverage for business equipment and activities, so check with your agent to determine if you need a separate business policy or if you can add an endorsement to your homeowners policy.
Managing Your Insurance As much as you’d probably like to, insurance isn’t something you can take care of once and then forget about. In addition to making sure you have coverage each time you buy or sell a piece of real estate, you should do an annual review of your needs, your coverage, and what new products are available that might work for you. Keep records of all your assets in case you need them to document a claim. If you make changes to existing policies, follow up to make sure the necessary paperwork was completed properly. It may be your agent’s job to do the paperwork, but it’s your responsibility to make sure you have the right coverage in place.
Keep in mind that insurance companies often structure their policies differently, so if you change any of your insurers, study the new policy carefully to be sure you really have the coverage you think you have. Don’t buy a policy based on rates alone. Be sure the coverage is what you truly need and the company is financially sound with a reputation for good customer service.
Remember that insurance is essentially a gamble–you’re betting that you’ll need it and the insurer is betting that you won’t. Be sure that you can still come out a winner whether you win or lose the bet.