11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW ABOUT INSURANCE
1 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
SHIELDS-INSURANCE.COM
BUSINESS | HOME | AUTO
BRY SHIELDS III, CIC, CLCS 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW ABOUT INSURANCE AND YOUR AGENT WON’T TELL YOU OVERVIEW If you own real estate - whether it’s a few single-family rentals or a large portfolio of apartments or commercial buildings - there are certain types of insurance coverage you should consider (or may already be buying). Below is a list of insurance types you may want to look into. Unfortunately, each of these policy types contains exclusions and coverage restrictions and if your agent doesn’t consider your unique needs, he/she will not be able to adequately customize it to your needs. In my insurance practice, I see a lot of major problems in business policies and most of the time, the business owners (or other decision makers) had no idea there were any problems in their coverage. Even worse, it often does not cost any extra (or sometimes nominal additional costs) to rectify the problems. First, here are those types of coverage you may want to consider: COMMERCIAL PROPERTY – If you own buildings, personal property and/or exposures to loss of income due to property damage. Don’t forget to consider loss of income resulting from damage to a major supplier’s building. Ideal policy types: Replacement Cost Value on a Special Coverage Form. Make sure you are using adequate valuations and request to have coinsurance waived if possible. FLOOD INSURANCE – Property policies usually exclude flood coverage, so you may need to consider your exposure to this risk and purchase a separate policy. If you are in a low-hazard zone, the costs may not be very high. EQUIPMENT BREAKDOWN – Intended to cover your equipment and machinery from breakdown or electrical arcing, which includes your phone and computer systems, machinery, generators, HVAC systems, etc. This coverage can either be included in your commercial property policy or it can be written on a stand-alone policy.
2 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
INLAND MARINE – If your company owns any moveable equipment or takes custody of client property, inland marine-type policies will be necessary to insure these exposures, because the property policy only protects property while on your premises. COMMERCIAL GENERAL LIABILITY – Literally, almost every business requires this type of coverage. It is the most comprehensive form of liability coverage available to protect you from lawsuits arising out of bodily injury (to others), property damage (to others) or personal and advertising injuries. BUSINESS AUTOMOBILE – If you own automobiles, then this coverage is obvious. However, do not overlook your exposures to “Hired and Non-Owned” auto liability. If you or your employees drive their own vehicles or rent cars on company business, this exposure exists. COMMERCIAL UMBRELLA – General Liability and Auto Liability limits will usually be no more than $1,000,000 per occurrence. Serious accidents can cause very high settlements and legal expenses for defending your business. It’s important to consider protecting yourself for higher limits, especially if your company has large amounts of assets and/or high cash flow. Common umbrella limits are $1,000,0005,000,000, which become “excess liability” over the scheduled underlying policies. WORKERS COMPENSATION – State and Federal statutes mandate that Employers are the sole exclusive remedy for any type of work related injury or illness, regardless of fault, in regards to lost wages and medical expenses. The costs of an injured worker can be substantial, so coverage is important and most states actually mandate the purchase of insurance after a certain number of employees on staff (e.g. Alabama requires coverage at 5+ employees). COMMERCIAL CRIME INSURANCE – Protects your company from employee theft, fraudulent money transfers, forgery and theft or robbery of money. EMPLOYMENT PRACTICES LIABILITY – Employees who accuse your company of discrimination, harassment, or wrongful termination can create significant legal expenses and settlements can be very large. Employment Practices Insurance protects you from this exposure. DIRECTORS & OFFICERS LIABILITY - Covers liability to director and officers of your company resulting from fiscal mismanagement, breach of duty, etc. FIDUCIARY LIABILITY - Covers liability to “fiduciaries” on behalf of beneficiaries of employee benefits, health/welfare plans and retirement plans CYBER INSURANCE – Your organization may have exposures to privacy or network security breaches, in which case you could face large legal and notification costs. Cyber insurance is designed to respond to myriad of issues related to this risk. PROFESSIONAL LIABILITY - Professional Liability coverage protects businesses and individuals from losses related to wrongful acts (negligent acts, errors or omissions) during the rendering of professional services. GARAGE LIABILITY – Protects your garage operation from liability related to auto accidents, slip & fall injuries on premises, garagekeepers (damage to customer vehicles) and many other types of bodily injury or property damage. It essentially replaced the General Liability policy purchased by most other types of businesses. SURETY BONDS - Construction Bonds – Performance, Supply, Payment, Bid bonds and many others. Surety bonds are similar to insurance, in that they are risk transfer
3 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
method. Unlike insurance, they involve three parties: Principal, Obligee and Surety Carrier. Insurance only involves two parties: Insured and Insurer.
THE PROBLEMS Below is a list of the 11 most common coverage problems I find when reviewing commercial insurance policies. 1. Name Accuracy It is important to have all applicable Named Insureds listed on the policy accurately; otherwise coverage can easily be denied. Also, when a business goes through a name change or shuts down operations in a given entity, don’t be so quick to drop that name off the policy (this mainly applies to liability coverage, not property). You may be allowed to keep the name listed and not be charged anything. Dropping the name could create a very serious gap in coverage (e.g. occurrences of injury or damage from your past work may only be covered if coverage still in force) 2. Rating Accuracy If the Classifications in your Rating Schedule are wrong, beware. It could be that your underwriters do not really understand the risks they’re insuring and could deny claims on the basis of material misrepresentation, especially if there is a paper trail of miscommunication (or, even worse, outright dishonesty). Many agents and clients with good intentions fall into the misrepresentation trap when trying to “game” an underwriter to give them a certain classification or rate. There are some innovative ways to keep rates low (discussed later), but just be sure you and your agent have maintained utmost integrity and honesty throughout the process. 3. Retro Dates If any of your policies are “Claims Made”, then beware of coverage gaps generated when switching from one carrier to another. You want the new carrier match the retro date or, even better, provide what’s called “full prior acts.” 4. Prior & Pending Dates Be aware of this clause in any policy, but especially in any type of “Claims Made” policy – usually professional or management liability policies (i.e. E&O, D&O, EPLI, Fiduciary, etc.). This clause states that any prior or pending litigation is NOT covered under the new policy and any potential issues you were aware of prior to the policy period (you will sign a warranty statement on a “new business” application to this effect, so always try avoid signing any new warranty statements with renewals or when switching from one Insurer to another). 5. Warranty Statement
4 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
In connection with a Prior & Pending date, there will usually be a warranty statement on the application requiring signature. This typically associates with a “new business” application. Avoid this trap for any renewals or moving from insurer to another. I already stated this above, but it’s too important to miss, so I’m repeating it! Always refuse to sign a “new business” application. 6. Policy Warranties Insurance policies often contain warranties that attach certain obligations or requirements to an insurance policy. For example, a property policy in a high crime area may warrant after-hour security guards. Do anything you can to avoid Policy warranties, but usually if attached, there is a reason and it may be touch to negotiate out of. Just be sure you comply with it, if you must have it on your policy. 7. Protective Safeguards Make note of these and be sure you comply. For example, if you disclose fire suppression sprinklers or burglar alarms, the underwriter may attach a Protective Safeguards endorsement, similar to a warranty, mandating that it be in working condition for the duration of the policy period. If a loss occurs and you have not complied, it could jeopardize coverage. If you can avoid Protective Safeguards, that is ideal, but most carriers insist on keeping them attached if they are providing any premium credits. 8. Work Comp Claims – Late Reporting & Return To Work Always promptly notify carrier of any worker injuries, even if you are going to pay out of pocket (better to arrange a deductible plan in this case anyway), otherwise they can deny coverage for “late reporting” and you could also be imposed fines and penalties by the Department of Labor in your state. Maintain good communication with the injured worker and with your claims adjuster. Always keep written job descriptions for a “return-to-work” or “light duty” role for the injured worker to get them back as soon as possible. This will help reduce the size of your claim and reduce future damage to your experience mod rates and work comp rates. Also, if at all possible, keep the claim as “medical only” and avoid letting the insurer pay out indemnity to the worker. Medical only claims only count 30% of the values to the experience mod rating, which greatly affects your work comp rates. 9. Late Reporting or Noncompliance In the event of a property or liability loss, be sure to read and comply with all provisions under “Duties In The event Of Loss or Damage” section in the policy to avoid claim denials. Noncompliance can lead to similar problems as with work comp listed previously.
5 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
10. Inadequate Limits Most CGL policies provide $1M per occurrence and $2M aggregate limits. This may not be enough coverage if you suffer a large claim, particularly if you perform large jobs or sell high dollar volumes of product. Your liability limits should be enough to keep a plaintiff from attacking your persona assets, but not so high that you become a “target” either. Excess liability (umbrella) policies provide efficient opportunities for increasing your liability limits. On commercial property policies, being underinsured can lead to problems during a claim. This is due to the “Coinsurance” clause contained in most policies, which will cause you to receive only partial payments in the event of a partial loss. For example, if you are only insured at 50% of your Replacement Value and suffer a $100,000 loss, you may only receive half of your actual claim payment. 11. Failure to Comply with Contractual Requirements If you sign a contract with Indemnifications in favor of your vendor or client, then some or all of those indemnifications may not be insurable. It’s important for your agent to read the entire contract and advise you of any uninsurable sections. Additionally, if you fail to comply with insurance requirements in the contract, like Waivers of Subrogation, Limits, etc., your owners or board members could be held personally liable for negligence.
Shields Insurance Agency is an Independent Insurance Agency specializing in property and casualty insurance for businesses and individuals. We find that most businesses don’t fully understand their unique risks or their insurance coverage. We developed an easy threestep process that allows you to clearly identify Key Exposures, improve your Insurance Coverage and dramatically reduce costs. The results of our process will increase your operating margins and give you Peace of Mind, so you can focus on growing your business!
https://shields-insurance.com/
6 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
1 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
SHIELDS-INSURANCE.COM
BUSINESS | HOME | AUTO
BRY SHIELDS III, CIC, CLCS 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW ABOUT INSURANCE AND YOUR AGENT WON’T TELL YOU OVERVIEW If you own real estate - whether it’s a few single-family rentals or a large portfolio of apartments or commercial buildings - there are certain types of insurance coverage you should consider (or may already be buying). Below is a list of insurance types you may want to look into. Unfortunately, each of these policy types contains exclusions and coverage restrictions and if your agent doesn’t consider your unique needs, he/she will not be able to adequately customize it to your needs. In my insurance practice, I see a lot of major problems in business policies and most of the time, the business owners (or other decision makers) had no idea there were any problems in their coverage. Even worse, it often does not cost any extra (or sometimes nominal additional costs) to rectify the problems. First, here are those types of coverage you may want to consider: COMMERCIAL PROPERTY – If you own buildings, personal property and/or exposures to loss of income due to property damage. Don’t forget to consider loss of income resulting from damage to a major supplier’s building. Ideal policy types: Replacement Cost Value on a Special Coverage Form. Make sure you are using adequate valuations and request to have coinsurance waived if possible. FLOOD INSURANCE – Property policies usually exclude flood coverage, so you may need to consider your exposure to this risk and purchase a separate policy. If you are in a low-hazard zone, the costs may not be very high. EQUIPMENT BREAKDOWN – Intended to cover your equipment and machinery from breakdown or electrical arcing, which includes your phone and computer systems, machinery, generators, HVAC systems, etc. This coverage can either be included in your commercial property policy or it can be written on a stand-alone policy.
2 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
INLAND MARINE – If your company owns any moveable equipment or takes custody of client property, inland marine-type policies will be necessary to insure these exposures, because the property policy only protects property while on your premises. COMMERCIAL GENERAL LIABILITY – Literally, almost every business requires this type of coverage. It is the most comprehensive form of liability coverage available to protect you from lawsuits arising out of bodily injury (to others), property damage (to others) or personal and advertising injuries. BUSINESS AUTOMOBILE – If you own automobiles, then this coverage is obvious. However, do not overlook your exposures to “Hired and Non-Owned” auto liability. If you or your employees drive their own vehicles or rent cars on company business, this exposure exists. COMMERCIAL UMBRELLA – General Liability and Auto Liability limits will usually be no more than $1,000,000 per occurrence. Serious accidents can cause very high settlements and legal expenses for defending your business. It’s important to consider protecting yourself for higher limits, especially if your company has large amounts of assets and/or high cash flow. Common umbrella limits are $1,000,0005,000,000, which become “excess liability” over the scheduled underlying policies. WORKERS COMPENSATION – State and Federal statutes mandate that Employers are the sole exclusive remedy for any type of work related injury or illness, regardless of fault, in regards to lost wages and medical expenses. The costs of an injured worker can be substantial, so coverage is important and most states actually mandate the purchase of insurance after a certain number of employees on staff (e.g. Alabama requires coverage at 5+ employees). COMMERCIAL CRIME INSURANCE – Protects your company from employee theft, fraudulent money transfers, forgery and theft or robbery of money. EMPLOYMENT PRACTICES LIABILITY – Employees who accuse your company of discrimination, harassment, or wrongful termination can create significant legal expenses and settlements can be very large. Employment Practices Insurance protects you from this exposure. DIRECTORS & OFFICERS LIABILITY - Covers liability to director and officers of your company resulting from fiscal mismanagement, breach of duty, etc. FIDUCIARY LIABILITY - Covers liability to “fiduciaries” on behalf of beneficiaries of employee benefits, health/welfare plans and retirement plans CYBER INSURANCE – Your organization may have exposures to privacy or network security breaches, in which case you could face large legal and notification costs. Cyber insurance is designed to respond to myriad of issues related to this risk. PROFESSIONAL LIABILITY - Professional Liability coverage protects businesses and individuals from losses related to wrongful acts (negligent acts, errors or omissions) during the rendering of professional services. GARAGE LIABILITY – Protects your garage operation from liability related to auto accidents, slip & fall injuries on premises, garagekeepers (damage to customer vehicles) and many other types of bodily injury or property damage. It essentially replaced the General Liability policy purchased by most other types of businesses. SURETY BONDS - Construction Bonds – Performance, Supply, Payment, Bid bonds and many others. Surety bonds are similar to insurance, in that they are risk transfer
3 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
method. Unlike insurance, they involve three parties: Principal, Obligee and Surety Carrier. Insurance only involves two parties: Insured and Insurer.
THE PROBLEMS Below is a list of the 11 most common coverage problems I find when reviewing commercial insurance policies. 1. Name Accuracy It is important to have all applicable Named Insureds listed on the policy accurately; otherwise coverage can easily be denied. Also, when a business goes through a name change or shuts down operations in a given entity, don’t be so quick to drop that name off the policy (this mainly applies to liability coverage, not property). You may be allowed to keep the name listed and not be charged anything. Dropping the name could create a very serious gap in coverage (e.g. occurrences of injury or damage from your past work may only be covered if coverage still in force) 2. Rating Accuracy If the Classifications in your Rating Schedule are wrong, beware. It could be that your underwriters do not really understand the risks they’re insuring and could deny claims on the basis of material misrepresentation, especially if there is a paper trail of miscommunication (or, even worse, outright dishonesty). Many agents and clients with good intentions fall into the misrepresentation trap when trying to “game” an underwriter to give them a certain classification or rate. There are some innovative ways to keep rates low (discussed later), but just be sure you and your agent have maintained utmost integrity and honesty throughout the process. 3. Retro Dates If any of your policies are “Claims Made”, then beware of coverage gaps generated when switching from one carrier to another. You want the new carrier match the retro date or, even better, provide what’s called “full prior acts.” 4. Prior & Pending Dates Be aware of this clause in any policy, but especially in any type of “Claims Made” policy – usually professional or management liability policies (i.e. E&O, D&O, EPLI, Fiduciary, etc.). This clause states that any prior or pending litigation is NOT covered under the new policy and any potential issues you were aware of prior to the policy period (you will sign a warranty statement on a “new business” application to this effect, so always try avoid signing any new warranty statements with renewals or when switching from one Insurer to another). 5. Warranty Statement
4 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
In connection with a Prior & Pending date, there will usually be a warranty statement on the application requiring signature. This typically associates with a “new business” application. Avoid this trap for any renewals or moving from insurer to another. I already stated this above, but it’s too important to miss, so I’m repeating it! Always refuse to sign a “new business” application. 6. Policy Warranties Insurance policies often contain warranties that attach certain obligations or requirements to an insurance policy. For example, a property policy in a high crime area may warrant after-hour security guards. Do anything you can to avoid Policy warranties, but usually if attached, there is a reason and it may be touch to negotiate out of. Just be sure you comply with it, if you must have it on your policy. 7. Protective Safeguards Make note of these and be sure you comply. For example, if you disclose fire suppression sprinklers or burglar alarms, the underwriter may attach a Protective Safeguards endorsement, similar to a warranty, mandating that it be in working condition for the duration of the policy period. If a loss occurs and you have not complied, it could jeopardize coverage. If you can avoid Protective Safeguards, that is ideal, but most carriers insist on keeping them attached if they are providing any premium credits. 8. Work Comp Claims – Late Reporting & Return To Work Always promptly notify carrier of any worker injuries, even if you are going to pay out of pocket (better to arrange a deductible plan in this case anyway), otherwise they can deny coverage for “late reporting” and you could also be imposed fines and penalties by the Department of Labor in your state. Maintain good communication with the injured worker and with your claims adjuster. Always keep written job descriptions for a “return-to-work” or “light duty” role for the injured worker to get them back as soon as possible. This will help reduce the size of your claim and reduce future damage to your experience mod rates and work comp rates. Also, if at all possible, keep the claim as “medical only” and avoid letting the insurer pay out indemnity to the worker. Medical only claims only count 30% of the values to the experience mod rating, which greatly affects your work comp rates. 9. Late Reporting or Noncompliance In the event of a property or liability loss, be sure to read and comply with all provisions under “Duties In The event Of Loss or Damage” section in the policy to avoid claim denials. Noncompliance can lead to similar problems as with work comp listed previously.
5 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
10. Inadequate Limits Most CGL policies provide $1M per occurrence and $2M aggregate limits. This may not be enough coverage if you suffer a large claim, particularly if you perform large jobs or sell high dollar volumes of product. Your liability limits should be enough to keep a plaintiff from attacking your persona assets, but not so high that you become a “target” either. Excess liability (umbrella) policies provide efficient opportunities for increasing your liability limits. On commercial property policies, being underinsured can lead to problems during a claim. This is due to the “Coinsurance” clause contained in most policies, which will cause you to receive only partial payments in the event of a partial loss. For example, if you are only insured at 50% of your Replacement Value and suffer a $100,000 loss, you may only receive half of your actual claim payment. 11. Failure to Comply with Contractual Requirements If you sign a contract with Indemnifications in favor of your vendor or client, then some or all of those indemnifications may not be insurable. It’s important for your agent to read the entire contract and advise you of any uninsurable sections. Additionally, if you fail to comply with insurance requirements in the contract, like Waivers of Subrogation, Limits, etc., your owners or board members could be held personally liable for negligence.
Shields Insurance Agency is an Independent Insurance Agency specializing in property and casualty insurance for businesses and individuals. We find that most businesses don’t fully understand their unique risks or their insurance coverage. We developed an easy threestep process that allows you to clearly identify Key Exposures, improve your Insurance Coverage and dramatically reduce costs. The results of our process will increase your operating margins and give you Peace of Mind, so you can focus on growing your business!
https://shields-insurance.com/
6 | 11 THINGS EVERY REAL ESTATE INVESTOR NEEDS TO KNOW
