How can you insure your property using a limited liability company (LLC)? What’s the best type of insurance to obtain? Today, Clint Coons of Anderson Business Advisors talks to Drew Maconachy of Maconachy Stradley Insurance. Drew discusses the importance of insurance and provides information on planning for multifamily, commercial, and other policies.
Highlights/Topics:
- Insurance Policies: Understand the intrinsic value of what and why you’re buying
- Teach and Preach: Drew generates organic growth by spreading his gospel on insurance
- Be proactive and make it a priority to get an insurance policy; don’t wait until it’s too late to solve a problem
- How to avoid the biggest mistakes made with insurance policies for properties:
- Find in-the-know industry experts who understand your needs; don’t go to a family member or representative who sells auto insurance
- Only buy what you need; not stripped-down policies that don’t offer adequate protection and coverage
- Make sure insurance policy handles most common claims, including ordinance and law, business interruption, and water backup coverage
- Consider purchasing the following coverage through insurance policies:
- Commercial package that includes:
- Property coverage to insure buildings, their contents, and loss of rent.
- General liability coverage if someone slips, trips, or falls on your property
- Additional coverage and insurance policies:
- An umbrella policy for additional liability coverage
- Pollution coverage for older buildings or that have increased exposure to moisture because mold is usually excluded in most policies
- Directors and Officers (D&O) coverage if accepting money from outside/third-party investors that could file a lawsuit against you
- Commercial package that includes:
- Ask the right people, the right questions:
- Do you cover loss of rents? Is there water backup coverage on the liability side? Is there assault-and-battery coverage included? What about dog bite coverage?
Resources
Drew Maconachy’s Phone Number: 330-966-5170
Essential Elements of a Commercial Insurance Policy – Drew Maconachy
Tax and Asset Protection Event
Full Episode Transcript
Clint: Welcome everyone. Hi, it’s Clint Coons here with the Anderson Business Advisors. We have another podcast coming to you. Today, we’re going to be talking about insurance. There’s a lot of questions that come up whenever I’m teaching in an event from individual real estate and investors about, “How do I insure my property when I’m gonna be using a Limited Liability company? What is the best type of insurance I should be obtaining?” I understand that it’s a big question for all of us, we want to make sure that we’re not buying a policy we don’t need or the policy we are getting is definitely gonna be protecting us.
My partner, Michael Bowman, as you know, he’s an attorney, he used to work in the insurance industry, and he always tells a story about how he went to an annual meeting one time years ago in Phoenix and everyone was talking about the insurance industry, how they were charging the most and providing the least amount of coverage. Well, that’s not what we want. If we have real estate, if something bad happens to us, we have our entities to protect us. The way I teach it is that we want the creditor, the plaintiff, to go for the policy, and that policy is what’s going to protect us, the LLC is the backstop. If they go beyond the policy limits, then they can’t come and take your assets.
What I’ve done today is I brought in a very special guest, I met this individual at a multifamily commercial event. I listened to him talk for about 30 minutes on the importance of insurance and it just really opened up my eyes. I thought, “I have to get this person on our podcast because he can definitely provide you a wealth of information when it comes to insurance planning, especially for your multifamily and commercial policy.” With that, I’m going to introduce you to Drew Maconachy from Maconachy Stradley. Drew, how are you doing?
Drew: I’m doing great. Thank you so much for having me on.
Clint: No, thank you for taking the time. I know you got a busy day ahead of you. If we could just jump right in, why don’t you tell the listeners a little bit about what you do, and how you got started?
Drew: Thank you very much. My name is Drew Maconachy. I insure real estate investors, mostly on the commercial side, I have more of a focus in apartment buildings, but certainly have lots of people who have […]as a single family, rentals as well. How did I get started in this? I enjoy teaching real estate investors about the products they’re buying, I don’t just want you to send me a check, and I send you a policy and that’s it. I want my investors to see what they’re buying.
I just happened to come across a guy who runs a mastermind event and I did some work for him, and he was like, “I have never seen anything like this. Now, I’m understanding these $100,000 that I spend every year, I understand why I’m spending it.” He was very kind and spread my gospel, that has gotten me relatively involved in the industry nationwide. It was organic growth through practicing what I preach, is how I got into the space. I’m excited to keep growing in the space, Clint.
Clint: You just mentioned something right there. When people are looking an investment in real estate, insurance is not one of those things that comes to mind right away. We know we have to have it, but it’s like going to the doctor, you know you gotta go to the doctor once a year, but you really don’t want to, it’s not high in your priority list unless there’s a problem, that’s when you really want to find out about your policy. You never wanna wait to go to the doctor until you have that lump that’s under your arm that’s been growing there for years, you’re like, “Oh, […].” You need to be proactive to get the right policy in place. Tell me this, what are some of the biggest mistakes you would see then when it comes to insuring property that real estate investors are making today?
Drew: When I take on a new customer or a prospect at that point, I say, “Let me see what you have. What do you have enforced right now?” Generally, what I’m seeing are these very stripped out policies that are being sold by people who aren’t experts in the space, they’re going to a state farm guy or their uncle sells them their auto insurance. They decided they’re gonna buy a building, and they’re gonna have this guy who does personal insurance to create this policy for them, and they just aren’t industry experts.
I can tell that within 10 seconds by looking at a policy that they’re missing ordinance and law coverage or they’re missing business interruption coverage or there’s no water backup coverage—very common claims that these real estate investors are gonna face. I promise you, each real estate investor, if they stay in it for 10 years, is going to face one of those three claims, and most of the time it’s not covered or it’s covered very poorly by poorly written coverage. They’re gonna be on the hook, unfortunately, beat a lot of that loss in the event that they come across it.
Do I see one issue? One specific coverage, no. Like you’re saying, being reactive to it and saying, “I just need a policy, give me a policy, and make it as cheap as possible.” I would much rather sell you something that’s 10% more expensive than that cheap policy, but provides 10 times the coverage. Again, that comes into my whole philosophy that I need to teach my customers what they’re purchasing so they understand the intrinsic value of these policies instead of just saying, “This is nuisance payment that I need to pay just like paying my utility bill.” Does that make some sense?
Clint: It makes total sense because it fits in line with what we teach at Anderson. We’re talking about, in the multifamily space, how you setup your LLC and the elections you make and creating it. If you go to someone who’s not experienced in working with multifamily investors, they’ll set you up something, “Great, it’ll work.” Then when you really need it do something for you, you’re gonna find that you can’t sell your property because he checked the wrong box on the tax election, you can’t get financing for it.
This goes right to what you’re saying is that if you’re getting a commercial policy, you’re gonna go to the expert, you’re not gonna go to the guy that’s writing policies for your single family rentals, your cars, your personal residence. You want someone who understands what your needs are and they put that policy together.
Drew: Absolutely right.
Clint: Alright. With that in mind, what are some of the must-haves? When it comes to policies, I’ve heard that you need to get a DP123 policies, and then you have endorsements you can throw onto your policies. When you approach it, is there one over outreaching policy that people should be looking at or do they buy one policy with a bunch of endorsements?
Drew: My opinion of the policies you buy, it’s called a commercial package policy now. What we can do, if you’re in an area where you can get a commercial package policy, that’s going to exclude some of the tough states. If you are in a heavy wind and hail zone, you may not be able to procure that. If you’re coastal, that can be tough to get. Generally speaking, if you are in the, what people refer to as the flyover space, there are relatively easy policies to obtain. Each coverage is going to be lumped into one policy.
You’re gonna have property coverage which is going to insure your buildings, the contents of those buildings, and loss of rents. Let’s say you have a fire in 10 of your 25 units, we’re gonna have a coverage in there that’s going to pay you that full rent, so that you can continue to meet your lender requirements or keep the building functional for the other 15 people while there’s a damage. Also, it’s going to have a general liability policy that’s associated with it.
General liability, most common claim there is they slip, trip and fall. Somebody comes on to your property, they slip, they sue you for that; they slip, they’re hurt, they sue you. It’s gonna have coverage for that. That’s your commercial packages, those two coverages. On top of that, I generally tell people to buy an umbrella policy. An umbrella policy is going to sit over your liability, it’s just going to stack limits.
If you buy $1 million per occurrence general liability policy, we’ll buy another $1 million or up to $20 million for some of my customers who have a broad real estate holdings where they need that protection, they have a lot to lose so they buy big. Now they have $21 million to pay off a claim. Obviously, the odds of that happening are very low, but it’s a very inexpensive coverage, so I strongly suggest that my customers really pay attention to umbrellas because a slip, trip and fall can run through $1 million very quickly.
I happen to be in Cleveland, Ohio. If you’re here in the winter and you have somebody or a family walking up a set of stairs to get into your building and they slip on the stairs and fall and become disabled, you’re gonna burn through that $1 million very quickly in the settlement. I would certainly tell your listeners to focus on umbrellas and not forget that. What I found, it’s about it’s about $400 per $1 million of additional coverage. It’s a tremendously value-based policy.
Clint: Any other things? I heard you talk about pollution too.
Drew: I must do a terrible job of explaining pollution coverage because nobody ever wants to buy it. It’s always excluded under these commercial package policies. You might have $25,000 sub limit to pay for some pollution coverage, but if you are in an old building or if your building has an increased exposure to moisture, that building could very, very easily have a mold problem. Mold is excluded under pretty much every policies that any of your listeners are going to run into.
This pollution policy would pick up coverage for that, it’s a little bit more expensive than your package policy rates, but again, if you have lead paint to abate, if you have asbestos to abate, these are all things that would get picked up under this pollution coverage. It’s not tremendously expensive, but the remediation of these issues within your building can be business altering, especially for these investors that don’t have the deep pockets, and don’t have the reserve banks set up. It’s certainly something to thinks about. Thank you for bringing that up.
The last coverage that I would tell your listeners to pay attention to is called D&O coverage, that’s directors and officers coverage. In my opinion, the only people who need this are the people who are accepting money from outside investors. If you are accepting money from a third party and they sue you, you don’t have any coverage under any other policy other than this D&O coverage.
If you get to the point where you’re creating a fund or you’re taking money from family and friends, I would certainly tell you to explore, it’s called D&O, directors and officers coverage because that is going to be the way where, if they sue you for any issue, you tell them you’re gonna give them 10% return, you give them 2% or you lose their money, they can sue you. This policy is not only going to pay for the settlement that would come from those claims, but it’s also gonna pay the defense cost. As they sue you, you’re gonna hire an attorney, and this attorney is going to be paid for by this D&O policy at no additional cost.
Clint: I agree with you 100%, that is so important. I have a lot of clients that like to joint venture, bring other people in on their deals. You tell someone something, but you don’t know what they hear, I’ve learned that in 20 years of public speaking. You get down with an event and they’ll come up to you and say, “You said to do this.” I was like, “Were you in the same room? I never said that.” That’s just how we hear things.
One of the things I heard you talk about was remediating, but how about if somebody comes up and they say, “My young child […] molds […] and their tender, young body is now racked by disease as a result of this.” Do you cover defense cost and settlements on something like that if you have pollution coverage?
Drew: Correct. They’re obviously going to bring a suit against the landlord. As an attorney, you’re gonna understand, they’re going to need to prove that that was picked up because they were living in your building. If they pull back their shower wall, let’s say, and there’s black mold in there, that is pretty solid proof. Yes, this policy would respond, that would be the bodily entry portion of the claim. Yes, that would be a covered […] within that pollution coverage.
Clint: How many years have you’ve been doing this now?
Drew: That’s a loaded question. I’ve been in the insurance industry, I was an underwriter, in 2007, I started underwriting. My goal when I got into the insurance industry was to learn the products that I was selling from the inside out. I went to the people who are building these policies, they’re called insurance underwriters. I became an underwriter first, learned the bones of the product with the ultimate goal always of going out and helping customers, being on the sales side of that. I also wanted to have that technical knowledge, that started in 2007, I did that for three years and then jumped into my passion which is customer interaction and selling and education. Since 2010, I’ve been on this side of the business.
Clint: I’m just curious, what is the worst case you’ve ever seen ?
Drew: Wow. That’s a great question.
Clint: Because […] in the sales that’s why we eat it.
Drew: I had a customer, who wasn’t my customer at the time, but they had a policy that excluded ordinance and law coverage. Let me explain what that is. Let’s say you own a 30-unit building, like I said earlier, 10 of the units go down. This building is 75 years old. You’re going to come and fix the building, you would think it’s as simple as fixing the building and opening the doors back up and you’re good to go.
Before they opened the doors back up, a city or township inspector is going to come in and say, “Wait a second, you have all of these ADA compliance issues or compliance zoning, any sort of law or ordinance that you were grandfathered into because there hadn’t been an issue. Now, there’s been an issue so you have to update your whole building.” California is a very tough state on that, New York is a very tough state on that. Now, you’ve gotta bring the whole building up to code.
This issue happened in Cleveland, and it was a 175-unit building. He had one of these cheap policies that had a $25,000 ordinance and law sublimit. Well, it ended up being a $350,000 law and ordinance issue. What he ended up actually, having to do was, he essentially took a check from the insurance company that almost covered the mortgage, and essentially sold the building as an unfinished building because he didn’t have the funds on hand. He didn’t have the $350,000 build up yet to fix the building up to code to allow him to open the doors back up to his tenants.
So he has a $350,000 uncovered loss that in every single policy that I’ve ever sold would be covered. I had talked to him, I had quoted his business, and I was 10% or 12% high. I pointed out, “Here are all the issues.” He said, “I knew, I’m just trying to get off the ground. I can’t afford that. I don’t wanna pay the extra $800 or $1000,” and that $1000 would have returned $350,000. What is that, a 3500% return on investment? That is what I would call a very easy fix. It was either overlooked by the prior agent, or they just didn’t have the expertise in the space.
I really wanna pound home that you gotta pepper your agent with questions, your agent or insurance broker—if they wanna call themselves that, I call myself an insurance consultant, we all like to use different names—but pepper your agent with questions, go through and ask them if there are ordinance and law coverage. “Do you cover loss of rents? Do you have water backup coverage on the liability side? Is there assault and battery coverage included or abuse and molestation coverage? How about animals? If I’m a tenant, and I have an animal with a dog bite, my dog bites another tenant, is there coverage for that?” These are questions that any agent who’s worth their weight should immediately know and immediately be able to talk to you about.
If you’re not finding somebody, keep trying because there are people who know what they’re talking about. I’m more than happy to help any of your listeners, if they would like to contact me directly. I’m more than happy to help, educate them, and properly transfer risk away from themselves onto an insurance company.
Clint: For all of you listeners out there, he has provided us with two white papers that are maybe in the show notes. Drew, I read through those, many information that I pulled out of there, stuff that I didn’t even realize. I’ve been investing myself for 19 years, I would encourage everyone listening to download those, go read those and then compare them to your policy or talk to your agents about it. What just amazes me is that a lender would actually loan someone money without having the protections that you just talked about because that could jeopardize their loan if something traumatic would occur.
Drew: It is crazy that the amount of deals that I see come across my desk, there’s always the lender requirements page, I always get that. It couldn’t be any less uniform from lender to lender. If you’re with a small credit union, they may ask first three things where if you’re doing a Fannie or Freddie loan, that one page is 12 pages long and it borders on the side of over insurance. But to the lender’s point, they’re trying to protect themselves. I certainly understand that, but I also tell some of my customers, “You should push back on some of these points because it really doesn’t impact you.”
A great example of that is terrorism coverage. It is a 3%-5% surcharge, but if you are in a town that has 5000 people in it, in the middle of Texas, I’m not tremendously concerned with terrorism coverage. There are areas that your agent should be able to identify and try and push back against the lender. Are you going to be successful 100% of the time fighting a lender’s requirement? Absolutely not. I’m certainly not. But there are areas where you kind of need to say, “Come on, this isn’t realistic. If I’m in New York City, of course, I need this coverage, but I’m in Pleasantville, Texas. This may not pertain to my building.”
Clint: I had a condo in Hawaii. It was way up I think on the 8th floor. They said I had to buy flood insurance for it, I’m like, “That’s tsunami, and the whole island is gonna have to go underwater before it’s ever gonna get to my level.”
Drew: There are bigger fish to fry at that point.
Clint: You know what, this has been fascinating. This is the first one I’ve done without taking a break because you gave so much information. I forgot about taking a break because I wanted to get all of these in. If they wanna contact, I know we have it in the show notes, but how should they go about contacting you? What is the best way to get a hold of you?
Drew: I’m a phone guy. The best way to get a hold of me would be calling into my office and just asking for Drew Maconachy. I’m one of the principals of the agency and if you just call, our number is 3309665170. If you just reference this podcast, I’ll certainly know who you are. I will take your call or at least return your call within 24 hours and do my best. I’m more than happy to just have a call and help you review your policies if you have specific coverage questions. I’m more than happy to do that. Or if you want to send me a copy of your policy and say, “Pick this thing apart and tell me what’s wrong and fix it.” I’m more than happy to do that as well. Anything I can do to help, that’s what I’m here to do.
Clint: Guys listen, go to the experts. When you’re putting together your insurance policy, go to someone who understands what it is you’re doing because you’re gonna be covered in that way. Don’t risk it, you’ve got too much invested in it to let one small thing take you out of the game. With that Drew, thank you for coming on today. I know you got other stuff to do today, so I don’t wanna hold you up any longer. We’ll be talking soon.
Drew: Clint, thank you so much for the time.
Clint: Alright, take care. Bye.
Drew: Take care.
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