Property Investor Insurance: What Coverage Do You Need
Real estate investors face unique challenges when purchasing insurance because they often are trying to cover a wide variety of property types and locations. Whether you have 50 or 500 properties, each building in your portfolio needs to be protected from loss and damage. This extensive guide will explain all the different types of property investor insurance and what coverages might be best for your business.
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What types of insurance do property investors need?
There are commonalities between most property investment businesses that allow us to assume the type of insurance coverages you will likely need. That being said, every business is unique and you may need more or different coverage than below. These are merely guidelines and not gospel.
General Liability
The first and most foundational type of property investor insurance is general liability. It is the most common business insurance policy in the U.S. because of its broad coverage. General liability protects your business against a wide variety of potential risks, such as bodily injury, property damage, or legal defense costs from third-party claims. For example, if a visitor injures themselves by slipping and falling on a wet floor in a commercial building that you own, general liability insurance helps cover the costs of their medical expenses.
Is it worth it to get commercial general liability insurance? Here are some important stats to keep in mind:
- Over 40% of small businesses experience a property or general liability claim within 10 years of operation
- The average cost of a slip and fall claim is $20,000
- Slip and fall accidents account for over 30% of general liability claims
A general liability policy will protect you from having to pay the debilitating costs of a bodily injury or property damage claim that arises due to your actions—however unintentional or inadvertent—toward another person.
Commercial Property Insurance
Property investors will also need commercial property insurance. This coverage protects your buildings, structures, and other assets from perils such as fire, theft, or vandalism. For example, let’s say a fire breaks out in one of your warehouses, causing extensive damage. Commercial property insurance will cover the costs to repair the building and replace the inventory you lost.
There are three types of property that this policy will pay claims on:
- Your building, which can be a structure that you own or a property that you do not own but are responsible for insuring. The coverage includes completed additions, indoor and outdoor fixtures, and permanently installed machinery and equipment.
- Your business personal property, or more simply, the building’s contents in or within 100 feet of the building itself. This includes items like furniture, machinery, stock, and tenant upgrades.
- Personal property of others in your care, custody, and control. This includes borrowed or customer property, and coverage is also limited to within 100 feet of the building.
Important Stats Relating To Commercial Property Insurance:
- There was close to $115 billion in insured losses from 2022 natural disasters and $121 billion in insured losses from 2021 natural disasters. These numbers account for a 40% increase in the 10-year annual average.
- 3%-5% of all U.S. commercial property insurance claims are due to fires that start from lighting strikes. Lightning-related fires account for $2 billion in annual payouts to small and medium-sized businesses.
- 20% of all commercial property insurance claims are burglary and theft
Commercial property is essential insurance for real estate investors. There has been a record number of natural disasters in recent years and economic inflation is making everything pricier. In short, it’s becoming more expensive to repair or replace property that is increasingly being damaged or lost.
Cyber Liability
Cyber threats are no longer as obvious as deleting an email that asks you to send money to Nigeria—with each passing day, cyber-attacks become more sophisticated and aggressive, and their prevalence increased dramatically when the global pandemic forced the world into a remote environment. From oil companies and healthcare organizations to the government, no one is safe from ransomware.
Cyber liability insurance provides property investors with financial protection from any actual or suspected data breaches or cyber-attacks that occur on your company's computer systems. This policy can not only help cover your losses, but will provide you with expertise on how to deal with a cyber-attack.
For example, let’s say a hacker gains access to a property management company's database, exposing sensitive tenant information. Cyber liability insurance helps cover the costs of responding to the breach, including legal fees and notification expenses.
Important Stats Relating To Cyber Liability Insurance:
- Ransomware attacks increased by 150% due to the pandemic and security issues associated with working from home
- In 2022, the average cost of a data breach in the U.S. was $9.44 million
- Approximately 60% of small businesses go out of business within six months of a cyber attack
Cyber liability insurance can help protect you from the financial and reputational costs of data breach, while also offering you expert guidance navigating a complex situation.
Workers Compensation
If your property investment company employs staff, it’s essential to have workers' compensation insurance. In fact, most states (including Oklahoma) require some form of workers comp insurance if you have any employees on the books—and keep in mind, even independent contractors can be considered employees in some instances.
This policy covers potential medical expenses, lost wages, and other related costs for an employee’s work-related injuries. If a maintenance worker falls from a ladder while performing repairs and breaks their leg, workers' compensation insurance would cover the hospital bill, physical therapy costs, lost income, and other associated expenses.
One huge benefit for property investors is if you have this coverage and a worker files a lawsuit, the worker must go through the workers comp system rather than general civil court. This helps protect you from tort actions and provides you with a predictable amount that you will spend on workplace injuries each year—the amount you spend on workers comp insurance.
Important Stats Relating To Workers Compensation Insurance:
- The average costs for a workers comp claim in 2019-2020 was $41,353
- Auto accidents are the most costly workers compensation claims, averaging $85,311 per claim in 2019-2020
Liability Umbrella
Operating in the real estate industry is fraught with risk—property investors juggle a multitude of buildings, people, regulations, and laws amid unpredictable economic and environmental situations. Most business liability insurance for real estate investors comes with limits of $1,000,000 per occurrence, so you may find that your company needs extra protections.
A liability umbrella, or excess liability, policy is purchased in addition to your primary property investor insurance policy and provides additional coverage. Liability umbrella policies are highly recommended for property investment companies with substantial assets or high-risk exposures. Consider for example that the average business negligence lawsuit is $1.5 million, and it becomes clear that a $1,000,000 limit is simply not enough coverage.
Here's how it works: Your umbrella policy will kick in once your general liability limit is reached. For example, if a property investor is sued for $3 million after a tenant's child is injured on the premises, their general liability policy will cover up to the limit of $1 million and then the umbrella policy covers the remaining $2 million.
With inflation on the rise, damages awarded in lawsuits are higher. A $1M claim in 2018 might be $1.5M (or more) now for the same accident. Purchasing higher limits though an umbrella policy can insulate your company from the worst-case scenario.
Tenant Legal Liability (Residential Investors)
Tenant legal liability insurance for real estate investors is particularly useful because it covers damage tenants cause to rental properties. The policy is designed for the owner and landlord of a building, but protects everyone involved. It is not a renter’s policy, but tenants are named as additional insureds, so are also covered.
Tenant legal liability insurance covers a variety of common issues that come with the territory of renting a building, such as damage caused by pets, accidental flooding due to an unaddressed plumbing issue, and smoke damage from candles. The coverage also includes loss of rental income.
The main benefit to property investors of having tenant legal liability insurance is it protects your expensive property policy from claims and unnecessary rate increases.
Directors & Officers Insurance (For Real Estate With Many Equity Owners)
Directors and officers (D&O) liability insurance protects your company and the personal assets of corporate directors and officers and their spouses if they are personally sued by employees, vendors, customers, or other parties, for wrongful acts performed in their role within the company.
D&O insurance is helpful for property investment companies with multiple equity owners because it protects against potential claims related to management decisions. For example, aproperty investor might face a lawsuit from equity owners alleging mismanagement of funds and breach of fiduciary duty. Directors & officers insurance helps cover the legal costs and potential settlement amounts associated with the claim.
Important Stats Relating To D&O Insurance:
- The average cost of a directors & officers claim is around $387,000
- In the past ten years, D&O claims have affected 27% of private companies, and 33% of public companies.
Different Methods To Insure Property Portfolios
In addition to the types of insurance for real estate investors above, each policy can be structured a bit differently.
Master Policies
With a master policy, less is more. All your properties are insured on a single property investor insurance policy instead of having a different policy for each building. The benefit is it eliminates administrative hassles for investors, as well as property managers and landlords—you won’t have as many problems tracking your insurance renewals or juggling different policies. There’s also potential cost savings due to the economies of scale—you might be able to obtain quotes from more carriers due to the increased size of the policy.
Layered Policies (or Coverage Tower)
With layered policies or coverage towers, multiple insurers share the risk of a single real estate investment insurance policy. So, a series of insurers write coverage for your property, each one in excess of the lower limits written by the other insurers.
For example, if you have a $30,000,000 property, you could have trouble finding a single insurance company to write the full amount. Instead, you might have to find three insurance companies that are willing to write $10,000,000 each. Continuing the scenario, let’s say you have a $25,000,000 claim. Insurer A, who insured the first $10,000,000, will pay the full amount; Insurer B, who insured the second $10,000,000, will pay the full amount; and Insurer C, who insured the third layer of $10,000,000, will pay $5,000,000.
The primary benefit of a layered policy is it allows you to obtain full coverage limits for your property. Using this method is oftentimes a necessity of the market conditions, rather than a preferable method of insuring the property.
Quota Share Policies
Similar to layered policies, quota share is a method where multiple insurance companies share the risk and premium of a policy on a proportional basis. In this case, the insurer and reinsurer share premiums and losses according to a fixed percentage (up to a predetermined maximum) instead of a fixed amount.
Using the example above, instead of the insurance companies taking the first $10,000,000 of the claim, they instead agree to take a certain percentage (e.g. 33% of the total claim will be paid by Insurer A). This is just another way insurance companies disperse risk on real estate investor insurance.
Loss Limited Policies
Loss limited policies insure a large amount of property, but cap the total amount the insurance company is obligated to pay in a single claim occurrence. For example, a policy might cover property valued at $80,000,000, but have a per claim cap of $10,000,000.
This is a great insurance tactic for property investors who have several buildings in different locations. In this case, the chances of a storm or fire affecting multiple buildings at once is slim to none, so having a limit that is lower than all your properties combined can be a great idea if you are geographically spread out.
Extra Coverages To Consider On Your Property Insurance
Business Income & Extra Expense Coverage
If one of your buildings is destroyed due to a storm or some other debilitating incident, the costs to resume normal operations can snowball fast. You need to pay to fix the property damage, while dealing with a major cash loss—there’s no money being generated when your proper is unable to operate.
There are two essential business interruption coverages that will help you rebound in these types of situations. Business income insurance covers lost income when your property is nonoperational. More specifically, it pays for “time element” losses, replenishing your net-income and normal operating expenses when your business is down and rebuilding. Extra expense insurance covers the additional costs associated with getting your property back up and running (e.g. expediting materials, paying for overtime labor, renting temporary equipment, buying additional advertising, etc.).
For example, let’s say a commercial property is damaged by a fire and the tenants are forced to temporarily relocate. Business income and extra expense coverage helps cover the property investor's lost rental income and additional costs incurred during the restoration period.
Important Stats Relating To Business Interruption Insurances:
- Of all small businesses that were forced to shut down operations because of a disaster, 40% failed to reopen, 25% closed permanently within a year, and a over 90% ceased operations within the next two years
- Only 30-40% of business owners have business income and extra expense coverage
Equipment Breakdown Insurance
Equipment breakdown coverage protects property investors from potential losses due to mechanical or electrical failures in their equipment. The term equipment can include everything from laptops and photocopy machines to generators and elevators.
While fixing a single electrical cable might have a negligible cost, larger equipment breakdowns can be prohibitively expensive to fix or replace, and potentially even lower cash flow if operations are impacted. Equipment breakdown coverage will insulate you from this risk. For example, if your commercial building experiences a major HVAC system failure, your policy would help cover the costs of repairs or replacement. If the building has to be shut down due to the HVAC failure, this insurance can also cover some of the resulting lost income.
Ordinance & Law Coverage
Ordinance and law coverage protects property investors from potential losses due to changes in building codes or local laws. If you need to rebuild an older property that’s been damaged, but current building codes require costly upgrades, ordinance and law insurance helps cover the increased costs associated with meeting these requirements.
This type of coverage is strongly recommended if you live in an area with strict building codes that are regularly updated. For example, if you have properties located in historical districts that you know will require rare textiles or materials for any upgrade; or maybe your buildings are in highly populated urban areas with ever-increasing safety regulations that mandate things like additional fire escapes. When updates to laws and building codes first occur, you are not typically obligated to comply immediately. However, you must comply once you replace the affected location. Having this coverage will protect you from paying out of pocket for expensive upgrades that you hadn’t budgeted for.
Flood Insurance
Flooding is the most common natural disaster in the United States, which is why it is not covered on your commercial property insurance policy. The risk and cost are too high for your standard insurance company to take the gamble. Flood policies are only underwritten by government-backed programs (NFIPs) and specialty insurance companies.
While purchasing flood insurance isn't as straightforward as your standard commercial property insurance, it is incredibly important if you have properties in high-risk flood zones. If your building is not covered and is damaged by a flood, you will not have any help covering the costs of repair and replacement.
Important Stats Relating To Flood Insurance:
- Flooding is America’s most frequent and expensive disaster
- The average flood insurance claim is around $52,000
- A single inch of floodwater can cause $25,000 in damage to even a modest-sized building
Earthquake Insurance
Like flood insurance, earthquake coverage is not covered under a standard commercial property policy because of the frequency and high costs of this natural disaster. The United States experiences an estimated annual loss of $6.1 billion in property damage due to earthquakes.
Therefore, we highly recommended earthquake coverage for property investors with buildings in areas prone to seismic activity. Earthquakes often cause severe damage to properties and the costs to repair your building could be steep if they are not protected with earthquake insurance.
Wind Deductible Buy-Down Insurance
A wind deductible buy-down is a property insurance policy that that reduces your deductible by insuring the difference between what your current deductible is and what you want it to be. This coverage is particularly important for property investors in regions prone to hurricanes or severe storms.
Many insurance carriers are only offering deductibles that are 2%-5% of the total value of the structure (this could be a $400,000 deductible in some cases) if there is a high frequency of wind or hail damage in the area. Again, carriers are worried about risk—about 26 percent of all property claims are caused by wind. A wind deductible buy-down offers you a workaround, so you can you can control your expenses and make the costs of repairs more manageable.
For example, a real estate company with a $5 million property with a 5% wind deductible of $250,000 could purchase a separate wind buy-down policy to cover $200,000 of their deductible and reduce the out-of-pocket expense to $50,000.
Expert Tips & Tricks
Always have your tenants provide proof of liability insurance and, if commercial, add you as an additional insured on their policy.
Regardless of the types of individuals, organizations, groups, or businesses that use your investment properties—and whether they’re long-term or short-term renters—it is always critical that you verify they are properly insured and request certificate of insurances.
This is because if an incident were to happen on the property, chances are you would be named in the lawsuit. Even if you had no direct control over the incident, you bear some liability simply for owning the premises.
Additionally, if any tenant is a business owner, always ask them to add you as an additional insured on their policy. This ensures their policy will cover your property investment company’s liability in the event you are named in one of these lawsuits.
Only work with insured contractors when doing renovations or maintenance.
When you are doing maintenance or renovations on your property, make sure you only use insured contractors. There are a few reasons for this:
- Legal Protection: Construction is a high-hazard activity. Sooner or later, an incident will happen that can result in both of your being sued. Perhaps the contractor makes a mistake and causes water damage to your building or tenant property, or their negligence injures someone or themselves. Regardless of what it is, you will need the contractor’s insurance policy to cover the costs of the incident. Using insured contractors will protect you from these risks, for the most part.
- Lower Premiums: If you use uninsured contractors, your general liability policy might get hit with additional premium at the time of audit. The general liability policies that property owners purchase are usually low cost and low risk; if you are taking on the liability of a contractor, insurance companies will add that cost to your general liability policy, running up your premiums.
- Expanded Coverage: Your general liability policy probably does not cover completed operations. Even if you dismiss the potential for an audit, chances are your policy will not adequately protect you from the risks of relying on a contractor for certain projects. Using an insured contractor and having them add you as an additional insured on their policy will ensure you have the appropriate completed operations coverage to safeguard the work done on finished projects.
Keep a spreadsheet that includes details of each property and the most recent maintenance updates.
The number one thing that insurance carriers want to know about a property is the age of the building, the construction of the building, and when the building has been updated.
For example, insurance companies are not interested in insuring old roofs in areas with a lot of hail because it is just a matter of time until the roof needs to be replaced.
Having a spreadsheet that tracks important building information, including roof replacement dates as well as updates to the HVAC, plumbing, and electrical systems will make getting quality and cost-effective insurance much easier.
Keep an eye out for sublimits.
No insurance policy is perfect, so it is important to periodically review which coverages you have (or don’t have) and the amount the insurance company will pay in a given scenario. Sublimits are becoming more common, which provides a separate, smaller limit for a given insurance claim on your policy.
For example, if your property investment company focuses on hotels, some policies are starting to sublimit water damage claims for this type of lodging.
This is because hotel guests are more frequently causing different plumbing issues (e.g. leaving the faucet on, resulting in water seeping through the walls). This sublimit is something you should be aware of and keep an eye out for in your policies.
Always know what protective safeguards are on your policy.
When filling out an insurance application, you might note that you have a fire sprinkler system and a burglar alarm. What you might not know is that sometimes the insurance company will add an endorsement called a “protective safeguard” to the policy thereafter. This warrants that you do indeed have the fire or burglar system in place and that you properly maintain that system. If a theft claim happens and it turns out that you do not have a burglar system, insurance will not pay the theft claim.
Get A Quote
The market for property investor insurance can be confusing and complex. You only want to pay for what you need, while ensuring each property is fully covered. We can help you navigate this challenge. We have helped people find the right coverage for their business at the most affordable price for over 100 years. Contact us today to speak to one of our insurance experts.
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.