By Clark Sanchez | State Farm
As an investor in income property, you may not have ever considered how your insurance company determines how much to charge for your policy. In the insurance business, determining cost and what to charge is a big part of “actuarial science,” which is the math that considers many factors including risk, claims costs, and how much to charge for an insurance policy.
Most people have some experience with Homeowners insurance. This policy is used for owner-occupied homes that are usually the primary residence of the occupant/owner. Before this policy was created in the 1950s, a homeowner had to purchase several separate insurance policies. At the time, ‘purists’ said that it was just not possible to combine insurance for the building, insurance for the contents, and insurance protection from lawsuits, into a single policy. However, this combination was done and almost every owner-occupied home uses this type of insurance today.
New investors are sometimes surprised that a homeowner policy, which includes an automatic amount for contents items, costs about the same as a landlord’s policy for a rental house that has no contents coverage at all (since most long-term rentals are leased with no furnishings). These two policies cost about the same because the risk factor for a tenant-occupied home is considerably higher than for the same home when owner-occupied. Stated more simply, owners take better care of their homes than renters.
In general, the longer the lease term, the lower the insurance risk. This would mean that any home rented out for a short term, such as VRBO or Airbnb, is generally considered high risk whereas an unfurnished rental property with a lease of one year or longer is considered to be a lower risk.
Regardless of the rental term, it is also good to know that rental homes that are rented fully furnished are also at higher risk, regardless of the lease term. And most insurance policies do not include insurance coverage for ‘theft of contents items by the tenant.’ The legal concept here is that when the landlord or property manager handed the tenant the keys to the furnished home, that tenant was given ‘permissive access’ to the home and the contents. Therefore, if the tenant takes some (or all) of the furnishings, there is usually no insurance coverage.
In one actual case that occurred in the San Tan area, the tenant signed a one-year lease on a furnished home. As the end of the lease approached, the tenant backed a large truck up to the house and emptied all of the furniture and furnishings from the house into the truck. The tenant then disappeared. After over 3 years, the police have still not been able to trace or locate the former tenants.
Lastly, remember that your claims record follows you everywhere, so if you have a claim with an investment rental in another state, that information will probably be considered by the underwriter if you apply for insurance somewhere else (like Arizona).
*********************************************************************************************************************
Clark Sanchez is a 42-year Arizona insurance agent and 24-year AZREIA vendor member and sponsor. You can reach him with your insurance questions by calling (602) 803-2179 or by emailing rental@clarksanchez.com.