Wrinkles of property insurance
By: J. David Chapman/April 22, 2021
I find myself in a love/hate relationship with property insurance. The purpose of insurance is to limit my risk. As a prudent property owner, I am always assessing my risk and making a determination of how much risk I am willing to retain, and thus decide how much insurance coverage I need to purchase. If the property is leveraged, meaning it has a loan, the lender will certainly determine how much insurance I must obtain and want to see proof of purchase.
Insurance has changed in the last decade, and become much more difficult to obtain. As a condition of insurability, the condition of the property is considered. We recently added to our residential portfolio by purchasing several rentals. The insurance company required a new roof on one house, several cracked windows to be replaced on another, and trees to be trimmed away from all homes. Inquiries to the age and condition of the electrical and plumbing on all homes were made.
It is not just the condition of the property; insurance companies are now restricting tenants. Landlords should be aware that insurance companies are restricting the breed of dogs that are allowed in rental properties. My policy will not allow pit bull terriers or Rottweilers. Nothing angers a potential tenant more than to have a rental application rejected because they have a breed of dog on the restricted list.
The last issue I would mention regarding property insurance is for owners to make sure they have proper coverage. Policies for rental units have various names depending on the company. But they generally are referred to as dwelling policies, and fall into three categories: DP-1, DP-2 and DP-3. A DP-1 policy is basic and covers simple things like fire and vandalism. A DP-2 policy is broader and covers named perils like damage from a windstorm, hail, fire or vandalism. Most even have a provision for collision, in case a car hits your house. Yes, I have had that happen. A DP-3 is a special form, or an open peril policy, and unless a peril is specifically excluded, it is covered. A DP-3 will generally give you replacement cost, whereas a DP-1 is generally only cash value on the house and is most commonly purchased by owners of rental property.
J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).