What does every real estate investor need to know in 2021? Obtain the right insurance at the right time for your properties. Make sure if something goes wrong, you’re protected.
Today, Clint Coons of Anderson Business Advisors talks to Shawn Woedl, President and CEO of the National Real Estate Insurance Group (NREIG). Shawn’s responsible for overseeing all aspects of the agency specifically focused on maintaining strong carrier and industry relationships, developing new and innovative product offerings, and managing internal sales and service processes. He is an industry-recognized speaker and educator with an emphasis in commercial property insurance
Shawn has helped grow NREIG into the largest insurance program in the country, insuring more than 88,000 locations. Through Shawn’s efforts, NREIG has expanded to accommodate investment properties up to 20 units, vacation rentals, and non-performing notes. He has enhanced coverage options for terrorism, earthquake and sinkhole, tenant protector plan, and cyber liability to fill gaps that investors may experience in their property and liability coverage.
Highlights/Topics:
- If you’re going to be a landlord, you’re going to buy property, and you’re going to hold it long-term, what type of policy or coverage do you need? At a minimum, you need property and liability coverage.
- What’s covered and what’s not? Not every carrier is the same. Read your policies to figure out vacancy versus occupied provisions.
- A tenant’s pet gets sprayed by a skunk, and everything smells like skunk. If I’m a landlord and the tenants vacate, how do I protect against that type of event? Require your tenant to carry renter’s insurance and make sure that the policy has a provision that covers damage by pets.
- What about toxic mold? Most property policies do exclude that completely. Build into policies at least a sub-limit. If a lender says you’ve got to have limited mold coverage, that sub-limit will provide enough coverage to satisfy them.
- When I build out my portfolio and have eight properties, do I need to acquire a separate policy for each property, or can I get an umbrella policy that covers everything? You don’t necessarily need eight policies for eight locations. Doing that puts you at the mercy of the underwriter on what they want to assign as property and liability rates for each risk.
- What about an excess liability policy? There are two options: Umbrellas go over multiple lines of coverage, and excess liabilities go to one line of coverage.
- Would we use the word, ‘additional insured in this policy’ anywhere? The only place to put additional insured or who would be listed as additional insured would be your lender.
- Do you need to see documents when doing this? What do you need from the client to put something like this together for the policy? No closing documents. Carriers don’t ask for that. They’re okay with just what the insured provides.
- When we’re setting up structures, anonymity is important. You’ll put it in the name of the trust, that’s no big deal? It’s in the name of the trust, but you can list the trustee in the name insured in addition to that actual trust name.
- Is there a special type of policy you need with an Airbnb? Not really. The Airbnb industry took the insurance industry by storm. For the longest time, trying to obtain insurance coverage for an Airbnb was difficult because liability exposure was written differently. Insurance coverage is not cheap on the liability side.
Resources:
National Real Estate Insurance Group (NREIG)
NREIG’s Tenant Protector Plan (TPP)
Real Estate Investors Association (REIA)
Anderson Advisors Tax and Asset Protection Event
NREIG Rental Property Hazard Recognition Checklist and Smoke Detector Maintenance Log
Full Episode Transcript:
Clint: Hey, guys. In this video, what I wanted to cover was insurance. Why talk about it myself when it comes to obtaining insurance for your properties when we could bring on an expert? I know most of the days, you used to see me where I go through and I talk about various aspects of real estate investing, using entities, how to tax plan for real estate, but in this particular topic which is of so importance to everyone of you out there who’s investing in real estate, you really need to get the insurance right.
Rather than try to convey this myself, what I wanted to do in this video is bring on an expert, someone that I’ve been working with for years in structuring real estate investors on the insurance side to protect their investments. I could think of no one better than Shawn Woedl, the CEO of National Real Estate Insurance Group to bring on.
We’re going to go through some questions and answers to answer most of those questions that I know that you have about how do you get all the stuff set up the right way. After the end of these are in place, to make sure if something goes wrong, you’re protected.
Hey, Shawn. Thanks for coming on.
Shawn: Anytime, Clint. Thanks for having me. Good to be here.
Clint: This is going to be great because I know I get a lot of questions about this. Before we get started, why don’t you give some street cred to your company—what it does, and how long you’ve been in the business?
Shawn: Sure. National Real Estate Insurance Group is a national independent insurance agency. When I say that, it means we represent hundreds of companies. It actually started back in 2008 with Tim Norris (who’s my partner) and myself. We were in Cincinnati. He was a nationwide agent, I was just breaking into the business, and we found ourselves in some local REIA event—Real Estate Investors Association—which I’m sure many of your listeners are familiar with.
We found a niche, we found a need. There wasn’t any insurance presence there, nobody that was actually serving the needs of these real estate investors. So, we came up with this idea beginning then and really rolled it out a year or two later of National Real Estate Insurance Group, which is a group where we specifically worked with residential real estate investors predominantly in the 1-4 family space. We built a program to accommodate for their needs because the insurance industry was not there for them. They wouldn’t write the policies, they didn’t want to service them, they’re higher risk. Nobody liked doing them so we fell into this niche by accident.
Here we are 12 or 13 years later as the largest and longest-running insurance program in the country for the residential real estate investors. The uniqueness of our program is the ability to accommodate the locations in all phases of occupancy. If they can’t occupy renovation, a combination of the three. Whatever your investors have in their portfolios, we put into one single schedule so we can leverage their size and their activity to keep their property rates stable over time.
That’s a monthly reporting form, so it’s pay as you go. No minimum earned premiums, no long-term commitments to the coverage, which anybody that’s doing renovations or flips will be very familiar with, if not wanting to have that. They’re higher risks, they’re properties at the insurance agency or insurance industry, and they want a long-term commitment. They want the investor to pay for 6 or 12 months at a time, and then if that flip gets done early they go to cancel that coverage, they can’t get any money back.
We saw a lot of challenges in it in the industry back in 2008. Some of them hold true today and there’s some new ones as well. What we wanted to do is build a program to alleviate those and I think we’ve done a pretty good job.
We’re all 50 states, so wherever you’re investing that we can accommodate for and start to bring each out really over the last few years, and be able to accommodate not only for the traditional rentals or fix-and-flips but vacation rentals. We can give you that self-storage program, we can give you non performing notes—lender-placed—so if you’re lending on stuff, you have the force placed.
It’s become a one-stop type of shop for all of our investor clients. They are never going to either want to have to go anywhere else to acquire any insurance product they need or acquire to have by one of their lenders.
Clint: Wow. You just covered a lot there. For the people that are watching or listening to this, what I want them to understand is that the reason why you’re here is because so many people don’t get this information when it comes to setting up the insurance because they keep running into roadblocks with people. We’ll get into that.
I want to know. For some of those listening and watching this, what type of policy? If you’re going to be a landlord, you’re going to buy property, and you’re going to hold it long-term, what type of coverage do you need?
Shawn: First things first—this will be what we touch on later—is whatever owning entity or entity that purchased the asset in question has got to be listed as first named insured on the insurance policy. Regardless of what anyone tells you, that’s got to be the case.
At the very minimum, you need property and liability coverage. Every investor situation is different, which is what sets us apart from all of our competitors or wants to try to play in our space. We go through a full analysis with an investor client to make sure that we figure out what their pain points are, what their extra strategy is, what their investment strategies are, so we can develop the coverage that’s appropriate for them.
On the property side, obviously, you want to cover the dwelling, you want to look at loss of rents coverage. You want to look at if you got detached structures like garages or something you want to extend coverage to, or if it were to be blown away or burned to the ground. If you’re in vacation rentals where you’re furnishing your locations, you want some contents coverage of business personal property.
From there, you can fluff up a form. You can look at equipment breakdown, you can look at earthquake and flood, you can look at ordinance or law, some of these add-on coverages that you have available.
Property coverage is really just is what it is. Every investor is different, some choose just to sell to insure those properties. If I pick up a property for $10,00, I know that it’s vacant, if it burns to the ground, I’m out $10,000. I can maybe stomach that and don’t necessarily need the property coverage. Again, every investor is different.
Liability is a whole different animal. Liability is one that you should never go without even if you’re wholesaling a property and you have ownership interest in the property for a day. Purchase the liability coverage through all sorts of months or of quarters. You pay $7 or $8 a month and have that piece of mind that if God forbid, somebody would either slip and fall, gets injured, or worst on that property and you’re named in a lawsuit, that liability coverage would pick up and throw out that coverage for you so you’re not stuck out on an island with no coverage and having to pay that out of pocket.
At the very least, property and liability, there are obviously some extensions on there as well with different lines of coverage that we offer if it’s necessary or needed for that investor.
Clint: All right. You got to have that coverage and knowing what’s covered versus what isn’t (I think) is a challenge. I’ll give you a couple of examples here. Scenario number one. I am a real estate investor, I’m in the process of rehabbing the property because the tenants trashed it. We’re on day 45 of the rehab. I can’t get materials right now, or contractors are slow because they’re so busy to get to my project. Somebody comes out and they’re hurt on the property. It’s a rental property, it had this typical landlord policy in place, but it’s been vacant for 45 days. Am I covered?
Shawn: With NREIG, with National Real Estate Insurance Group, absolutely. Unfortunately, not every carrier is the same way. You have to dig into those policies that you purchased and figure out where their vacancy provision starting in. Some of them say at day 31, if that location’s still vacant when the initial policy of the setup is occupied, coverage ceases. You got to be careful.
I always say the way to read an insurance policy is look at the decorations pages first, the contact information, the address or location, the insured values that you decided upon the purchase, and then flip all the way to the back and look at the endorsements and exclusions because those are the ones that can really harm you. Vacancy provision is where that’s going to be held. It’s right there at the end, so you’ve got to be careful on that.
With NREIG, it’s not a problem because we’re able to accommodate through all phases of occupancy, so no coverage will ever be diminished. One side note to that one, as you mentioned, hey, this is a renovation property, there’s probably GCs and workers on site. It really has to depend on what the cause of that liability loss was. Was it just somebody that was injured on site or was it something that had to do with the general contractor being negligent? Did they leave their ladder on the front yard that that person tripped and fell on the front yard and got injured?
In that situation where the general contractor will be at fault, we tell our investor clients, look, if you got a GC that’s going to be working on site, you need to make sure that you’ll require a couple pieces of information from them. You want their proof of liability coverage as well as their workers comp coverage if they have employees with them. In addition to that, your owning entity needs to be listed as additional insured on their general contractors liability policy for the duration of time they’re working on your property. We do that so that their liability coverage extends to you.
Clint: Exactly. We’re going to come back to that because that’s a really important point about using entities, how we insure those, and how they get named under the policy.
I got two more quick ones for you. One of them has to do with the aspect of animals. Here’s the scenario. My assistant’s boyfriend came down with COVID, and he lost his sense of smell. This is a great story. He can’t smell, he can’t taste anything. She is no longer living there at the house. He’s living by himself and had this big, black Lab. The black Lab came into the house one day and he’s just acting weird. He starts foaming at the mouth after about a couple of hours of being in the house.
He thinks to himself, man, something is going on with my dog. He contacts the vet and he throws the dog in the truck, goes down to the vet. The vet takes a little while to come out to see him. Vet opens up the door. He says, what’s wrong? He said, my dog. He goes, oh my gosh, your dog has been sprayed by a skunk. He’s like, what? He goes, yeah, your dog. Can’t you smell? He’s like, no, no, I’ve got COVID, I can’t smell anything right now.
Here’s what happens. He gets his sense of smell back. The house is trashed, the carpets, the hardwood floors in the house, 50%–60% of their clothing items, everything’s smell of skunk. His truck smells of skunk and they don’t know how to get it out. Called the insurance provider, not covered.
I know that’s an extreme scenario there, but if I’m a landlord, I have that property, and the tenants vacate it, how do I protect against that type of outlier event?
Shawn: The easiest way to do that is to require your tenant to carry renter’s insurance and make sure that renter’s insurance has some kind of provision in there to cover damage by pets. That’s a unique scenario so depending on how each policy is written, that could still be an exclusion. Tenant damage is always excluded off of the investor’s property policy. That’s something that is really considered uninsurable by the insurance carrier.
What they look at is they say, okay, you got a couple things, you got security deposits that should help you through that. If you have a situation where your tenant goes sideways, they start to give you trouble, and you’re afraid they’re going to bash the walls up on their way out, there’s cash for keys programs and alternatives to insurance care coverage.
Probably what I would recommend there is not only to put it into your lease, but they have to carry renter’s insurance. You got to enforce it and make sure that the investor is listed as additional interest, not additional insured but additional interest on those renter’s policies. They’re going to be notified prior to that coverage cancelling for nonpayment or any other underwriting issue.
You can also say that hey, part of your renter’s product or policy that you have to purchase has to have coverage for animal damage and see who can structure those policies a little bit. There are carriers out there that provide that. We’re working on one right now called Canine Guard that we should be rolling out probably end of Q1 for 2021 that should have some coverage in there for something like that.
That’s a really unique scenario. That’s probably the best way to do it, it’s to fall back on the renter policy.
Clint: Got it. You have to name yourself as the owner. The owner of the property needs to be named as an additional interest is what you’re saying?
Shawn: Correct. They won’t be additional insured because the main advantage to the renter in that case is the contents coverage. Tornado blows away the property, here’s the investor and made whole again. Your tenant’s belongings are all a loss unless they have that coverage. You’re not an additional insured because you don’t have any ownership interest in their contents, but you can get additional interest and be notified prior to that coverage cancelling.
Clint: How about toxic mold?
Shawn: Most property policies do exclude that completely. That’s one of the things that took the insurance industry by storm back in the 80s and 90s and that’s been an ongoing event. What NREIG did, what we’ve done, what I’ve built into our policies is at least a sub-limit for that. If you’re insuring a dwelling for $100,000, I can’t provide $100,000 of mold coverage but I can provide $15,000 which is a sub-limit assigned to you to help and will meet or exceed lending guidelines every time. If there’s a lender that says you got to have limited mold coverage, that sub-limit will provide enough coverage to those to satisfy them.
Clint: When I build out my portfolio and I have eight properties, do I still need to go and acquire a separate policy for each property, or can I get an umbrella that would cover everything?
Shawn: Umbrella is an overused word in the insurance industry. You don’t necessarily need eight policies for eight locations. Doing that really puts you at the mercy of the underwriter on what they want to assign as a property rate and liability rate for each risk.
What we did is we built this to our [00:13:20] where we accommodate and put every location for an investor on a single schedule, so as their portfolio grows we just add locations to that schedule when it comes time to renew that piece of business. There are 8 locations that grew from 4 or go to 12, that gives us more leverage to negotiate those rates down with the underwriter.
People use blanket forms. It’s not a blanket form, it’s individual limits per location but we’re leveraging that investor’s activities. If they do successful flips throughout that annual term, that’s looked at just as favorably as adding locations to that portfolio.
You put it on a single schedule, one or two insurance companies where there’s property in geo, and we just leverage that to keep them going month over month and keep the rates stable. So no, I wouldn’t do an individual policy per location. There are better alternatives.
Clint: You do one policy (basically) that lists out all of these additional properties. They’re covered onto that policy. Of course, you would structure it to fit the investment itself based upon the nature of the asset. But what about obtaining an umbrella policy on top of that? Recommend it? Is it worth it?
Shawn: Yeah, I’m never going to say no on an umbrella. First, umbrellas don’t do anything to help you on the property coverage. It doesn’t extend to dwelling coverage, loss of rents, anything on that. What it does is it’s cost-effective way if you got additional liability coverage above and beyond whatever your primary premises liability will provide.
In our program, each and every location that’s insured with us gets $1 million per occurrence with a $2 million annual aggregate limit. $2 million is the maximum amount of coverage that would be paid out under the liability policy for slips and falls, personal injuries, wrongful death, over a 12-month period that resets to a new limit every new or every year.
Many investors look at that and go, wow, $1 million per occurrence, $2 million aggregate, and it’s per-location limits, that’s more than I’m ever going to need. But there are other investors that say, wow, that doesn’t seem to be enough. An umbrella is the way that they can acquire additional liability coverage and they can purchase that in the form of an excess liability or umbrella policy. We can go up to $200 million if they need to. On average, when you start to get around 8–10 locations in your portfolio is when investors historically tend to start looking at umbrellas as additional asset protection.
Clint: It sounds as if you’ve already got the umbrella policy really built in and they would want an excess liability. But my understanding is that the difference between the two is that with an umbrella policy, you’re dependent on the underlying policy to cover you.
Let me throw this at you. We got the scenario where it’s an environmental contamination, toxic mold, you cover $15,000 of that. Judgments entered against me for $1 million because the family’s exhibiting all these signs or maybe it was even COVID. You give me $15,000 but I have a $1 million umbrella policy. I’m not covered under that umbrella, correct? Because the underlying policy capped it $15,000. Is that fair to say?
Shawn: The $15,000 mold coverage that I was speaking to had to do with property damage. That would be property coverage. If you have more coverage on your liability, which most don’t, there are pollution “riders” that you can add to that policy. Ours does that but it does it to carbon monoxide. If the tenant were to pass away or get sick from carbon monoxide, they would have up to the policy limits.
In your example, let’s just say that there was a mold rider of that liability policy. If there was $50,000 of mold coverage, then the umbrella could step in and pick up another $50,000. They’re not going to exceed whatever the underlying limit is but it’s not necessarily going to be a declination either. Most umbrellas actually follow the form of the primary or underlying liability. If it’s included on the primary, it’s included on the umbrella. The same goes with the exclusions.
Clint: How about excess liability policy? Is that different?
Shawn: It is. Umbrellas have the ability to go over multiple lines of coverage. Whether you have investment properties, maybe you have professional liabilities, maybe you have commercial auto, and you need that umbrella to encompass several lines of coverage to provide additional liability, that’s what those will do.
Excess liabilities are usually at a bit more cost-effective but they’re limited to go to only one line of coverage. I could put an excess liability policy in place for you, same $200 million if you needed to, but would only extend to your investment properties.
So there are two different options: umbrellas go over multiple lines, excess go to one.
Clint: Got it. The question that comes up a lot, when you’re structuring your policy and you’re using entities, people always do want to know or ask who should be the insured, who’s the additional insured, what is the named additional insured, or additional named insured. It’s confusing especially on the additional insured portion what the differences mean.
Shawn: Again, on the name insured, the first name insured is always going to need to be the entity that purchased the property. If you purchased it in LLC, LLC needs to be listed as the name insured. Each officer of the LLC has coverage underneath the LLC so the individual names don’t have to be listed in addition to it.
Additional insured is usually reserved for liability coverage, and then mortgagee or loss payee is on the property side. Mortgagee and loss payee is typically your lender that lended funds to acquire the property and is named on a claimed checking conjunction with the first named insured. Collectively, after the property [00:18:44] to both names, they decide how the money is divided up to make the repairs.
On the liability side, on the additional insured, what that does is provide additional liability for anybody that’s named. If you and I go into a property together, maybe it’s my LLC, you lended some money on it, you’ll be listed as additional insured. If, God forbid, a slip and fall were to happen and we were both named in that lawsuit, the liability coverage that I’ve purchased extends to you because you’re listed as additional insured.
Clint: What is the additional named insured though? How does that differ? I’ve seen that term [00:19:20] about.
Shawn: It’s not, it’s the same thing.
Clint: All right. It’s just how they want to do it?
Shawn: Yeah. The advantage to the additional insured is just like the additional interest on the renter’s policy. If I’m the first named insured, I’m not paying my bills, and my insurance coverage is in jeopardy of collapsing, you’re notified prior to that happening. You can get in touch with me and say, hey Shawn, pay the insurance and get it taken care of.
Clint: To recap what I’ve heard then is that if you’re a landlord, if you’re buying investment property, you want to have dwelling coverage, you need liability coverage, your tenants should have tenant coverage as well with you named as additional interest—I think is what you said—under their policy, and then you might want to consider putting in place an umbrella policy on top of that if you have more than eight units. Does that fairly sum it up?
Shawn: It does. More than eight units or if you’ve had a bad experience in the past where you got hit for a million dollars on a slip and fall or an injury at the property. You think a million is not enough. There’s no right or wrong answer to when the umbrella should start. It’s up to the individual investor and what helps them sleep at night.
I’ve actually got investors that have thousands of locations with us that go with a single million-dollar, $2 million limit. There’s no umbrella. Then, I’ve got other investment groups that purchase them 5 at a time and they buy a $10 million umbrella in addition to the primary liability for each owning entity for each asset. It’s really up to the investor.
Clint: Why is it the state farms and all states out there when you call them up, why do you think it’s all screwed up? You talk to them, all they tell you is you can’t do that, you can’t do this, you can’t do that. All we can do is write one little policy for you. What’s going on out there?
Shawn: It just depends on what they have. I may do the same thing if they call me and say, hey, I need you for my homeowner’s coverage. It’s really what they specialize in. They are phenomenal companies. I use them as well for my homeowners and my auto, but you’ve got to get with the right type of company and programs that have appetites for these risks.
Not owner occupied, dwellings, or renovation locations with certainly vacant locations are considered high risk by the insurance industry and those household names don’t necessarily have the appetite to write those higher risk locations. We’ll do it from time to time. They feel obligated to do so for their existing client base. But many of them have a limit. If you go above three or four locations, we can’t do it anymore. There’s limitations to liability covers that aren’t favorable to an investor.
It’s just about finding the right niche product for what you’re doing. Again, state farms, those guys are great but not when it comes to investment properties. You need to work with some specialist that knows nothing about this. That’s why the 12 or 15 companies that power our program all do that. They all have an appetite for this. These policies are built specifically for revenue-generating assets, or at least what it’s supposed to be once they become occupied. It’s just about what the carriers had appetites for.
Clint: Got it. I’m going to switch over now. I’m going to bring up my screen. I’m going to go through a scenario with you that has to do with how a lot of people end up structuring their real estate. You should be able to see it here in just a moment. Here we go.
Now, for a lot of individual investors, they’re either going to structure as follows. I talk a lot on my channel about setting up a land trust right there. Here’s a land trust and that land trust in turn would be held by a limited liability company which we’re going to make the beneficiary. In some cases, this is even held by a secondary LLC that’s in Wyoming. And just to throw another wrinkle into this, to make it complicated for you, is that this property wasn’t purchased in the land trust or in that red box LLC.
I bought the property in my own name because I got financing on it. I put 10% down on one of those Freddie-Fannie programs they have out there, I got into this first investment deal, and I want to protect it. I then transferred it into the land trust. I get this set up and now I want to get my insurance into place.
Shawn: Here we go. Once you transfer that property into the land trust, that land trust, the beneficiary, any additional LLC should be listed as the first name insured on your insurance policy.
Clint: Don’t go too fast now. You’re saying that this is a named insured?
Shawn: It is.
Clint: And you can have more than one named insured?
Shawn: Again.
Clint: This is a named insured.
Shawn: Yes. It will all be connected one right after the other.
Clint: Who else would be a named insured on this?
Shawn: I put the Wyoming LLC on there as well.
Clint: Just in case.
Shawn: Yeah. If your loan, if your lender kicks back, what’s going to happen is, your lender is going to push back. They’re going to say, the loan is in your personal name, Clint. Why is the interest in the land trust named? It’s not necessarily on the insurance side, however, to satisfy your lender on the type of loan that you took out, we [00:24:43] also as a named insured. In most instances, that will satisfy your lender enough to move forward and accept the insurance is in place
Clint: Okay. Would we then use the word additional insured in this policy anywhere in this scenario here?
Shawn: The only place I would say put additional insured or who would be listed as additional insured would be your lender.
Clint: Lender, okay. Because there was a scenario I was recently working through with the client. I think he was using Allstate on this deal. They knew that the property was in a land trust, we put it into a land trust, but they only have one named insured, they said. They wouldn’t name him as a named insured. They put the land trust down, so then we have to figure out, we had to name the trust as the additional insured on the policy, and same with the LLC. I wasn’t aware why they wanted that set up that way.
Shawn: Its limitations and probably understanding on how they handle land trust. I’m actually surprised they would even offer coverage. What I’m speaking to is how NREIG does it which is the correct way to do it, and all of our carriers actually agree with that. In our case, it’ll be listed as named insured. They may not all fit on that evidence of insurance right there, on the named insured box, that’s why there was a comment section to list all the named insured that goes with it. Those will probably be first named insured with the lender listed as additional.
Clint: Let’s assume then we put together this scenario where I have built out my real estate portfolio for trust, or LLCs, whatever it is. Now, we write one policy that covers all of these, correct?
Shawn: Correct.
Clint: And then that one policy would name all of these as the named insured?
Shawn: That’s correct.
Clint: So you just keep typing that stuff on to the policy, is what you’re doing?
Shawn: Yeah. Individual evidence since certificates of insurance that outline the property and liability coverage that’s assigned to that location in question, but there’s common ownership among all four of those.
Clint: Absolutely. What you have, typically is a scenario like this, all owned by this, all owned by me.
Shawn: Correct.
Clint: All common ownership. Do you need to see the docs when you’re doing this? What do you need from the client in order to put something like this together for the policy?
Shawn: No. No closing docs, anything like that. We work directly with investors. They just give us the LLC and the name of the locations that are assigned to that LLC; we structure it for them. No, the carriers don’t ask for that. They’re typically okay with just what the insured provides us.
Clint: If I told you I have a land trust, you don’t need to see a copy of the trust. You’ll just take down whatever information I provide?
Shawn: Sure.
Clint: A lot of structure, when we’re setting them up, anonymity is important. We don’t want our information out there in the public records. On title, when we structure these things with a land trust, if we’re using that entity, it’ll be a land trust here and the client will use an LLC. Say this is something advisory services, say it’s real estate advisory services as the trustee of their land trust. Does that impact it? Do you guys even care about that? You’ll just put it in the name of the trust, that’s no big deal.
Shawn: It’s in the name of the trust, but you can list the trustee in the name insured in addition to that actual trust name, so that if they’re both listed owners we know. That’s not any problem at all.
Clint: Got it. And then you mentioned, for people who are involved in flipping real estate, that if I’m out there flipping and here’s a typical scenario, I’ll have a corp set up here for tax purposes on the flips and then I’ll structure each flip through its own separate limited liability company like this.
Shawn: Great idea.
Clint: What do we do?
Shawn: You can list the corp as well as the LLC.
Clint: These are named?
Shawn: Those are both named. And if you had a second location underneath a different LLC, because there’s common ownership in the corp, you could do it on one account.
Clint: One account. If I’m just turning the properties, I just keep one account open and just tell, hey, take another property. You have to close it down every time you’re reinsuring them.
Shawn: No, keep it open. We have a lot of investors that do that. They’ll do one or two flips at a time and they’ll keep their account open. Maybe two months out of the year, there’s nothing on their portfolio at all. We just don’t bill them any amount of money because there’s no coverage. And then when they come in, they acquire the next one, they just add it back to their portfolio.
Clint: Wow. That’s so simple. Do it that way and it speeds up the process, most assuredly when you’re acquiring that protection.
Shawn: Yeah. And even better is we developed a client portal which has been a few years now and we continually enhance it. Some investors would prefer to call and talk to a live CSR or a licensed rep. Hey, add this property and we’ll do that for you. And those other ones like I would do that, I’d log on and do it myself. You can go on and self-serve and add the lead as you need to.
Clint: That’s awesome. I use GEICO for my vehicles. And yeah, whenever you swap out a vehicle, you just go on the app, fill it out, and boom, you’re covered. Just like that.
Shawn: Absolutely. And you can pull proof of coverage right away. You’ve got documents. If you get to the closing table and you’re like, I’ve got everything in line but I forgot my insurance, you can get proof of coverage from us in 5 or 10 minutes. We’re not holding up closing.
Clint: That’s great. Airbnb. In that scenario. It’s going to be similar. A lot of times we’ll have it structured where I put in the properties in this LLC and I’ll run a corporation up here for the business aspect of their Airbnb investing. We enter into what’s called a master lease, where the LLC leases the property to the client’s corporation, and then the client’s corporation deals with the Airbnb tenants that rent out the space. We’re collecting maybe $10,000 here on a monthly basis, we’re paying $6000 back to the LLC that the client owns. How’s that get structured then?
Shawn: You want both the LLC and the corp listed as named insurance. The reason you want that is because property-wise, it is what it is. They both need to be listed on there. God forbid, you’re going to suffer a loss, your LLC and your corp will be listed on that claims check. I’m more concerned with the liability exposure there because if someone were to get injured on site, you can bet your money that whatever attorney is retained to do that, it’s going to look up any kind of ownership interest they can find on an auditor side or anything else and they’re going to name anyone that’s got ownership interest.
We don’t want to leave your LLC exposed, we don’t want to leave the corporation exposed. We would list them both.
Clint: Is there a special type of policy you need with an Airbnb that’s outside of what we’ve already discussed?
Shawn: Not really. The Airbnb industry, just like Uber, took the insurance industry by storm. It was like, wow, how do we respond to this? For the longest time, trying to obtain insurance coverage for an Airbnb was difficult. That’s because the liability exposure was written so differently. It was written like a hotel/motel, which if you’re doing resorts, hotels, and motels, you know that the insurance coverage is not cheap on the liability side.
Since then, because now the insurance industry has got some history there and they can figure out what that loss ratio is and what they can project out, now not so much. Our program in the last 24 months now has the ability to accommodate for Airbnbs, which means the liability coverage as well as the property.
The only real challenge with property coverage was the security measures, making sure that the codes were changed in between each tenant, there were cameras, there was whatever you could do to secure the property, and also the contents coverage because most property policies that are for investors don’t have business personal property or contents covered as an option because you’re not furnishing those homes, so what do you have in there that you would need to cover for. Now these policies actually will allow you to include content coverage. If you got $100,000 of furniture in there, you could provide coverage for it on our form.
Clint: Yeah, so they still had to break it because they had a big party. All right, this is timely. What about COVID? Have you had any claims that have been brought because of that? People haven’t been able to pay on their rents because of COVID. What is the industry response to that and where do you see it going?
Shawn: COVID’s going to be a multi-billion-dollar claim that’s going to drag out over a number years. The thing I can relate to the most is when asbestos or mold hit the market. You knew that right then, you weren’t going to get all those claims. This was going to continue to trickle in year over year and you’re seeing the insurance company begin to respond to that.
Most of the property policies that investors have options to purchase—including ours—have full bacteria and virus exclusions. For our loss of rent type of claim to be triggered, direct physical loss has to happen at the property, which viruses and bacterias don’t do. The property has to be uninhabitable from fire, wind, or something else that left it uninhabitable.
In our space, it was largely a non issue from a claims perspective. Now, it doesn’t take away from the challenges that all of our investors face and still facing and we can talk about TPP and how that’s a little bit different here in just a second. But the insurance industry as a whole is really [00:34:32] that because if those policies weren’t written with those specific exclusions, claims are being paid. The restaurant industry and the hotel industry and some of those larger types of policies that carriers are playing in there are paying some claims on that.
In terms of not being able to collect on rents, then evictions, coming down on the line was the moratorium [00:34:52], we have a product called Tenant Protector Plan. One of those sub-limits that’s included on that coverage is skip rent. Skip rent provides a one-time payment of $1000 to one of our investor clients if one of their tenants passes away mid-lease, if they’re deployed in the military, if they just pack up and leave in the middle of the lease and not tell anyone, or if an eviction has to happen.
What is designed to do is try to minimize what the financial hardship is for our investor while they’re scrambling to find another tenant. Skip rent will pay on COVID if you had already purchased it or did purchase it and then you’ve had something happen since then. It’s limited to a one time pay out of $1000. Or if your rent is $750, you’d be paid $750 the first month, $250 month two if you haven’t found a new tenant.
But it’s unique to us. I don’t know that there’s anybody else in the industry that has that. It’s just something that sounds like a great idea before COVID because I wanted to have that and it’s turned out to be a good idea for our investor clients because it’s helped many of them.
Clint: I would doubt if you covered this, but have you seen this come up? Housing discrimination claims, wrongful terminations and they’re suing. I was talking about here in Washington State, the way it’s structured now, if you’re a landlord and you agreed to show the property to five individuals, you have to choose the first person that you bring out there as the first tenant choice. You have to work through it in order.
If you brought out five people and the first person you find out as unemployed, arrived there on a skateboard, they have no means of paying, you still got to offer it to him. You can’t skip to number three, the person that you want to rent it to under law. They could sue you if you did that. How do the policies handle that now or it’s just something you’re not going to handle because the risk is too high?
Shawn: That was one, again, the insurance industry was like wow, what do we do? And they’re starting to respond. I have built a couple of master policies that we’re rolling out probably in the next couple of months. They’re almost finished for wrongful eviction, tenant discrimination. To try to help with those covered issues, usually, it’ll probably be a $250,000 sub-limit, but still, it’s a lot better than not having any coverage at all. It can be an extension to the liability policy.
You’re also seeing—kind of as a piggyback on that—states that are requiring you to come up with the security deposit alternative. Instead of having to pay cash, we’ve got that now, too, ready to roll out as well. We understand the challenges. It’s probably not the way we’d go about it, but we want to be able to offer every product we can to investor clients to help them along the way. Those are two of those offerings that we’ve responded to and we started to build products for that are coming out in the very near future.
Clint: All right. Anything else that you think that might be important to people that are watching this right now?
Shawn: Wow. The biggest thing for us that we find, we love getting in with investors when they start off and obviously as they succeed, we succeed with them. Challenge your insurance agents. Ask questions. They’re the experts on this matter. Don’t be afraid to say, hey Clint, hey Shawn, whatever, I’ve got some concern here and I want to make sure that I have this covered. Do your homework on a property before you invest in it and decide to acquire it. There’s all kinds of information out there readily available for you to do that.
One of the tools that we use when you were to send a property and say, Shawn, I’m going to purchase 123 Main Street, we pull a whole list of data about that property and the surrounding areas. You can take a look at that and find out what quality of that property is, what you’re going to expect to see from [00:38:32], what you can expect to receive from rental income, what your flood exposure is, your earthquake exposure.
Do your homework and partner with some experts that can actually give you that data to make sure that you know that it’s a property you want to invest in. Maybe there are flood issues, maybe there are losses in the past you weren’t made aware of that can harm your ability to obtain cost effective insurance. Just do your homework and make sure that you work with somebody that could help you along the way before you decide to acquire that property.
Clint: That’s great. In the show notes, I got a link for people that can reach out to you, not you particularly, but to the National Real Estate Insurance Group and get some information. How would that process work? Can they just click on the link and then go and fill out the information?
Shawn: It’s a couple of minutes of a questionnaire. It’s going to ask them basic information about the property, which is going to trigger one of our licensed sales advisors to contact you, to make sure that we can walk through that scenario we were into earlier. What the extra strategy is, what your investment strategy is, what your appetite for risk is. Some people are like, yeah, it’s investing in a good area. I don’t think I need theft coverage. Maybe I’m investing in the Southeast. I know that I’m not going to have water damage coverage because I’m not going to have pipes that freeze and burst. So I can look at basic forms and alternatives.
We will get on the phone, structure that coverage package unique to each investor. A couple of minutes on the questionnaire, probably a 15–20 minute phone call and then going through the proposal process of just hey, here are your options, here’s A, B, C, and D. These are the differences and allow that investor to choose what’s best for them.
Clint: It’s like you said. A lot of people that I know invest remotely. They’re buying properties in different states and they’re not aware of the issues, [00:40:11], repair or things like that. By dealing with someone who is familiar with the area that you’re investing in, who works with renters or landlords, I think you’re going to be better off because you’re going to be able to give us or tell me, as the investor, hey, these are some things you ought to consider because I’ve seen these scenarios before and you want protection against them.
I’ll plug for you guys.
Shawn: I appreciate that, and we’re giving them answers to the test before they take the test, hopefully.
Clint: There you go. Shawn, thanks. It’s been great. You gave us some ton of information. It’s going to help out everybody on here. It went way longer than I thought, but I was so interested in the topic. With that, take care.
Shawn: You too. Good to see you. Take care, yourself.
Clint: Thank you. Bye-bye.
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