10.31.2024 Michelle Clardie
Property insurance is necessary whether you buy real estate for residential, commercial, or investment purposes. What is the nature of property insurance, and what should you understand when obtaining this protection? In this article, let's examine these—and other—questions about property insurance.
What is property insurance?
The basic concept behind property insurance is that a large group pays monthly premiums. Any disaster occurring to a smaller portion of the group can be financially supported to help pay for what insurance companies call a "covered peril."
It's necessary to have property insurance for these reasons:
- Property damage and other liability risks for property owners may create a substantial loss and cause severe financial setbacks, including bankruptcy.
- Mortgage lenders require proof of homeowners insurance before they agree to finance the home purchase.
- Property insurance is crucial to protect the value of a real estate investment portfolio.
- Commercial property and rental property have more risks than owner-occupied residential property. These additional risks need insurance coverage, too.
Types of Property Insurance Coverage
There are various types of property insurance coverage that you should consider. The appropriate coverage for your circumstances depends on whether you are an owner, investor, builder, or tenant.
Homeowners Insurance
This insurance is for residential properties, which are usually owner-occupied. It covers standard damage to the home from fires, burglaries, and vandalism. It can also cover personal belongings (subject to limits) and liability if someone is hurt while on your property.
Renters Insurance
This insurance covers renters' personal belongings kept in the rental unit and may offer some protection if somebody is hurt while in your rented space.
Landlord Insurance
For real estate investors who rent out their properties, landlord insurance is a type of commercial policy that covers the structure itself and any other property owned by the landlord (like appliances) used by renters. It may provide liability coverage if a tenant or visitor gets hurt in common areas.
Condo Insurance
This insurance covers your unit's interior (walls in), while the condo association or building owner handles the insurance for the building structure and common areas.
Flood Insurance
Most standard property insurance policies don't cover flood damage, so if you're in a flood-prone area, you'd need a separate flood insurance policy.
Wind Damage
Wind damage may result from high winds, such as those experienced in a tornado or a hurricane. Most insurance policies cover wind damage.
Earthquake Insurance
Most regular policies don't cover earthquake damage, so you need a separate policy if you live in an earthquake-prone area.
Differences Between Homeowners and Commercial Insurance
There is a significant difference between homeowners insurance and commercial insurance. Most homeowners insurance requires the homeowner or an immediate family member to occupy the property. If the property is used for a commercial purpose, which includes renting it to others, a claim for a covered peril, such as a fire, may be denied if you have a homeowners policy but do not live there.
To evaluate whether you have this problem, read the terms and conditions of your policy. Carefully consider any stated exclusions. Get the advice of a qualified financial professional if you have concerns and do not understand what is said in your insurance policy.
Here's why this is critically important. Suppose you rent out your house and do not have commercial insurance. If a renter causes a fire, your insurance claim may be denied under a regular homeowners policy because you do not live there.
Homeowners Insurance Coverage
It is wise to conduct an insurance review each year and after any substantial change in your circumstances. A trusted insurance agent could help you with this process as long as you recognize the solutions offered may be biased in ways that make the agent money. You can also hire a financial professional to conduct an insurance review and get an opinion that is not tied to money considerations.
Here are some types of homeowners insurance coverage:
- Risks to the Dwelling: This covers damage to the home's structure, such as the walls, roof, and foundation, if a fire or another covered peril damages your house.
- Personal Property Insurance: This protects property inside the home, such as furniture, electronics, or clothes.
- Liability Protection: If someone gets injured on your property or you accidentally damage someone else's property, this coverage helps cover legal costs and medical bills (subject to limits).
- Loss of Use: If your home becomes uninhabitable due to a covered peril, this helps pay for temporary living expenses, such as hotel bills or rental costs, while your home repairs are in progress.
Commercial Insurance Coverage
Commercial insurance is a necessity for any business. You might need commercial insurance if any part of a property is used for business activities.
Suppose you have a home office and clients occasionally stop by for meetings. This use of your home is a commercial activity, which standard homeowners insurance may not cover. Similarly, you may need commercial insurance if you rent out the property, even only a portion of it.
Here are some types of commercial insurance coverage:
- Building Coverage: This insurance is for the physical structure of your commercial property, including the building itself and any attached structures. If a fire, vandalism, or another covered peril damages the building, this insurance helps with repairs or replacement costs.
- Business Personal Property Coverage: This protects the contents inside your commercial property, like equipment, furniture, inventory, and supplies. If these items are stolen, damaged, or destroyed by a covered peril, this coverage helps replace or repair them.
- Business Interruption Insurance: If your business operations are halted due to damage to your property (from a fire, storm or other event), this coverage helps compensate for lost income. It may also cover temporary operating costs, such as renting another space while repairs are made to your place of business.
- Equipment Breakdown Coverage: This provides protection if your essential business equipment—like HVAC systems, boilers, or manufacturing equipment—breaks down due to a mechanical or electrical failure. It helps pay for repairs or replacement of the equipment.
Tips for Finding Appropriate Coverage
To find the appropriate coverage for a piece of real estate, it's important to understand the types of coverage available and the exact amount of the deductible and premiums you'll need to pay. Other steps to getting the best insurance include the following.
Decide How Much Coverage You Need
It would be impractical to buy too much insurance. More insurance costs, and if you don't need it, you shouldn't have to pay the premiums. The coverage needed typically depends on the property you want to insure, location, age, construction materials used to build it, and whether the building standards are up to code.
Find Reputable Insurance Companies
Paying premiums is only worthwhile if your insurance company cooperates and pays you what is required under your policy terms when you have a legitimate claim for a covered peril. This requires finding a trustworthy insurance company.
To find such a company, ask for referrals from friends, relatives, and colleagues. Conduct due diligence on any insurance companies under consideration by doing the following:
- Check for positive reviews online
- Check for complaints made with the Better Business Bureau
- Check the insurance company's financial rating with Dun & Bradstreet and Fitch.
Get Multiple Quotes
Do your best to compare "apples with apples" by getting multiple quotes from reputable firms for similar coverage. Don't assume you have coverage or that a policy includes it. Carefully read and evaluate the insurance policy terms and conditions.
Set your deductible level high enough to save money on insurance premiums but low enough to be able to pay it if needed. A clever strategy is to set a high deductible and then place that amount of money in a long-term certificate of deposit.
Another way to save on premiums is by bundling insurance coverage (for example, using the same company for your auto and home insurance). Also ask for additional savings that might apply, like veteran or first-responder discounts.
Additional Considerations
Location Hazards
There are places and types of properties where it is difficult, if not impossible, to get property insurance. For example, insuring a beach house in Florida is becoming increasingly difficult and more expensive. Depending on other claims in the area, be aware that your existing insurance policy may be canceled or not renewed. In this case, the state in which your property is located may offer the only available insurance with expensive premium rates and extremely high deductibles.
Mortgage Requirements
Mortgage lenders require real estate to be insured when it is used as collateral for a loan. In some states, if you fail to carry homeowners insurance, a lender can force coverage and charge you for that coverage. The insurance obtained through forced coverage only protects the lender for the outstanding balance on the mortgage and nothing else.
Coverage and Peace of Mind
Insurance is a necessary property expense. Be sure to do your research and understand your coverage. If your real estate portfolio is extensive, work with a financial professional to conduct a risk analysis/insurance review. PropertyReach provides the data needed to find comparable properties (comps) and other information used to estimate property values, which can help you determine the right amount of insurance coverage needed. For more information, visit propertyreach.com and sign up for a seven-day trial.
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