Importance of Insurance for Real Estate Investors

Let’s face it, even if you use an LLC, you still need insurance. However, when we need insurance for LLCs, corporations, and land trusts, our local insurance people and providers don’t know how to write the right type of policy to protect our assets. Clint Coons of Anderson Business Advisors talks to Shawn Woedl from the National Real Estate Insurance Group (NREIG) about the importance of insurance and different types of policies that are available.

Highlights/Topics:

• Creating a Limited Liability Company (LLC) doesn’t relieve you of your responsibility to insure the property
• REIGuard: Accommodates portfolio of one to four family rental dwellings or any line of commercial real estate through any phase of occupancy, anywhere in the country
• Flippers should purchase Builder’s Risk Forms that include liability coverage for the premises
• Fix and flips are highest risk type of property for an insurance company; investors are forced to buy a longer-term policy, but won’t get a refund if they sell the property sooner
• Liability claims take down a company faster than any property loss, regardless of size
• General Contractor’s Policy covers faulty workmanship; a general contractor needs to provide Certificate of Liability Coverage and Workers’ Compensation Coverage
• Call monthly to verify their coverage, or add yourself to their General Contractor’s Liability Policy
• Flipping through a corporation can make it difficult to obtain policies; some carriers only offer coverage in the property owner’s personal name
• Local insurances don’t insure LLCs, only individuals, because of pre-negotiation through their reinsurance treaties and contracts, so they can’t accommodate for it
• Insurance agents encourage separate policies for each LLC, not an umbrella policy, to run up the cost; NREIG can aggregate them under one policy to lower rates
• Name anyone who has an ownership interest in the property that can potentially be included in a lawsuit as additional insured on your policy
• New investors who come to NREIG discover that they have many choices for property and liability insurance; NREIG structures unique coverage based on client’s needs

Resources:

National Real Estate Insurance Group

https://affiliate.nreig.com/Anderson

REIGuard

https://nreig.com/category/reiguard/

Clint Coons

https://andersonadvisors.com/clint-coons/

Anderson Advisors

https://andersonadvisors.com/

Tax and Asset Protection Event

http://andersonap.com/

Full Episode Transcript:

Clint: Hi everyone, it’s Clint Coons here with Anderson Business Advisors and today I have Shawn Woedl on from National Real Estate Insurance Group, and he’s going to talk to us about the importance of insurance and the different types of policies that are out there.

We all know as real estate investors that when you go out and you try to find insurance, you talk to your local guide. Many times they look at you as if you’re from another planet, because you’re using strategies that they’re unfamiliar with. We’re talking about LLCs, corporations, and land trust and we’re putting our properties into these entities or as a protection. Many times, when we need the insurance, our local insurance individual does not know how to write the right type of policy that we need to protect our assets. Because let’s face it, even though you use an LLC, you still need insurance.

Just this week, I was speaking to an attorney who’s an investor. They called me up, and he said, hey, I have this property in an LLC, and my tenant has been hurt. The ceiling fan fell down and hit him on his foot, and he can’t walk anymore, he’s going to be permanently disabled, and he’s suing my LLC and I don’t have insurance. You think I have a problem? Now, of course, you do have a problem, because even though you create a Limited Liability Company, it doesn’t relieve you of your responsibility to insure the property. So, when we’re setting up these structures, it’s imperative that you get the right information. That’s why I brought Shawn on, I think he can explain, why that’s important. We’re going to ask him a number of questions, and hope that by the end of this, you’re going to understand this is the group you want to go to. So, Shawn, thanks for coming on. How are you doing?

Shawn: Doing well, thanks. Thank you, Clint, for having me.

Clint: Great. With National Real Estate Insurance Group, can you just give me a brief background as how this came together –  this group, because you offer a number of products out there that I think are really advantageous for investors.

Shawn: Absolutely. National Real Estate Insurance Group itself is a national independent insurance agency who are licensed and active in all 50 states, with a focus on real estate investors. About twenty years ago, we developed what’s now known as the REI guard insurance program, and it kind of started with two separate programs that came together as one. We have Mike Wrenn here, one of our owners in Kansas City that was working with the home investors franchises and developed renovators insurance, which was a short term program for guys and girls who were doing fix and flips that needed a month or two of coverage and the insurance industry wasn’t responding to their need. Tim Norris and myself were in Cincinnati, Ohio, and we were developing National Real Estate Insurance Group and National Condo and Apartment Insurance Group, with the focus on residential real estate investors that were buying hold opportunities, as well as larger apartments, condo, association, really any line of commercial real estate.

In 2010, after really passing some business opportunities back and forth that multiple events across the country, Tim and Mike actually merged their agencies, and developed this crazy program called through National Real Estate Insurance Group called REIGuard, that now can accommodate for a portfolio, one to four family rental dwellings through any phase of occupancy, anywhere in the country, on monthly recording. And then in 2014, I went ahead and merged my agency as well, and we now can accommodate really for any line of commercial real estate an investor decides to dive into.

Clint: Wow. I mean that just, I mean, seems like it’s perfect for our clients especially, because at Anderson, we pride ourselves as being a one-stop shop for real estate investors, giving them the tax information, business planning, and asset protection, even a state planning. And it seems like what you’ve done with National Real Estate Insurance Group is hit the same type of demographic target, and that you saw there was a need out there, and people could then go to one place to make sure all their insurance needs are covered. And that’s refreshing, because I know how frustrating it can be, even with my own investing.

As I tell people, I own over a hundred properties and it’s just difficult to go out there and find an agent that gets it, and it sounds to me in my experience with working with you, that you guys understand it. And I can tell you this, it took us a long time to finally find someone such as National Real Estate Insurance Group that understands real estate investors. I’ve been real happy with our relationship, to make you a trusted resource for our clientele because of the value you bring to them. So with that, you’re talking about policies. Can you tell me why is a flipper, because we have a lot of flippers, they go out, they buy and sell properties. I don’t think they understand the importance of the insurance, and what type of insurance should they get?

Shawn: So, a couple of quick points that I’d like to make on those builders risk type of policies, or forms that these investors can purchase for these fix and flip opportunities: one, it’s typically a builders risk forms for property only. So, unless you specifically ask for liability coverage, that can be an exposure on a lot of builders risk forms to think of, maybe slips and falls, personal injuries like you just mentioned with one of your friends there, that’s happening, those are exposures on a lot of builders risks forms unless you specifically ask for liability to be included for the premises. Understanding the market the way we do, because we’re all investors ourselves, we of course include that into our forms, but to just kind of piggyback on that –  renovation properties, short term fix and flips, are considered probably the highest risk type of property for an insurance company to agree to insure.

There’s lots of parties going in and out, there’s a lot of ongoing operations, typically, those are susceptible of theft or people breaking and entering. So, insurance companies are going to force investors most of the time to come in and buy a longer-term policy, a six-month to an annual policy, which doesn’t make a lot of sense if the flip in your possession, you think you’re going to have it done in three to four months. Because these policies are fully entered in conception. Meaning, from the get-go, as soon as you agreed to purchase coverage from your carrier, you have to pay the full premium up front, and by the way, if you cancel early because that flip’s completed, you can’t get any money back from the unused premium, that’s the cost of doing business with a lot of these carriers that will agree to actually take on risks, and it’s just on renovation property. And it’s really just because they don’t have an appetite for the risk they’re taking on and they don’t understand the market.

Clint: Wow, yeah, I did not know that. I haven’t flipped properties in years, but yeah, I bet a lot of people think that when they buy a policy like that, once they cancel it, they’re going to get a refund of the premium, but they’re not. So that’s good to know. So you’re saying that with all your fix and flip policies, and you’re going to automatically include that liability coverage for them? It’s not something they have to ask for?

Shawn: Yeah, this premises liability that’s going to be included on every opportunity that we propose and go over with an investor, whether it’s regardless of its occupancy, we think it’s more important to cover the liability exposure than any property exposure. Think about it, a liability claim, a wrongful death, a personal injury that is severe, can take a company faster down than any property loss regardless of the size. It’s the unknown, once you fail on it, liability goes a couple of years down the line where you think your business is growing well, and then all of a sudden get hit with a lawsuit for a slip and fall that occurred on the site a couple of years ago when you had ownership and percent of property. So absolutely, we always include liability. The only time we’ll ever remove it is if it’s specifically asked for by an investor during a proposal process.

Clint: So, you just said something interesting in there. So if I bought this property and renovating it, and then I sell it, and then a year and a half later, somebody brings a claim, that they were injured on the property while they were working on it. You said that would be covered under your policy.

Shawn: It would be covered – liability is a slippery slope, there’s a lot of gray areas, right? So, if the injury happened, and they were just maybe, maybe they were breaking and entering, or the house was left unsecured, and they fell down the steps and were injured, then yeah, then that type of exposure would be picked up under the premises liability coverage that was enforced at the time of the loss. If it’s a loss that was occurred under from general contractors negligent, or if you, as the investor, were actually doing the renovations yourself, and then a lawsuit was filed for faulty workmanship post-sale by the new owner, those are all types of stand-alone coverages that you have to purchase in addition to your premises liability. But yeah, a lot of those would be covered under the premises form.

Clint: Got it. So there’s other policies you can or additions you can acquire when you’re purchasing a builders risk policy to cover that. So I’m going to give you an example. Just the other day, someone came into my office. They had rehabbed the property, they sold it, and it turns out there’s an issue with a catch basin in the basement. They have both greywater and rainwater that run into it, that pump it into the sewer lines. Supposedly, that’s not correct, and that needs to be changed. Would you have, would an insurance policy cover that type of change, that the contractor screwed up on or not?

Shawn: The general contractors policy would pick that up, for faulty workmanship, right? So, your carrier, the premises liability, if needed, would provide you with defense clause, would go in and help you, you know, go against the general contractors policy, but that’s a GC exposure. So, you know, typically what we always recommend that our investors do, is when a general contractor comes on to your site just to bid on the property, to work on a property, they should be able to give you two pieces of information: their certificate of liability coverage that tells you their business is covered adequately, as well as their workers compensation coverage, if they have employees that are going to be on site as well. And you know, the certificates of liability give you a couple of cool pieces of information that you can use. It gives you the carrier that wrote the piece of business, as well as the agency. So if you want to go in and reach out to the agency each month and make sure their premium is paid, this will get a nice shiny certificate for a year showing coverage by paying a month or two of premium up front.

You can do one of two things, and I always recommend the second, but the first one is you can call monthly to make sure their coverage is in good standing, or you can learn as an investor that those general contractors policies can work for us as investors, and we do that by adding ourselves as additional insured to their general contractors liability policy for the duration of time they’re working on your property. Those are always, those are usually free to do, or at most it costs $50 to endorse their policy, it’s well worth it to pay that money if they’re bellyaching about it. But that extends their liability coverage to you, if they do something negligent and you’re named in the lawsuit. And equally as important, it’s going to notify you as an additional insured prior to their policy cancelling or non-payment, or any other underwriting issues, and you can get out ahead of it and make sure that it’s right.

Clint: Wow. Sounds like, kind of like buying a tail, then, on their policy. Nice. So how about if they, when someone comes to you and they have a corporation, because a lot of our flippers will teach them is it, either flip through a corporation, or better yet, flip through unlimited liability company that is owned by a corporation. Does that pose any difficulty for obtaining these policies? Does it matter?

Shawn: It does for a lot of carriers, and a lot of carriers are limited to only being able to offer coverage in the personal name of the owner of the property. Again, knowing the market as we do, we’re all residential real estate investors ourselves, it made little to no sense for us to put that limitation on our investors, so we can actually accommodate for any type of name insured ownership entity, we can still have them all on one single schedule so we can leverage portfolio size and activity to keep an investors property rates and costs down at a time, because you’ve got common ownership or interest in the property, so LLCs, corporations, IRAs, trusts, you name it, it can all be bundled together through our program.

Clint: Okay, so hold on, I’m going to back to that topic, because that’s really important for the listeners here. But just on the side of talking about insuring the LLC, for instance, if it owns the property. Why don’t local insurances agree to insure the LLC? Why do they only want to insure the individual? What’s their hang up there?

Shawn: The best I can tell you is that it’s already been pre-negotiated through their re-insurance treaties and contracts, if they have, that’s just, they can’t accommodate for it. And those are the companies that you run into, like the State Farm, the Farmers, the Allstates of the world, they’re all, by the way, tremendous companies for what they do, and what they specialize in are home and auto and some life policies, some lower-risk type of deals homeowner policies.

When you start getting into the investor world, where these are higher risk locations, your tenant’s more likely to burn your house down than you are, they always offer the coverage out of a sense of obligation to their existing clientele. They don’t have an appetite for it, and you can tell by the fact that they require you to insure a property through a very high evaluation per square foot, more than you’ll ever recover from in a loss. And they do that in an effort to garner, to recover enough money in the premium to offset the risk they’re taking on on a higher risk location. So I think it’s just not having the appetite for the risk, more than anything, along with the contracts that they’ve negotiated to be able to extend coverage to them.

Clint: Interesting. Yeah, I can never figure that out, because it seems to me like you’re insuring me, I’m the owner of my LLC, it’s still the same insurance policy, who do you care or what does it matter who owns it, if there’s a claim made, you’ve still got to pay, so yeah. That makes sense. So, when you’re talking about this bundling, that’s something that’s really important, because the few that I’ve talked to, clients that have actually found that maybe their State Farm agent would offer them a policy, and I’ll give an example here. An investor comes into their State Farm agent and they have six limited liability companies, with one property in each LLC. The agent tells them, you need to have six separate individual policies, we can’t give you an umbrella policy over all of these, we have to do six separate agreements. And it just seems to run up the cost. Did I hear you to say that you can aggregate them together, it doesn’t matter how the properties are held in different LLCs, we can do it under one?

Shawn: Absolutely. That’s exactly what we do when it comes to property, and the primary premises liability, your underlying liability, we’ll touch on umbrellas here just a second, but it’s a master schedule for a particular investor or investment group, and it allows you to add and delete locations from your schedule as need me, but think about it, me, myself as your agent, right, if you came to me and said hey, I’ve got one location, and I’ve blanketed it out to the 250 different, you know, carriers that I’m contracted with.

One location, as opposed to ten locations, as opposed to a hundred, the more leverage I can get with that underwriter to drive your property rate down. So when we do a one-off policy for each location, you’re really at the mercy of the underwriter on what they want to assign as a property rate, and that can be based on the different areas of the country maybe that you’re investing in. could just be the mood they’re in that day. So, leveraging that, just it gives me more, you know, kind of fire power to go to, ammunition, we call it, and you go to the underwriter and drive those rates down for you.

Clint: So, tell me this. So, who should you name then as the additional insured on your policy?

Shawn: You know, it’s a good question, and we run across that all the time, and you can look at a couple of things if you have a lender on the deal. So, somebody, you know, whether it’s private or a larger institution, they’re usually going to require that you listed as additional insured, or the very least, certificate holder on your liability insurance. That way, again, they’re notified prior to your policy lapsing for non-payment or any other underwriting issue, on the off-chance that they’re named in a lawsuit, which would never happen and your liability cover, it would also extend to them. But you can, you know, many property management companies, if you’re dealing with a large property organization, would also require that you list their company on your liability as additional insured, so, again, you do something negligent, their liability coverage, or excuse me, your liability coverage extends to them. And you can do the same thing, vice versa, and be listed on their liability coverage, but really, anyone that has an ownership interest in the property, they can be potentially dragged into a lawsuit.

Clint: Okay. So as far as if you had a corporation that’s the manager of an LLC, should it be named then as additional insured, as well?

Shawn: No, the corporation would be listed as first name insured, though if the corporation’s managing other locations, if they don’t have ownership ventures then at that point, yes. That doesn’t stop, that doesn’t prevent them from having to seek out the correct liability coverage to cover the property management operations, as well. But, at least with the premises, they’d be covered without being listed as additional as well.

Clint: Perfect. Okay, so you can do business in all fifty states, right?

Shawn: Absolutely.

Clint: And then, for our clients, all they have to do, we have that link that we’ve set up that drives them right to your page and then they can put in some information and then someone will contact them, is that how it works?

Shawn: Yeah, and we do things a little bit different, as you well know, I’m sure. The last thing we do, especially if a new investor comes to us, and says hey, I need coverage but I don’t know what kind of coverage I need. You know, we’re not just going to send them a proposal and say, hey, take it or leave it. The most important thing that all these investors, all of our investor friends can know is that they have so many choices when it comes to property and liability insurance.

So, what we do is we get one of my license advisors or myself to actually jump on a phone call with our prospect. In the first ten, fifteen minutes of the call, we want to listen to you. We want to know exactly what your business model is, we want to know what your appetite for risk is, what you’re okay self-insuring, what you’re not, what you do, God forbid, a total loss occurs. Would you rebuild the property, or would you clean the land up, sell it, and go buy something else like it? Are there lending insurance requirements that we need to comply with? And then, we’ll help structure your coverage, unique, whatever your package need on it.

Clint: Perfect. All right. Well, I want to thank you for taking the time to be on this podcast today, and I know that for sure we will end up giving hopefully more people brought over to you so they can have their insurance needs taken care of. So with that, Shawn, thanks a lot, looking forward talking to you in the future.

Shawn: Thank you, Clint, have a good weekend.

Clint: You too, bye.