Just Catastrophic Please

Just Catastrophic Please

As an insurance agent who specializes in investment properties, I hear this phrase all the time: “I just want catastrophic coverage.” Seriously, I hear this at least 3 times a day from all kinds of customers. On the surface, that sounds simple. Usually, it is a plea for help with high rates, and it is completely understandable. In reality, it’s a recipe for a bad claims experience, unless you understand how you are covering the catastrophic.

In the end, the reason we purchase insurance is for the claim; they don’t happen very often, but even small claims can be catastrophic if you are undercapitalized. In today’s climate, investors are getting squeezed with falling rents and rising expenses, including insurance. Let’s break down an insurance policy to make sure you can tailor your coverage to you.

An insurance policy isn’t a single switch you flip to “on” or “off.” It’s a structured contract made up of several key components. Let’s review:

First, what buildings are insured? A policy must clearly define which structures are covered. Is it just the main dwelling? Are detached garages, sheds, carports, or fences included? Many investors assume everything on the property is covered, only to discover after a loss that only the primary structure was insured. Coverage doesn’t help if the building itself isn’t properly listed. This goes for addresses and parcel numbers, too. If you change an address or split a property, please update your policy.

Second, who is insured? (also known as the named insured). This is critical for investors using LLCs, partnerships, or trusts. If the wrong entity is listed, or if ownership has changed since the policy was written, coverage may not apply at all. A claim denied because of a named insured issue is about as catastrophic as it gets. So, if you change ownership, be sure to update the policy.

Third, what types of losses are covered? Policies don’t cover “everything.” They cover specific perils, such as fire, wind, hail, vandalism, or theft. Floods, earthquakes, and certain water losses are commonly excluded unless specifically added. Many people asking for catastrophic coverage are shocked to learn that their version of “catastrophic” isn’t actually covered. A perfect example is a friend of mine who just had a septic tank back up into his basement. The estimated total damage? Roughly $25,000. Insurance coverage provided? A limited $10,000 of water backup coverage. Was there anything my friend could do better on his policy? Not really. A cap was set by the carrier, and could not be increased. The point is that certain types of losses are excluded or limited.

Fourth, for how much? This is the limit of insurance, usually based on replacement cost, not market value or loan balance. Being underinsured can trigger coinsurance penalties (meaning you may receive far less than expected after a major loss). Penalty? Sure, the carrier plays fair. If you underinsure your property by 50%, they short your claim by 50%.

There can be sublimits as well. For example, would it be catastrophic to lose the furnishings in your short-term rental? There is a separate limit for personal property on a landlord policy…please make sure you have enough to cover all of them. Would it be catastrophic if you couldn’t receive rent for 6 months because your property was uninsurable? This is known as Loss of Use or Loss of Rent and is also subject to different limits; understanding these things can help you determine what would be catastrophic for you.

Finally, how much is retained by the insured? (better known as the Deductible). Higher deductibles lower premiums, but they also increase your out-of-pocket responsibility when a loss occurs. A “catastrophic-only” mindset often overlooks how painful a large deductible can be during a real claim. That said, if you really only want catastrophic coverage because you are well capitalized, increasing your deductible can be a great way to ensure you have the property, buildings, people, losses, and limits, while taking on more of the risk yourself through your deductible and decreasing your premium.

If you own rental property, your insurance should be intentional, not accidental. If you want to understand how your policy is structured and whether it truly protects your investment, visit Gilainsurance.com/azreia and start the conversation today.