When getting insurance for your entity, make sure to pay the least amount for the most amount of coverage. Today, Clint Coons of Anderson Business Advisors talks to Drew Maconachy of Maconachy Stradley Insurance about insurance inspections.
- Appearance is Everything: Do you look like a mom-and-pop or professional real estate investor to your insurance carrier?
- Fake it, til You Make It: You’re smart, knowledgeable, and know what you’re doing – even if you don’t – when carriers inspect your properties
- Matrix of coverage and cost determines which carrier is picked to insure your property
- Inspection Required: Insurance carrier may require an inspection within 60 days and has the right to cancel coverage due to the results
- Failed Inspection means: This isn’t a great operator, this isn’t a great building, or both
- Failing an inspection is worse than losing your policy; finding coverage won’t be easy
- Certificate of Insurance to Lender: If insurance company changes within annual term, notifying the lender is required
- 3 ways to prepare for inspection:
- Professional housekeeping and maintenance: Clean, clear, and repair general areas
- Management Summary Report: Aggregate maintenance and housekeeping records to show people are being held accountable for specific tasks
- Know your building/property: All the nuts and bolts from foundation to roof; be able to answer questions before being asked
- Cost-benefit Analysis/ROI: Spend a little money now, to save a ton later
Drew Maconachy’s Phone Number: 330-966-5170
Essential Elements of a Commercial Insurance Policy – Drew Maconachy
Insurance Planning For Multifamily & Commercial Real Estate
Anderson Advisors Tax and Asset Protection Event
Clint: Hey, everyone. It’s Clint Coons here at Anderson Business Advisors and this is another edition of our weekly podcast. On this edition, I have Drew Maconachy of Maconachy Stradley that will be on. We’re going to be talking about insurance inspections.
The last time we talked to Drew, we talked about insurance in general and I wanted to bring you back on because it’s really important when you’re acquiring insurance that you want to make sure that you’re paying the least amount as possible for the most amount of coverage rather than the reverse, they’re charging you the most for the least amount of coverage when it comes to acquiring insurance because it’s necessary. Even though you use entities, you still need to have insurance. We have to make sure we’re doing it right and getting the best deal out there.
Another level to this is how you look to your insurance carrier. One of the things we talked about with entity planning at our events is that, the way you set-up your entities can impact how you look to a lender, to an underwriter. You can either look like you’re a professional real estate investor or you can look like you’re a mom and pop investor that’s doing it on the side. So, the appearance is everything when it comes to running your business.
Another important aspect of it is that when you’re setting yourself up to deal with that carrier when they come out to inspect your properties, there are things that you can do to give that appearance that you’re at least a smart operator that’s out there. You understand it, you have tons of experience, and even though you have no experience at all, you can make it appear as if you know what you’re doing.
With that, I want to welcome Drew back to my podcast. Drew, how are you doing today?
Drew: I’m doing great, Clint. Thanks for having me. I’m excited to speak to your audience once again.
Clint: I know. We got into this a little bit on the last podcast. For those of you who missed that, definitely go back into the previous episodes and look that up. That is a highly-rated podcast and we had a ton of listeners that downloaded it and listened to it. I got some emails after the fact and they want to know more about this.
Today, you can talk about insurance inspections. Tell me just a little bit why this is important to someone who’s considering buying a multifamily or a commercial property.
Drew: Sure. How the process works is we get there a bunch of quotes together. We try and find the best matrix of coverage and cost. Once we have determined that, we pick the carrier. The carrier comes in, they insure you.
One of their subjectivities, especially if the building’s a little bit older or has “some hair” on it, they’re going to require an inspection within 60 days. We already have a coverage now. We got a binder, it’s going to provide coverage for 60 days until they go out and perform this inspection. After they perform the inspection, they reserve the right to cancel coverage.
The concern that your listener should have is if they bomb the inspection, the insurance company will come off the deal. They’ll cancel that binder and won’t transition that into a full annualized policy. What they’ll say is it was a material change in operations from what we told them to what they actually witnessed when they sent their inspector out.
The problem that you run into there is we pick the carrier for a reason. They were the lowest cost operator with the most amount of coverage. So now, we’re taking the what we would call the A+ deal off the table, we’re going back out to market 60 days later, almost always to the exact same insurance companies that we already went to, and we’re coming back with our tail between our legs saying, “We failed the inspection.” Guess what? They’re going to think that either this isn’t a great operator or this isn’t a great building or both.
So, failing an inspection is much worse than just losing your policy. It is having to go back out and finding coverage elsewhere to the companies that we’ve just looked at. They’re going to know if it’s within 60 days that something is up, so the deal that they had on the table before is not going to be quite as good.
Clint: I got a few things here. Do you have a horror story you could tell us about how this has happened?
Drew: Sure. I’ve got about 10 of them and most of them are pre-need, but that doesn’t mean they’re not horror stories. I had a customer who, on his first building, he had an inspection that was done—he had multiple states—I think it was in Oklahoma. It was a 60-unit building and he had what he thought was a good deal. They had an inspection done and they failed the inspection. That’s actually when I got brought in through another referral because he wasn’t able to find really any markets that would do his deal because everybody who had seen his deal knew that something was up, so he had to go find a whole new agent.
Thankfully, that brought me in the door. It’s not a horror story for me, but I was able to bring in some markets that weren’t approached the first time (markets meaning carriers, meaning insurance companies) and solved the problem for him. From a cost standpoint, it could have been disastrous if the other agent had gone to the exact same markets that I had access to. They just didn’t happen to do that, but if he was very happy with his agent, he had to end that agency relationship.
That’s probably not as good of a whole story as you want, but it could have been disastrous if the other agent has done their job appropriately and gone out to all the insurance companies available.
Clint: Okay, let’s assume that this were to happen. If I have my carrier come out, they look at the property, and they say, “No, we’re not going to insure this property because it fails the inspection,” what does that do to my loan?
Drew: That’s a good point. We would have had to provide a certificate of insurance to your lender naming them as […] and a part of our requirement under law is if the insurance company changes within that annual term, we need to notify the lender. Now, the lender’s going to be all over you saying, “Wait a second. What’s going on here? What’s wrong with the building? And what are you doing with insurance?” That’s a whole another bee’s nest that you’re going to jump into if you have an inspection fail.
Clint: Yeah, because it means the lender can’t jam a carrier down my throat and force me to pay maybe three times market for the insurance because that’s a requirement of the loan. You can really get burned on this.
Drew: Absolutely. This is nothing to be taken lightly. That’s why I spent the time to come up with this white paper to help your audience not beat the system, but look as good as possible to these insurance companies.
Clint: Yeah, rig the system in your favor. I got it. Like you said, it’s in the notes. You can go and you can download that white paper. I read through it, it’s great, and I want to talk about this as well.
Let’s talk about some of the things then that, if you’re an operator or owner of a property, that you should be focusing on prior to that carrier coming out, to help or give the appearance that you’re the smart operator and you’ve got all your stuff together.
Drew: There’s really three items that I want to walk through and I’ll stop after each one so that we can have a conversation about it. The key to this whole thing is there is minimal or no cost to doing this. This is a function of time. This is not a function of money. I’m not telling you to go out and spend $15,000 to get ready for your inspection. I’m telling you you might have to spend $100 or $200 or $500, depending on the size of the building.
I don’t want your listeners to think, “Oh, I have to set up all these controls and have to add all the…” I’m not asking you to do that. Are there things you could do to really go over the top? Yes. Are you going to get the return on investment on those that you’re going to get these three items that I’m going to go through today? No, and I don’t think you need to do it, frankly.
This is all going to probably seem pretty logical, but maybe you haven’t heard of it before. The first one is general housekeeping. You know you’re going to get a call to schedule this inspection. You’re going to know exactly the date and time that your inspectors are going to be there. The very basic thing that you should be doing is general housekeeping.
All common areas should be professionally and freshly cleaned. If you’re scheduling something at noon, you should have a cleaning team in there that morning that are sweeping, even paint, little paint items. Have your entryways look spectacular. Any cracks in the sidewalks or broken uneven stairs, they should either be repaired or roped off with a note there that says a repair has been ordered.
Again, this is just going to make you look professional. If your building is in the north and it’s in the winter when you do your inspection, your sidewalk should be cleaned, your parking lot should be salted, any tree branches, any garbage, all that you want to clean it up. Think about this as you’re showing off your building.
That’s a great way to put this in the back of your mind, like you’re selling it to this inspector. What would you do if you had a hot buyer coming to your property? You would want to be doing all these things. The same for your inspector. You want to show off your facility to this inspector.
Clint: That’s the first thing that came to my mind when you were talking about this, is treat it like you would if you’re trying to sell the property. What would you look at? It would have curb appeal that when you walk in, that the entryways, everything is going to be clean. If the carpets are dirty because you have tenants moving in and out, make sure they’re spotless as well. Again as you said, it gives the appearance that you maintain your properties and you’re on top of it.
Drew: Absolutely. And again, housekeeping’s probably the most costly thing of any of these items that I’m going to talk about. So, if you have a maintenance manager on site, you can have them do it. I would suggest that you go and get an outside firm to do it, but you don’t have to. That’s the most expensive thing that I’m going to be talking about. Just to give you an idea why you’re continuing to listen to this. I’m talking about anything crazy here.
Clint: You brought up something that is important. You said hire an outside party to do it. If you have an onsite manager or somebody else managing the property, I wouldn’t […] 100% because in my experience with on-site property managers or property managers that you use, they have a different level of what they think is acceptable for these areas. It makes sense because they’re running the property and they’re trying to minimize your cost. But on something like this, their standards are not of the same standards as a third party you’re going to be paying to come in and actually do the work.
I’d rather spend a little now to save a ton later because as you talked about earlier, if you get denied and they leave the property, now you have to go back out to the market. You’re going to be kicking yourself. Just like asset protection. People say, “Well, I’ll put five properties in one LLC rather than put one LLC per property.” I said, “You know? At the end of the day, when you’re involved in that lawsuit and they’re coming after that one LLC that has five properties, you’re going to be kicking yourself for not having the five separate LLCs.” So, yeah. Right on 100%
Drew: I couldn’t agree with you more, yes.
Clint: What’s the other point? You said there were three main points.
Drew: Okay, that’s point number one. Point number two is one you probably haven’t heard before, but I think this is a fantastic report to put together. I call it a management summary report. Call it whatever you want, but this is where we are aggregating our maintenance records, our housekeeping records, and showing that we are holding people accountable, that we have certain people that are performing certain tasks.
This can be a three-ring binder with ten tabs in it. One of the tabs should be when was the last time we had the electrician out to look at our breakers? Another tab, when was the last time we had a plumber out? Who was the plumber? When was it? What service did they perform? Same thing for HVAC.
The next one now we’re starting to get into stuff where there’s common claims. When was the last time we had the laundry lines cleaned? There’s a ton of lint fires if your building has a laundry room. That’s something we definitely want to show that we’re paying attention to. That can be your on-site maintenance guy. That doesn’t need to be a third party who’s doing this. When was the last time we had our laundry room cleaned and our dryer lines serviced?
Next, roof. When did we have our last leak? Who looked at the leak? Who fixed the leak? And has that been followed-up on? The fact that you fixed it and it’s no longer showing issues is great, but a month later after our next big rainstorm, have we gone up there to make sure that even though it may not be coming through the walls, is there water within the walls?
My fear for you there is you have moisture in the walls, you’re going to get mold. Mold is a common exclusion in these policies, so that can be turned into a big deal for you as an owner that’s not going to get picked up by a policy.
Smoke detector maintenance. When was the last time batteries were changed? What’s your smoke detector battery program? Every January first, we come in and change the batteries in the smoke detectors and then we tell our tenants to change them as they beep. But we want to make sure that we’re showing that these smoke detectors are being attended to at least once a year.
Same thing with fire extinguishers. Your code’s going to require that you do that as well, but we want to keep a log of our fire extinguisher maintenance. If you have sprinklers in the building, same thing. When are they getting updated and checked on? So, have a maintenance log that has all these major systems within the building, when they’re being serviced, who’s servicing them, and any notes that you can take to make it appear more thoughtful.
The other item that I brought up was a housekeeping policy. This isn’t necessarily a log, but when was the last time housekeeping was performed? Who is responsible for housekeeping? Who’s repairing these stairs that I just had repaired in general housekeeping? When was that done? Was that followed-up on to make sure that the repair actually stuck? That’s just another item.
This is literally a one three-ring binder with several different tabs in it to show everybody who looks at it, that you’re an A+ operator. I’d be shocked if many of you have it. If you do, kudos to you. It’s not common in the industry, but it goes a whole heck of a long way. Everytime you go out to get quotes, you should make sure that your agent is sharing with the underwriters that you have this in place because this will save you money.
Clint: Yes. For example, I bought an investment property in Hawaii and the seller of the property gave me a three-ring binder. It had all of this information contained inside of there. Who they used to maintain the AC unit, who’s maintaining the refrigerator, the contractors they used to paint it, the last time where the bugs was sprayed. When you see that, it gives you a sense of confidence that the person you’re buying the property from has paid attention to their property.
Now, it could all be […] (excuse me), but you don’t know that and you just take it on faith that that’s what’s going on. I actually do the same thing when I am selling property. I put together those binders for the buyer because it helps. When they actually come to inspect the property, to look at the property as well, I have that binder laying on the counter so they can see all of that information.
Who wants to buy a house if you don’t know anything about it and you have to figure out where the sprinkler systems are located in the ground and all that stuff. If you got that all laid out there, it gives people a sense of confidence that they’re working with someone who has taken the time and they care about that particular property. So, that’s spot on.
That conversation, though, when that inspector comes out, I assume it’s, “Hey, by the way, would you like to look at our maintenance binder?” Is that how you go about that?
Drew: Yeah, exactly. The inspector’s going to ask you if you have any maintenance records. That will be a question they’ll ask and you’ll say, “Oh yeah. Here, look at this.” Their eyes are going to light up like it’s Christmas morning. That’s how the inspectors feel about it.
So, if you can show them that three-ring binder, if your housekeeping’s intact and you show them that, all the inspection is going to get cut. The time that you’re going to spend with them is getting cut in half. It’s going to be a benefit to you personally that you don’t have to spend a bunch of time with this inspector doing this inspection that you probably don’t want to be doing in the first place.
Secondly, you’re going to look like an all-star operator. I mean, it is not just for insurance. This is a great tool to have in all facets of property ownership. When you sell this property, you’re going to look like a wizard to the person who’s buying it and they’re going to think that the asset that they’re buying was in great hands. So, I totally agree with your point.
Clint: How about knowing your building? That’s pretty important, right?
Drew: Yeah. Again, this one seems pretty intuitive. They’re going to ask you questions. When was the last time your roof was replaced? That’s probably going to have been on our apps. They’re probably looking at the answer that we have on our apps from that. They’re just double-checking that either you didn’t lie on your app or do you know what’s going on with your building.
Some of these can be tough, so take five minutes or have your agent send you a copy of the applications before they do the inspection. That’s an easy way to do it. You can look at these apps and say, “Here are all the questions they’re going to ask me. I should know this. What type of roof is on your building? It’s good to know that. When was it done? When was the last time you had it cleaned? What have you don’t to remediate the exposures that created that claim? Any item like that is going to, again, elevate you against your peers when they look at it.
There’s a good example to this, too. Let’s say you had a $50,000 loss because one of your tenants left the stove on and the fire broke out. First of all, your management summary should have a past claims and remedies tab. In there you should have a claim report that outlines what happened and you should probably have a copy of a memo that you sent out to each of your tenants to say, “We had an accident within the building. Here’s what happened. Here’s what we can all do as a little community to make sure that we don’t have any other issues like this,” because likely, several of the other tenants were negatively affected by this issue. And then third, this is just a pie in the sky type of option, but you could have installed stove-top suppression systems. They’re $25 each on Amazon.
Again, think about that. If you do that, how many of your peers in the property ownership space have done that? Nobody. You’re going to look like an all-star. By the way, it’s also going to save you money. You’re never going to have another $50,000 claim. You probably had $1000–$5000 deductible, and now you’ve spent $25 per unit to make sure that never happens again. So, you’ll likely will never have to pay that deductible again if you spend that $25 and risk management to get that done.
So, little items like that and everything they’re going to ask you that we have on the apps, they’ve already seen. They’re just going to dive into it a little bit more. Again, if you can provide light on the box that we checked on an app or number that we put on an app, if you can say, “Yeah, we had a slanted roof before. We went to a flat roof this time because X, Y, and Z.” All that stuff is just going to make you look like a star operator.
Clint: Yeah. As you stated, these are small things that someone could be doing. First off, what I would do is I would send you a copy of my existing carrier’s policy and what I’m paying. You review that. You tell me, “Hey, Clint, I can save you $10,000 a year and get you better coverage.” Great. Then, you’re also going to tell me that, “Hey, Clint, you better go out and make sure your property meets these standards because this is what the carrier’s going to be looking for.
So, it just makes sense. You should be doing this if there’s a potential to save money. That’s what would start with giving you over the policy, so that you could review it?
Drew: Correct. First and foremost, I want to make sure that you’re policy lines up with the exposures that you have. A lot of times, I see people who have buildings that they sold years ago and they’re still insuring them because the agent never pulled it off. I can’t tell you how often I run across that. It’s usually not a big one.
I had three single family rentals. I sold two of them and kept one, but I forgot to pull the two off as I was buying larger assets. So, it’s a great time to do a review like that, but it also allows me to say, “Here’s some issues that the insurance companies are going to point out. Let’s get out ahead of that. Let’s answer the questions before they ask them.”
An underwriter is going to love that because that makes us look good as agents, that we’re informing our customers, we’re getting ahead of these questions, and we’re not hiding from them. You never want to give the appearance that you’re hiding from anything. Even if you have had a claim in the past, disclose it and tell these insurance companies what you’ve done to remedy the situation going forward. That’s much more valuable than hiding from it. In all likelihood they’re going to find it and when they find it, they’re going to cancel your policy. And then you’re behind square one. So, I totally agree.
The process starts with getting an agent to review your policies and have the agent be an expert in the space. I can’t tell you how key that is and the agent should be doing so much more for you than just, “Here’s some quotes. Go ahead, tell me what to do.” That’s not what you want. That’s not what you need because you’ve got a bunch of other stuff on your plate. Your agent should be a partner to you and not just a monkey who’s going out to get quotes that anybody in the world could do. A computer could do it. That’s not our job. Out job is to be an extension of your business and essentially be an off-site risk manager for you.
Clint: Exactly. It’s like I tell people with asset protection. If you went to an attorney, you’re setting up an LLC, and he asks, “How do you want to get taxed? As an S Corp, partnership, or disregarded entity,” you’re like, “Uh, isn’t that your job?”
Drew: It shouldn’t be. Exactly.
Clint: Yeah. It’s about everything. Whoever you’re working, it starts with a plan. It’s working with somebody that’s an architect and knows how to build these plans out the right way, because I’m not the expert on that field. You’re the expert when it comes to insurance, so I’m going to rely upon you to help me navigate all of this stuff, so I can get the best policy for the least amount of money for my property.
One other thing you mentioned about being on the property. A lot of investors own property in different states, so they’re remote investors. I would assume that you think that it’s a good idea that they’re on-site when the inspection occurs?
Drew: In a vacuum, yes. I would love to have the owner there. It’s good for the optics, but at the same time, I understand that’s not possible. I just did this. I had a customer who lives in Southern California. They bought a property in Oklahoma. Am I going to make him fly out for this inspection? No. But they’re going to allow him to schedule it.
If this investor can schedule an inspection around a time that he’s going to be there anyway, of course, it’s great for you to be there. I would tell you to have your property manager walk around with you. They’re the ones who you’re probably tasking with knowing your building, putting together your management summary report, and housekeeping. They’re going to be able to fill in a lot of the blanks that you might not know because you’re not involved in the day-to-day.
Yes, it would be nice for you to be there. Does it happen all the time? No. Are you going to fail the inspection because you’re not there? No, but in a vacuum, it is good for you to be there.
Clint: Totally. You got to check on your properties and this would be a great time to do that anyway. A lot of people don’t realize what’s going out on their property, so visual inspection are always important.
Clint: Anything else you want to leave in parting on this, that you want the listeners to know?
Drew: I just want to hammer home again that this is a low-cost fix. This is something that will provide long-term gain. I sincerely believe that your return on investment in accomplishing these three situations will be some of the best return on investment that you’ll do in any walk of life. You’re an investor. Think about it that way.
Return on investment. This is incredibly a high return on investment. I’m asking you to spend a couple of hundred bucks. It just could be $100,000 insurance policy that goes to $180,000 policy once you fail your inspections. So, I’m asking you spend $500 to save $80,000. Think about it that way. Don’t think about it as, “This is an incremental dollar that I don’t want to spend.” Think about doing a little cost benefit analysis that this will really shine for you. I guess that will be my parting shot.
Clint: I hear that all the time from people. They basically admit to the fact they’re tripping over the pennies on the way to dollars and it’s one of those issues that when something does go wrong, everyone is typically always in agreement. They knew they could have done something different earlier, but they chose not to because they let a small cost get in the way of helping them protect their assets.
Definitely, they should reach out to you. We’ve got all your contact information in the show notes. We got your email there so they can look at that. Do you want to give them another way in case they don’t have time? They’re driving in their car, listening to it, and they want to call you right away? What should they do?
Drew: Probably the best way to get a hold of me is through email. It is email@example.com. I’m wonderful at checking my emails. I’m not good at many things, but checking my email happens to be one of them because it is the lifeblood of my business. I would suggest shoot me an email. I’m saying I’m happy to do anything that you need from me. I’m happy to share any intellectual property that I have. I want to help you become a successful investor and not lose money on your way to profitable growth.
Clint: Great. All right, Drew. Thanks for being on the podcast again. Again, very valuable information for all the listeners. Hopefully, they’re going to take you up on that and look for ways to improve their policies. With that, everyone, thanks for being on and make sure you catch our next podcast that’s coming up next week. There’s always lots of information. My partner, Toby, is on here talking about taxes and everything interesting in real estate and asset protection, tax planning, and business planning-related. Take care, everyone.
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