If Coverage A provides insurance coverage for the dwelling and things that are attached to the dwelling, “Coverage B Other Structures” provides insurance coverage for all structures that aren’t connected to the dwelling. In this case “structures” is a complicated way of saying anything that is constructed. For example, a detached garage (remember an attached garage would be coverage A), fences, storage buildings like sheds and greenhouses, in ground pools, barns, sports courts, gazebos, walkways, and driveways.
Usually the limit of coverage A will be defaulted to 10% of the value of the home, although more can be purchased. This limit is a “blanket” meaning you will have one limit for all your other structures, be sure you are purchasing enough to cover your needs. For example if you have a nice 2 car garage, pool, or mother-in-law quarters you probably don’t have enough coverage.
Coverage B Other Structures will have the same coverage form and loss settlement as Coverage A Dwelling. Again, the special form is always the best form. Replacement cost is always better, but you need to get the proper limits for it to work best. Also, it is important to note that if you intend to rent out an other structure such as a pool house, mother-in-law quarters or something similar or use it for business, coverage can change. If you have a situation like this explain this to your agent to ensure you get proper coverage.
Protecting your stuff is why you purchase insurance. The section I coverage of a rental property insurance policy tells you what will be covered and how.
Rental Property Insurance Coverage – Section I Coverage
Section I – The part of insurance you care about
Every insurance policy has sections. On a rental property insurance policy the there are two sections. Inventively, they are called Section I and Section II. This article breaks down Section I only. Under each section, there are a handful of coverage parts. Insurance doesn’t have to be complicated. So, let’s see if we can break these down into understandable pieces.
Section I – Protects your stuff, you know the stuff you care about. There are typically 4 parts or coverage items provided by section I.
Coverage A – Dwelling – This will be the rental property itself; the main house. PLUS, it will include anything that is attached to the house. So, things like attached porches, decks, car ports, and patios are part of the dwelling. However, if it’s only connected by a wire or a fence, there is no coverage.
Coverage B – Other Structures – This includes any buildings or structures that are not connected to the house. Including, but not limited to things like: detached garages, storage buildings, fences, pools, gazebos, walkways, and driveways.
Coverage C – Personal Property or Contents – This is tricky, because most rental properties don’t come furnished. Also, contents or personal property of tenants are NOT covered. So, for typical investors, this is going to include things such as refrigerators, stoves, washers, dryers and other appliances, but check your policy some of these things may be covered as a part of the house.
Coverage D – Loss of Use – If a rental property suffers a covered loss, and becomes uninhabitable, the insurer will pay the “fair rental value” for the rents that are lost. Meaning that if there is a fire, and your renters move out while things are being fixed, you can still be reimbursed for the rent that you would have otherwise received.
That’s it. Four coverage parts in Section I. Pretty simple. So, you have the house, any other structures, the stuff inside, and the rent you receive. Not complicated at all.
Start your quote online now, or contact with questions about Section I. Our licensed agents can walk you through the process, just call 1-877-784-6787.
Let’s get real for a second. You are investing in real estate. You need to protect the asset, the cash flow, your business. So you buy insurance, but managing the risks you face is more than just buying an insurance policy. There are several types of risks you face. Some are insurable, some are not, but A LOT of headaches can be avoided with some simple risk management concepts. The Risk Management process is pretty simple.
- Identify Risk
- Analysis
- Plan
- Monitor
- Rinse and Repeat
Let’s walk through this for a moment from the perspective of a real estate investor. Let’s take a look at three common risks, and how one might manage the risk.
A FIRE
A fire could down the home, destroying the asset and its cash flow. So let’s walk through the process, we know the risk. What would the loss of the home do to your business? If you have a mortgage on the home, you would still be on the hook for the payments, but would be out the cash flow. It would probably be devastating to your business. So your best plan? In most catastrophic scenarios where the financial well-being of your business is at risk, it is best to transfer the risk. Insurance is a risk transferring mechanism. Rather than you taking on that risk, the company does. So by purchasing a dwelling fire policy that protects the asset, you insure the cash flow with business income coverage or the “fair rental value” which pays for the cash flow. Pretty simple. Then monitor, this one is pretty easy, but when it comes to insurance it is important to review. What has the market done? How much is the home insured for? Does that need to be adjusted? Do you have enough liability insurance, have you increased the rent? Remember the company will pay you the rents you lose in the event of a loss, but you need to state what you are collecting in rent. If that has increased you need to increase that coverage. So there is a little work to do, but your insurance agent or broker should be able to help you through the monitoring process.
A TENANT
A tenant poses all kinds of risk. They could damage the home, they could not pay rent, they could sue you and so much more. A lot of risk. For example, say we will focus on the risk that the tenant damages the home. This too can be catastrophic, and require reinvestment that eats into our profits. However, risk transfer is not an option, as damage done by a tenant is not covered by the insurance company. So how do you manage this risk? In this case your best bet is what is known as Risk Avoidance. That is, avoid tenants that will destroy the home, or in other words tenant screenings. There are a number of tenant screening services. We recommend that you use one that will not only provide the online screen, but that will do full background checks. Usually the cost of these is cheap, and if you do it right, you can have the tenant pay for the screening. That extra step may go far in deterring those would-be investment destroyers and non-cash flow payers. It’s a great plan that won’t eat into your profits. From there monitor the situation. Find a good screening company, and if something goes wrong review what happened. Did you ignore a red flag in your haste to get the vacancy filled? Did your screening service miss something important? Analyze, and make a new plan or continue on.
A TENANT
Didn’t we just cover this? Yes, but they pose A LOT of situations that are scary. The risk is that you have to evict, and you get nailed with a lawsuit because you didn’t follow the legal steps. Again, this is catastrophic, but again risk transfer is not an option because wrongful eviction of a tenant is not covered by the insurance company. You might notice that insurance companies don’t like to pay for your lack of information. So how do you manage the risk? This time the answer is Risk Reduction. You can’t really control what a tenant does or how they react. But there are ways you can reduce the risk that you are actually found to be at fault. This one is a no brainer, but too many investors fail to take the proper steps, which include education, education, education OR outsource. If this is something you plan to do on your own, education is the single most important step you can take to ensure you are following all applicable laws. If you can’t or won’t do that, then outsource it. This is one of the things that property managers do, so get a good one that knows the process and has done it (i.e. your brother-in-law, while a good guy, is probably not your best option). The experience or knowledge can help you avoid pitfalls and heartache and reduce the risk you face. That’s the plan; now, let’s hope you never have to do it. How could you further reduce the risk?
Bottom line is that we as investors run into risk all the time. The question is will you have a plan, or fly by the seat of your pants? It doesn’t take long, take a few minutes, sit down, and list those things that could potentially keep you up at night and figure out a plan and how you will react. It may make all the difference in the world when it comes to your sleep habits.