My Investment Properties—Am I Covered?
Whether you’ve just purchased your first investment property or you’re a seasoned investor with a large portfolio of properties, you own valuable real estate which requires the appropriate insurance coverage.
The next question is: What unique requirements of investment properties warrant your attention?
Here are a few of the key items you should be aware of:
1. Rental Income Protection
If my property is damaged, how will I pay the mortgage without a tenant to pay rent?
Coverage is available to protect you against the loss of rental income—when your property is damaged by an insured peril that prohibits tenants from continuing to occupy the unit. This rental income coverage enables you to still meet your mortgage or other financial obligations despite the loss of rental income.
2. Vacancy Protection
What happens if a pipe bursts while my rental suite is unoccupied?
It is very important to become familiar with the vacancy protection provision in your insurance policy. Most policies allow for a 30-day vacancy period. If the rental property is unoccupied longer than the specified period, additional coverage needs to be arranged. In addition, most policies exclude water damage and vandalism that occurs when a property is vacant. A vacant property may require daily inspection and/or needs the water supply turned off and the pipes drained for your coverage to remain valid. Be sure to familiarize yourself with the specific vacancy terms in your policy to ensure your investment properties are and remain covered.
3. Level of Coverage
If construction costs spike, will my current coverage still be adequate?
It depends on the level of coverage you have purchased. Insurance is typically available at three different coverage levels:
Actual Cash Value pays to repair damages or replaces your building or your possessions, minus a deduction for depreciation. It is often offered at a lower price but is a poor choice due to continually rising construction expenses, and the ACV value of your property will be lower than its replacement cost, requiring you to pay the difference, which could be a substantial amount.
Replacement Cost coverage ensures that your rental building is repaired or rebuilt at the actual cost to replace it. However, it is important to note that the repairs or rebuilding costs are only covered up to the amount of insurance purchased. For example, if your policy limit is $200,000, and today’s construction prices cost $300,000 to rebuild your building, the maximum payout would be $200,000. In addition, when only a portion of a building is damaged by an insured loss and your building is not insured to the full replacement value, the insurer will apply a financial penalty against your claim. This is known as a co-insurance clause. A simple way to describe this penalty is if you are only insured for half the replacement value, the insurance company will only pay half of the cost to make repairs and you will have to pay the difference yourself. To protect yourself against such an event, you can increase the value of your coverage or buy a Guaranteed Replacement Cost policy.
Guaranteed Replacement Cost offers the highest level of protection as it pays the entirety of repair costs to rebuild your building as it was before the loss or damage—even if it exceeds the total sum of the policy limit. This gives you protection against increases in construction costs.
4. Investment Condo & Townhouse Units
Isn’t my property already covered under the Strata/Condo Corporation’s Master Insurance Policy?
Insuring an investment condominium unit is complicated by the fact that there are three parties involved: the owner of the unit, the tenant, and the strata/condo corporation. As a result, many condo owners mistakenly do not obtain coverage for their unit. A condo insurance policy fills the existing gaps in coverage when relying exclusively on the Strata/Condo Corporation’s Master Insurance Policy. As an investor, you require your own coverage for appliances, personal liability, rental income protection, betterments and improvements, and loss assessments.
Investment properties face unique risks and therefore require unique coverage. Therefore, it is very important that your insurance policies are designed specifically for investment properties.
5. Where Can You Find Insurance Tailored Specifically for Investment Properties?
Over a decade ago, REIN management realized that members were struggling to find tailored insurance coverage for their unique needs as real estate investors. REIN members were surveyed to determine their exact insurance requirements. From the results, the REIN Member Insurance Program was created to address those needs. The program features:
- Guaranteed Replacement Cost Coverage
- Multiple property discounts
- Extended terms for vacancy
- Coverage for vandalism by tenants
- Actual Loss Sustained for rental income with no $ limitation within the 24-month indemnity period
- $2,000,000 Comprehensive General Liability coverage included
- Earthquake & flood coverage in most areas
The program is managed by Park Insurance and is available exclusively to REIN members. You can learn more at https://park.ca/rein/.
Chris Westrop is the Commercial Insurance Manager at Park Insurance. He has over 25 years of experience in the commercial insurance business and is a Chartered Insurance Professional with the Insurance Institute of Canada and a member of the Professional Liability Underwriting Society. He is also a REIN member and a regular attendee of many of our programs. Chris may be reached at (604) 659-3133 or [email protected]a.