Over-Insuring is Killing Your Profits

How One Landlord Saved $86,000 in Premiums

Insuring the Market Value Wastes Your Money

“What property owners need to understand it that there’s a big difference between market value that lenders use and the replacement cost carriers use,” says Patrick Nugent, CCIM, JD, with Commercial Insurance Solutions out of Dallas.

 ”A property insurance policy is intended to make an insured whole and will not act as a profit center.” 

With that in mind, Nugent recommends that a property owner take a hard look at the insurable values with an eye toward replacement costs because this will lower premiums.

Lower Premiums Saves You Even More in the Long Run

Patrick explains about a client who was buying a 400 unit complex in Hawaii. The property was built in 1965. The lender wanted the owner to insure the full loan value, or $150 per square foot for the frame construction, but they did not factor in the land, which is highly valued in Hawaii. 

After hearing an explanation from the insurer on proper valuation, the lender agreed to go with replacement cost, which lowered the premiums to $80 psf. That was a savings of $86,000 in property insurance premiums alone.

At a 7% cap rate, that’s $1.2 million savings on the investment.

Over-insurance is a common mistake, for both lenders and brokers, especially brokers who do not specialize in real estate.

Find out if you are over-insured.  Contact Commercial Insurance Solutions.

American Apartment Owners Association offers discounts on products and services related to your commercial housing investment including REAL ESTATE FORMS, tenant debt collection, tenant background checks, insurance and financing.  Find out more at www.joinaaoa.org. 

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Tags: over-insuring+property, how+to+insure+real+estate, real+estate+investing, tenant+screening, apartment+owners+associations, landlords, landlord+associations

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Filed under: AAOA Forum, Insurance

This entry was posted on Thursday, October 2nd, 2008 at 9:25 am and is filed under AAOA Forum, Insurance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

1. AAOA - American Apartment Owners Association » How Savvy Investors Do Property Insurance said at October 23rd, 2008 at 4:35 pm

   [...] How Savvy Investors Do Property Insurance “For investors with a portfolio of properties, greater opportunities exist to save on premiums, and thereby increase your investment income, by purchasing insurance on the portfolio, just like insurance carriers do on their portfolios as a whole,” according to Patrick Nugent, CCIM, JD with Commercial Insurance Solutions in Dallas.   For example, take an owner who has a $500 million portfolio that includes properties in California, Texas, and Florida. The highest valued property does not exceed $30 million, but $50 million of the portfolio properties are in a concentrated area of California.    “To help determine its level of risk, the carrier compares these locations against probable exposures, like earthquake and fires.  Using this example, the probable maximum loss is only a fraction of the total value of the portfolio,” Patrick explains.   The aggregation of values across a broad geographic area is what makes a portfolio program work.  Realizing that a single occurrence cannot affect a location in Houston, Los Angeles and Orlando simultaneously, it allows for a lower insurance limit.   In our scenario, it does not make sense to purchase $500 million in coverage (the portfolio value). The maximum loss per occurrence is $50 million (the value of the L.A. properties that are in close proximity). The insured may still want to cover up to a $100 million in a per occurrence limit to provide a buffer.  But the lower loss limit means lower premiums. During a hard market, like in 2006, premium savings would have equaled $100,000 to $200,000.    Capitalize that over the life of the investment, and it translates to $1.4 million to $2.8 million in value.     To learn more, contact Commercial Insurance Solutions.   See a related feature, Over-insuring is Killing Your Profits. [...]

2. AAOA - American Apartment Owners Association » Learn How Savvy Investors Do Property Insurance said at November 6th, 2008 at 1:53 pm

   [...] Learn How Savvy Investors Do Property Insurance “For investors with a portfolio of properties, greater opportunities exist to save on premiums, and thereby increase your investment income, by purchasing insurance on the portfolio, just like insurance carriers do on their portfolios as a whole,” according to Patrick Nugent, CCIM, JD with Commercial Insurance Solutions in Dallas.   For example, take an owner who has a $500 million portfolio that includes properties in California, Texas, and Florida. The highest valued property does not exceed $30 million, but $50 million of the portfolio properties are in a concentrated area of California.    “To help determine its level of risk, the carrier compares these locations against probable exposures, like earthquake and fires.  Using this example, the probable maximum loss is only a fraction of the total value of the portfolio,” Patrick explains.   The aggregation of values across a broad geographic area is what makes a portfolio program work.  Realizing that a single occurrence cannot affect a location in Houston, Los Angeles and Orlando simultaneously, it allows for a lower insurance limit.   In our scenario, if does not make sense to purchase $500 million in coverage (the portfolio value). The maximum loss per occurrence is $50 million (the value of the L.A. properties that are in close proximity). The insured may still want to cover up to a $100 million in a per occurrence limit to provide a buffer.  But the lower loss limit means lower premium, During a hard market, like in 2006, premium savings would have equaled a $100,000 to $200,000.    Capitalize that over the life of the investment, and it translates to $1.4 million to $2.8 million in value.     To learn more, contact Commercial Insurance Solutions.   See a related feature, Over-insuring is Killing Your Profits. [...]

3. AAOA - American Apartment Owners Association » Premium Advice: Avoid This Property Insurance Trap said at December 17th, 2008 at 9:09 am

   [...] See a related feature, Over-insuring is Killing Your Profits.   [...]

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