Friday, 1 June 2012

Insurances for our US Property

With our property in Florida recently being purchased, and the renovations just about complete. The next step was to ensure we were insured properly. One of our biggest fears was that a tenant would slip over in the shower and then sue us for everything we had, probably a bit dramatic but was still a real concern for us. Even though we have the property owned in our LLC, we thought that this meant the total liability we could be facing was everything the LLC owned, i.e the property. I mean this is what Limited Liability Companys are used for right? To limit the liability, at least that is what I initially believed. Although it is true in most cases, in the situation where the owner of the house has been extremely neglient and there is a serious injury or death due to this neglience, then the law system may have the power to go after the personal assets of my business partner and I. 

To be honest, I have not looked into the potential to be sued as an individual too much, I have only been told that is is a possibility, especially in America where anything seems possible. Due to this, we have to make sure we protect ourselves as best as possible with all the necessary insurances. Our property agent set us up with a contact who is able to sort out insurances for us, she recommended that we procure three different insurances for our property

Flood Protection - although in a 'low risk' flood zone, it is still recommended
Personal Liability - otherwise known as Umbrella insurance to protect the landlord for being sued as above
Property Insurance - self explanatory, building insurance should the property sustain significant damage

We initially received quotes for the insurances and below were the premiums (received on 24/5/2012):

Flood Protection - $343 per annum
Personal Liability - $410 per annum for $300,000 cover
Property Insurance - $1,826 per annum

The property insurance quote definitely raised my eyebrows, it was a fair bit higher than I initially was hoping for. Also along with this, due to the age of the property (it was built in 1966) we were required to have a roof stability report carried out, as well as a wind mitigation report conducted. To be honest I don't even know what a wind mitigation report is, I assume it just analyses the capacity of the property to withstand strong gusts of winds? Anyway, each report is only about $100 each so I have no problem getting them both carried out to satisfy the insurance company.

Back to the $1,826 quote for property insurance, looking through the quote, I noticed the property is being insured for $192,000. This seems a bit ridiculous seeing as only paid $44,000 for the property and spent $5,000 on renovations. So I would expect we only require it to be insured for around $75,000 to fully cover our investment on the property. Flood protection was similar, the property was being covered for $200,000, well over its actual value. Also there was contents insurance associated with the flood protection to the sum of $80,000, which again is not realistic as we not be renting out this property furnished, so we would only provide the bare minimum to the tenant, assume only $10,000 cover would be required for contents.

To be honest I am curious how this works, seeing as my home insurance for my house in Sydney is only $640 per year, and I paid $350,000 for this property a couple years ago. And yet, a property over there worth $44,000 requires $1,800 in insurance a year? Three times the cost of insurance for a property worth an eighth of what mine is in Sydney, it really does not make sense. I do understand that they are looking at replacement cost of the property, rather than the actual property value. So it very well may be that it would cost $192,000 to rebuild the property. But still, when I put the same property details into a quote generator with AAMI Home Insurance, the home insurance premiums were still only $750 a year, so I really do not understand where the extra $1,000 or so comes from.

After emailing the insurance broker, we found out that $1,200 of the cover for the home insurance was for wind cover. This seemed very excessive seeing as the property is relatively inland (approximately 20 miles) so most of the damage from a hurricane would subside, and also the property has been around since 1966 and never had wind damage previously. Due to this we opted to remove and wind cover for the property, bringing the property insurance level to $586. We were also able to reduce the flood protection cover from $200,000 to $100,000, which reduced our premium by half down to $174.

The final amounts we ended up paying for our property insurance were -

Flood Protection - $174 per annum
Personal Liability - $410 per annum
Property Insurance - $586 per annum
TOTAL - $1,170.00

To be honest it was still a bit higher than we initially were hoping for, but I guess it seems like a standard rate for the area so not much we can do about that. Removing the wind cover makes the total cost a lot more accessible for our budgets. It should also be noted that the personal liability insurance should be able to cover us under all of our properties, not just the individual property.

I was also talking to another investor who opted to not provide any property insurance, their argument was that they would most likely not bother claiming on the insurance for anything minor, and anything major is such an unlikely event that it was not worth worrying about. Their typical property value was around $40,000 and by saving the $17,000 a month in insurance fees (they had hundreds of properties), as long as a large fire or similar didn't occur more frequently than every 3 months, they would come out on top. I believe they are happy with their situation and have come out on top without using insurance at all. This is definitely one approach that can be taken, however for our first investment, we have chosen to have some security for us, if our port folio substantially increases and insurance starts eating significantly into our profits, our line of thought may change.

Anyway that was our experience with insurance for the properties, I guess at the end of the day it is important to question the costs of everything, it is easy to just assume it is the going rate over there, seeing as we do not know much about it. But by simply asking questions and realising what cover we need and what we can do without, we were able to reduce our premiums by half. And my business partner and I are more than comfortable with the amount of insurance we have. If we feel it is not enough, there is nothing stopping us increasing the cover next time when we renew our insurance.

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only.  Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

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