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Interesting Insurance Finding and Silver VS. Bronze Package

Nir

Nir

0
REIN Member
Joined
Dec 5, 2007
Messages
2,880
Hi,
A question on insurance and an interesting finding:

1. I noticed insurance premium is most affected by the property value. The problem is insurance companies decide what that "value" is! I have properties where the insurance appraised "restructuring value" to be 3 times the purchase price!!!
Unbelievable!
I guess we have 2 options in this case - either look for another insurance company who does not inflate property values as much OR get a restructuring appraisal showing the real cost and sending it to the insurance company.

Any other option/more creative idea?

2. Are "silver" and "bronze" packages general insurance terminology or just my insurance company`s terminology? "bronze" covers 80% in case of fire and silver 100%. bronze costs about 20% less each month.
what is your preference?

Regards,
Neil
 
Hi Neil

I`m not certain what your referencing so this might be wrong and proceed with caution
"restructuring value" might be the value to build the property new.
In your case, which I believe is purchasing multiplex`s for cheap in small towns, its entirely possible that your purchasing them for a fraction of the cost to build them new...You might be able to buy a concrete 2 bedroom apartment for <50K door but you can`t build it for that if it burns down.
 
Yes Adam, you`re right. so should I start buying high in order to close the gap!? just joking. thanks.

just wanted everyone to know that their property "value", which is sometimes computer generated, has the single most influence on the insurance premium!

Interestingly, sometimes this "value" is "flexible" and the agent WILL MANUALLY UPDATE WHAT YOU TELL HIM/HER and sometimes it is computer generated.
If there is any insurance professional here I would love to read more so all REIN members and fans could understand WHAT ____ ______ IS GOING ON!?

Sincerely,
N.
 
Hi Neil

Be very careful

In some (all ? ) policies I believe that if you have property insured for a replacement amount, and this is under the real replacement amount, the amount of coverage you have is only a fraction of what you`ll expect. You should read through your contract (or maybe someone with more knowledge will respond)
 
I think most insurance companies will fully cover regardless of initial estimate. just my logic because an estimate is just.. an estimate!

However, even if ridiculously insurance did not cover full amount in case of an initial underestimation what "value" would you be more happy with -
400K for a duplex you paid 200K on OR 500K machine generated number?

As mentioned a response from a knowledgeable insurer would be nice. Thanks.
 
QUOTE (investmart @ Jan 4 2010, 04:57 PM) Hi,
A question on insurance and an interesting finding:

1. I noticed insurance premium is most affected by the property value. The problem is insurance companies decide what that "value" is! I have properties where the insurance appraised "restructuring value" to be 3 times the purchase price!!!
Unbelievable!
I guess we have 2 options in this case - either look for another insurance company who does not inflate property values as much OR get a restructuring appraisal showing the real cost and sending it to the insurance company.

Any other option/more creative idea?

2. Are "silver" and "bronze" packages general insurance terminology or just my insurance company`s terminology? "bronze" covers 80% in case of fire and silver 100%. bronze costs about 20% less each month.
what is your preference?

Regards,
Neil

As far as I know, most insurance policies are for replacement value, i.e. the costs for rebuilding the destroyed structure to one of similar functionality.This is different from reproduction costs, which is rebuilding an exact replica of the structure that was destroyed.

The insured value typically covers the costs of replacing the destroyed building with one of similar functionality and excludes the land value. The higher the replacement costs the higher the insurance premium. If the replacement costs are more than the entire CURRENT property value then you should consider getting a quote from another insurance.

Hope this helps,
 
Being under insured is far greater risk than paying too much for insurance.

The land will not burn down, but when you rebuild, new foundations, sewers, concrete slabs, new building and of course removal of the old property in the event of a total loss. Then add in the replacement of the personal belongings, furniture, etc.

In many parts of Canada, we are buying property below the current replacement cost, and therefore you cannot use the purchase price for the "insured value".

For one or two residential properties, a homeowner policy will work. Not for the serious real estate investor, after 2 properties.

Don`t wait for a major loss to find out what is not covered under a home owner policy.
 
QUOTE (gwasser @ Jan 5 2010, 11:13 PM) If the replacement costs are more than the entire CURRENT property value then you should consider getting a quote from another insurance.

As mentioned it`s 3 times higher! Adam mentioned the opposite that maybe buying cheap explains the huge gap.
A rule of thumb would help in this case, something like "rebuilding "value" should not exceed double the purchase price."
Something like Don`s 10% rent ratio rule but for insurance. Cheers.
 
Hi Neil

There aren`t rules like that. A guess generally the lower the cost per door the greater the replacement cost compared to purchase price will be.

Keep in mind how much pain your going to be in if your place burns down, it costs $400K to rebuild, and your insurance was listed for $200K.

I also don`t know if my last post was clear but my limited understanding is even on damages claims for smaller amounts than you have the property value insured for.... so lets say you make a claim for $30000 in damages... and your replacement value is listed at $200K... I think (think..not certain... please check with insurance agent..) than when you want to be covered for the $30K claim they can come back to you and say "You`re under insured for the correct property value, it actually costs 3 times this and as a result were only paying you out $10K of your $30K claim...)

Please also re-read Brent`s post.


QUOTE (investmart @ Jan 6 2010, 11:55 PM) As mentioned it`s 3 times higher! Adam mentioned the opposite that maybe buying cheap explains the huge gap.
A rule of thumb would help in this case, something like "rebuilding "value" should not exceed double the purchase price."
Something like Don`s 10% rent ratio rule but for insurance. Cheers.
 
QUOTE (investmart @ Jan 4 2010, 06:57 PM) Hi,
A question on insurance and an interesting finding:

1. I noticed insurance premium is most affected by the property value. The problem is insurance companies decide what that "value" is! I have properties where the insurance appraised "restructuring value" to be 3 times the purchase price!!!
Unbelievable!
I guess we have 2 options in this case - either look for another insurance company who does not inflate property values as much OR get a restructuring appraisal showing the real cost and sending it to the insurance company.

Any other option/more creative idea?

2. Are "silver" and "bronze" packages general insurance terminology or just my insurance company`s terminology? "bronze" covers 80% in case of fire and silver 100%. bronze costs about 20% less each month.
what is your preference?

Regards,
Neil

Are you with TD meloche Monnex? they use the silver and bronze terminolgy and bronze coverage only gives you 80% of the replacement costs. As for the value, I have purchased a house in hamilton for 150K and the rebuild value they quoted is 425K. The rebuild value is not out of line, if you called any home builder for a single family house 1800 sqaure ft that is 230 $/ft.


Thanks

Asif Ghayoor P.Eng
 
Thanks Asif,
You`re correct. Yes, it`s one of TD divisions but not Meloche. They also have primmum and others - all under the same umbrella and do it the same way.
However, interestingly I recently helped an investor set his insurance with meloche monex and we literally AGREED with the agent
over the phone that "300K is ok". He then updated the system and reduced my friend`s cost by around 30%. my friend is more than happy with 300k
considering the circumstances. the initial estimate was around 500k.
Conclusion: apparently, they do have the option to update it manually/override their machine generated number*. I`m not their VP Sales but guess
they strongly prefer not to be flexible on that. maybe we spoke with a new employee who was sick during training.
Here is my main issue: just like for a new flat roof you can get a quote for 10K or 30K, I get the feeling their estimate is based on that 30K with their machine generator number.
what if I have a friend who is a developer? just pay half during fire and I`ll be fine. the problem is they do not let you do that. anyway, not a big issue
only around $50 they take extra each month from everyone that they shouldn`t thanks to their machine generated numbers.

Ethically I think they should allow you to reduce value covered and reduce monthly payment with the SAME insurance conditions but they don`t they switch you to bronze which is double dipping - you are not only covered for less, you are now only 80% covered - 80% OF THE NEW LOWER VALUE and can`t get silver anymore just bronze. that`s ridiculous. anyway, I`m sure I`m not surprising anyone here that insurance companies are trying to make money. cheers.

• apparently their machine generated number is rounding to the closest half million or close.
 
Can you not simply have it insured for cash value rather than replacement value?
 
QUOTE (fumbrunner @ Jan 7 2010, 04:27 PM) Can you not simply have it insured for cash value rather than replacement value?

I have come across this issue with my older buildings, particularly ones that are legally non-conforming (if damage is greater than 75% I CANNOT rebuild the same building and I have to then observe current zoning from that point forward). Setting a cash value is certainly reasonable in my specific situation. If you are relying on rebuilding then you`ll need replacement value coverage. Note on replacement coverage, if you go too low on estimating the building value, then you may find yourself getting hit by a co-insurance clause in the policy. This clause can limit the insurance company`s claim payout by the same ratio as your `under estimation` of real replacement cost. There is some latitude for under estimating, but not much...hardly worth taking the risk...after all you have insurance coverage to handle risk...no point adding risk to save a few dollars on the premium.
 
QUOTE (MikeDix @ Jan 7 2010, 07:36 PM) Setting a cash value is certainly reasonable in my specific situation.

Interesting. thanks Mike. who set that value - insurance company did it "for you" and you accepted their estimated value?
Did you actually have the option to insure based on replacement value instead of cash value and just chose cash vale OR did your insurance company only offer cash value? - basic question. however, since insurance companies do not even tell you about these options when you call for a quote, it is a bit surprising if they offer all options(?) I mean do they decide for you without telling you verbally? weird.
anyway, good stuff lots of new things learned.
 
QUOTE (investmart @ Jan 11 2010, 10:09 AM) Interesting. thanks Mike. who set that value - insurance company did it "for you" and you accepted their estimated value?
Did you actually have the option to insure based on replacement value instead of cash value and just chose cash vale OR did your insurance company only offer cash value? - basic question. however, since insurance companies do not even tell you about these options when you call for a quote, it is a bit surprising if they offer all options(?) I mean do they decide for you without telling you verbally? weird.
anyway, good stuff lots of new things learned.

I typically set the cash value based on purchase price, ensuring that the mortgage + equity is covered in case of total loss.
 
QUOTE (investmart @ Jan 6 2010, 09:55 PM) As mentioned it`s 3 times higher! Adam mentioned the opposite that maybe buying cheap explains the huge gap.
A rule of thumb would help in this case, something like "rebuilding "value" should not exceed double the purchase price."
Something like Don`s 10% rent ratio rule but for insurance. Cheers.

I guess you didn`t read my post quite right. I said CURRENT value you wrote 3x PURCHASE price which is what you paid whenever your bought the place.
 
QUOTE (investmart @ Jan 11 2010, 08:09 AM) Interesting. thanks Mike. who set that value - insurance company did it "for you" and you accepted their estimated value?
Did you actually have the option to insure based on replacement value instead of cash value and just chose cash vale OR did your insurance company only offer cash value? - basic question. however, since insurance companies do not even tell you about these options when you call for a quote, it is a bit surprising if they offer all options(?) I mean do they decide for you without telling you verbally? weird.
anyway, good stuff lots of new things learned.


In my case the cash value is something that my broker and I worked on jointly. E.g. What I have sunk into the capital cost of the building (purchase price, upgrades), plus an adjustment for any re-financing that may have taken place during the holding period. Essentially making sure the value is set at a level that mitigates my downside risk. Using cost per foot (typical insurance company view) is not that useful in my situation. Clarification: I have only done this on commercial policies...so the same may not be available for a home/residential rental policy. In one instance with a non-conforming commercial/multi-family building, after having held the property for about 5 years and just prior to doing a substantial upgrade, I had a full narrative appraisal performed for `as is` and `after completion`. These appraisals are not cheap, but it was worth it in my situation. The appraisal establishes a reference point that if a catastrophic 75%+ damage event did occur, I would have a much better likelihood of defending a full payout by the insurance company (if you have ever had to claim on a policy you`ll know how valuable a reference point is!). Since the value of the building had increased significantly due to adding suites, I then changed to a replacement policy. BTW, under a separate thread I talk about non-conforming properties. If chosen well and executed right, you can make exceptional returns on NC property both in property value and monthly cash flow.
 
QUOTE (MikeDix @ Jan 11 2010, 05:30 PM) In my case the cash value is something that my broker and I worked on jointly. E.g. What I have sunk into the capital cost of the building (purchase price, upgrades), plus an adjustment for any re-financing that may have taken place during the holding period. Essentially making sure the value is set at a level that mitigates my downside risk. Using cost per foot (typical insurance company view) is not that useful in my situation. Clarification: I have only done this on commercial policies...so the same may not be available for a home/residential rental policy. In one instance with a non-conforming commercial/multi-family building, after having held the property for about 5 years and just prior to doing a substantial upgrade, I had a full narrative appraisal performed for `as is` and `after completion`. These appraisals are not cheap, but it was worth it in my situation. The appraisal establishes a reference point that if a catastrophic 75%+ damage event did occur, I would have a much better likelihood of defending a full payout by the insurance company (if you have ever had to claim on a policy you`ll know how valuable a reference point is!). Since the value of the building had increased significantly due to adding suites, I then changed to a replacement policy. BTW, under a separate thread I talk about non-conforming properties. If chosen well and executed right, you can make exceptional returns on NC property both in property value and monthly cash flow.

Exactly. commercial only. I called the insurance company and "cash value" is not an option for residential (incl. Plexes up to 4 units). They will only insure based on their number - generated using a secret formula to "estimate" the cost to re-build. In other words they don`t pay you anything in case of a fire, they just charge a fee based on a very high estimated value. then in case of a fire re-build for the best cost they can find. cheers :-)
 
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