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As an investor you need to be aware…
Like I or not, it’s happening. Property and casualty insurance rates are on the rise for the entire nation and they will continue to increase over the coming years. For investors, this may mean diminished cash flow, increased exposure to loss (explained below) and a potential need to look for new insurance coverage. While no one likes paying insurance premiums, consumers have generally become accustomed to years of relatively-low and stable premium prices and any change is automatically viewed as extreme and unnecessary. However, this is not really accurate. In addition to raising rates, many insurance companies will also be making other changes. For example, those companies that have experienced large financial losses in claims for commercial and investment property and that want to begin backing out of insuring these types of risks and lessening their overall exposure to loss in these areas will begin non-renewing policies or raising the renewal premiums so high that they will, in effect, force the customer to find coverage elsewhere. There will be changes within the policies themselves as well, with many ‘value added’ coverages that were not in the original policy but which have since been included in recent years as an additional enticement for purchasing them (such as foundation coverage) being removed from these same policies at renewal. This means not only higher premiums but also less coverage.
The reason for these across-the-board premium increases is simple; it’s not directly related to ‘greedy insurance companies’ trying to make more money as many people would first think, but rather to the BILLIONS of dollars in claim losses that these companies have paid out over the past ten years as opposed to the amount of income generated from the premiums charged to their customers. Despite the assumption that all insurance companies are flush with cash, the fact is that many insurance companies have had to pay more than they have made and some have even become insolvent and gone out of business. Natural catastrophes such as Hurricane Ike, Hurricane Rita, Hurricane Katrina, Superstorm Sandy, the numerous fires and hailstorms in Texas, tornadoes throughout the Midwest, and numerous other disasters – combined with the regular day-to-day no- catastrophic claims – have taken their toll over the past decade and the insurance industry is being forced by sheer necessity to reevaluate pricing, coverage options, and even the types of risks or business they wish to insure.
Yes folks – many changes are ahead.
Add to this that the REINSURANCE rates that these insurance companies themselves pay have increased drastically as well. It’s a little-known fact that insurance companies themselves purchase insurance (called re-insurance) to help cover losses and reduce their financial risks. The reinsurance market is an entire behind-the-scenes industry unto itself and just like the premiums charged by insurance companies to their customers are increasing, so are the reinsurance rates that these companies themselves have to pay. Some have increased by 150% or more – which means hundreds of millions of dollars in new expenses that did not exist a year ago. Most of that expense get the rates that passed onto you and me (yes, I pay for insurance too!)
Many people want to know how insurance companies determine what rates will be charged – but there is no easy answer. The insurance industry runs on statistics and mounds and mounds of actuarial data and it is often slices and diced a hundred different ways and each company has its own way of viewing risk. As a general rule, premiums are adjusted (raised or lowered) depending on several factors, including the type of risk and the past claims history that category of risk has experienced (i.e. Commercial Lessor’s Risk, dwelling policies, etc.), the geographic area that the risk is located in (down to the zip code or County level), how badly the company wants (or doesn’t want) to write a particular line of business in a particular area, and the individual characteristics of the insured (insurance score, claims history, and so on). The amount of the premium change varies tremendously and it is not the same for all risks in all areas.
In summary, be forewarned that like most things in today’s world, insurance rates too are on the rise and they will continue to rise for the next 24 to 36 months before leveling out. There is no longer such a thing as ‘good cheap insurance’ (an oxymoron itself) and if a premium is low compared to other companies, there is a reason – and it is in your best interest to find out what that reason is. Is an important coverage being excluded or removed from the policy? Is the property quoted and insured correctly? Is the company financially stable? You should ask questions before it’s too late and you find yourself in an unexpected situation with little or no coverage despite the fact that you were paying a premium.
There are many issues involved when insuring wrap-around mortgages and, unfortunately, many investors and buyers are unaware of the potential problems and liabilities that they themselves may be inadvertantly creating by following bad advice, ignoring good advice, or simply refusing to address the issues of loan servicing and insurance billing because they are ‘inconvienient’. We hope this webinar video is both informative and useful to you.
So you’re a landlord and you maintain strong leases and good tenant-screenings - what’s the worst that could happen? How about being sued for renting a haunted house? Are liability suits arising from alleged paranormal activity covered in YOUR dwelling policy?
While most property owners are familiar with typical exposures such as bodily injury, invasion, or privacy, and wrongful eviction (which themselves are not even covered in most landlord dwelling policies because they are ‘personal’ injury issues), this is one of the more unusual and interesting liability issues that we at InsuranceForInvestors.com have seen in a while and we thought it was worth sharing just to prove the point that any property owner can be sued for virtually any perceived wrong. You don’t have to be guilty to be accused - but you must still pay legal costs to defend your innocence…
Read the Actual Story Below from CBS New York:
TOMS RIVER, N.J. (CBS New York) – Nighttime is fright time for a Toms River couple who claim the house they rented is haunted.
Jose Chinchilla and his fiancée Michele Callan say they hear eerie noises, that lights flicker, doors slam and a spectral presence tugs on their bed sheets. The couple even called in investigators with the Shore Paranormal Research Society. The group classified the activity as “paranormal” but that it did not indicate a haunting, according to their website.
Chinchilla and Callan are suing the landlord for their $2,250 security deposit claiming the paranormal activity forced them out of the home only a week after moving in. However, the landlord believes the couple was actually spooked by the $1,500 a month rental fee and made up the ghost story to get out of their lease. The landlord has filed a counter suit against the couple. A hearing is expected at the end of this month.
Read Original Story
We regularly get asked the question “How much does insurance cost?” before even having a chance to put together a quote. A good answer might be “How much does a red dress cost?” With regards to the dress, the answer is “It Depends”. What kind of dress? What size? What material? Which designer? What store? As you can see, there are many unknown variables that must be taken into consideration when answering that question.
The same holds true with insurance. We have many companies that we work with and in order to put together accurate quotes, we need certain information required by the various insurance carriers – both about the property itself as well as regarding the mortgagee and certain personal information for the named insured(s). With this in mind, we also have specific property information forms that we use to capture all of this information at one time. If this information is not provided and/or if the parties simply refuse to supply the information requested, we are not in a position to spend hours making numerous phone calls and repeatedly asking for this necessary data.
The danger with providing quotes with only minimal information is that they aren’t accurate and they will most likely change (increase) in premium once the order to bind the policy has been given and reports are pulled by the carrier and accurate data finally obtained.
In order to develop the amount of insurance needed to adequately protect the property against loss, known as the reconstruction or replacement cost, we must first need to know the physical characteristics of the property such as the square footage, year constructed, number of bathrooms, construction grade, and so on.
As addressed in another question, the reconstruction or replacement cost value is not a number simply chosen at random. Most companies use the Marshall & Swift/Boeckh (MSB for short) data service to arrive at this value. MSB is a large global company which tracks the labor and material costs for every zip code in every county in the United States. Insurance companies pay millions of dollars each year to utilize the MSB service and when performing quotes, agents are required to input the various construction data about the subject property such as square footage, number of baths, exterior construction, construction grade, and so on. This information is then used to calculate cost per square foot and total reconstruction value for the insured property.
The Surplus Lines insurance market (sometimes referred to as the non-standard market) exists to provide insurance to clients with risks that are not allowable in the ‘standard’ market. These companies, most of which are “A-Rated” or better, are required to charge state tax and the carriers also charge policy fees. Some of the reasons a policy may need to be written in this non-standard market include:
- The named insured has experienced a foreclosure or bankruptcy within the past 5 years
- There are an excessive number of claims on the property
- The property itself exceeds the carriers underwriting guidelines in terms of construction characteristics, age, or maintenance conditions
The money accumulating in the seller’s original escrow account will continue to do just that – accumulate. Although the seller may have agreed to transfer all monies in this account to the new buyer – that was an agreement between those two parties, not the underlying mortgagee, and this escrow account is still in the seller’s name. In most cases, the new buyer (or perhaps the seller) can send proof of the insurance policy being paid in full with money outside of this account to the mortgagee and request that funds be released from escrow as a reimbursement.
Unfortunately, any checks sent from this account for reimbursement will only be made out to the person whose name is actually on the account (the seller). This means that the seller will in turn have to cash this check and then send these funds back to the new buyer. This may have to be done each year. This is another inherent difficulty specific to subject-to and wrap-around mortgages.
NO. Only the Named Insured (Policy Owner) has the legal authority to make any modifications to the insurance policy, file claims, cancel the policy, or receive refunds.
Prior to cancellation for non-payment of premium, the named insured policy owner will receive several notices in order to make payment and keep the policy in force. If the policy does cancel, the named insured can contact us to make payment and we will have the policy reinstated ONE TIME if the carrier will allow it. If the policy cancels again for the same reason, we will consider this to be a non-performing account and we will not have the policy reinstated.
Note: The reason that we will only reinstate the policy one time for a non-payment cancellation is due to the fact that, in our experience, many wrap-around mortgage transactions are not set up correctly by the parties and insurance is only obtained AFTER the actual closing – with the new property owner electing monthly insurance payments. Many of these policies get monthly notices of cancellations and require numerous reinstatements simply because the insured fails to pay the bill.
No. Unlike real estate contracts; insurance contracts (policies) are NOT transferable and they cannot be assigned from one party to another.
