Have you ever been caught off guard by the fine print in an insurance policy? Clint Coons, Esq. and Shawn Woedl of National Real Estate Insurance Group uncover the often overlooked details of property insurance that could spell disaster or salvation for your investment portfolio. We dig into the labyrinth of insuring your LLCs and land trusts, as we scrutinize landlord insurance and why it’s a whole different ballgame from your typical homeowner’s policy. From accidents on vacant lots, fentanyl-related incidents, dog bites, and even snakes in the rafters, Shawn’s expertise sheds light on some wild scenarios where the tailored solutions offered by National Real Estate Insurance Group will have you covered.
Shawn Woedl is the President of National Real Estate Insurance Group. He is an industry-recognized speaker and educator with an emphasis on Commercial Property and Premises Liability. He brings over 12 years of professional and personal experience in real estate, business, and insurance to NREIG’s unique, investor-oriented brand.
Highlights/Topics:
- How is landlord insurance different than a homeowner policy?
- Some common policy exclusions you may not know about
- Fentanyl-related claims, toxic mold may be excluded
- Dog bite coverages, breed exclusions, snakes in the rafters!
- Injuries/coverage on vacant land lots
- Beyond primary liability – umbrellas and additional liability coverage
- Coverage for LLCs and land trusts
- “Subject to” property transactions
- Don’t go in ‘blind’ – do your due diligence, or have NREIG do it for you!
- Request a coverage estimate from NREIG with the link below
Resources:
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Tax and Asset Protection Events
Full Episode Transcript:
Clint: Hey, what’s up guys? In this video we’re going to be talking about insurance in business entities. If you’re a real estate investor and you’re wondering, how do I ensure my LLC or my land trust, what are my options? You’re going to find out because I’m going to be interviewing Shawn Woedl of National Real Estate Insurance Group. We’re going to go deep into why insurance is important, but how to use it when you have business entities.
Plus, if you’re a subject-to investor, you’re going to definitely want to watch this video because we’re going to cover exactly, when you’re investing subject-to, how to set up that insurance to make sure your assets are protected. All right, let’s get started.
Shawn, thanks for joining us today. Before we get into the casualty aspects of it, what types of claims are not covered, and what real estate investors really need to be aware of when it comes to insurance, why don’t we start off with briefly describing National Real Estate Insurance Group, what you can do for individual investors. Then we’ll get into landlord insurance and talk about the difference, because there’s a lot of confusion around this, landlord insurance versus standard homeowners insurance.
Shawn: That sounds great. And Clint, thank you so much for having me. Again. It’s a pleasure to be back. Always happy to help you in educating your client base as well.
National Real Estate Insurance Group started back in 2008, actually by accident. My now prior partner and I would go to some different real estate investor associations across Cincinnati, quickly found out that it was a very underserved portion of the market.
A lot of insurance companies were not providing solutions for these investor clients, specifically the residential real estate investors, the guy or girl with 1–4 family rental portfolios. The light bulbs went off and NREIG was born. It’s now the largest and longest-running insurance program in the country for portfolios of residential real estate investment properties.
The uniqueness of our program and how it’s evolved is where we used to focus just on the buy-and-hold long-term investors, we now can do locations through all phases of occupancy. So we’ll take occupieds, vacants, renovations, a combination of the three.
Collectively, we house them on a single schedule for our investor client, and it’s a monthly reporter. It’s pay you go. There are no minimum earned premiums, long-term commitments to the coverage. We pride ourselves on, as unique as the investor client can get with their acquisition strategies, we can accommodate for it.
We’ve now gone up to 20 units per location, ensuring an IRA’s trust, subject-tos if you’re acting as a private lender, lender-placed alternative, modular and mobile homes, vacation rentals and everything in-between. That’s the gist of it. We’re about 125,000–130,000 locations now, again across all 50 states. Majority are still single family buy-and-holds, but we do have fix-and-flips vacants as well.
One of the things that I always say that sets NREIG apart is the experience that the investor, prospect, and clients get with us is very different than you would get with a traditional insurance agency. I’m sure most of your investors know that it can be a painful process. You don’t know what you need to be insured for. You don’t know what the value should be. You’re maybe looking at some quotes and realizing that, wow, it looks like I’m over-insured. That house wouldn’t cost me that much to rebuild.
The experience with NREIG is a little bit different. We assign a licensed sales advisor to each prospect. Obviously, you become a client because you get the client service advisors as well that will actually walk through that with you—what your exit strategy is, what your business model is. We can tailor your insurance correctly based on what your business needs are.
It’s not one-size-fits-all. Investors have options, and we want to make sure that we make those available to those investors, so they can make the best decisions.
Clint: What I always say here, when it comes to entity planning, it’s not a one-size-fits-all approach. That’s why we’ve been working together for many years. You’re basically the only insurance company we refer people to that are real estate investor clients. You know so much, and that’s why we’re going to get in today talking about why insurance is just not enough.
So many people think, hey, all I have to do is go out there and load up on insurance. I see it on BiggerPockets, so-called experts weighing in, don’t set up entities. I see attorneys or CPAs that will talk about this on occasion; they’ll put up videos on YouTube. I just want to grab them and say, hey, where are you getting your information from?
Before we talk about those types of claims that I know people are interested in hearing about that their insurance is not going to cover them if something were to happen, just briefly discuss what is landlord insurance and how does that differ from homeowners?
Shawn: Our program itself is just for that. It’s just for the landlords. It’s for non-owner–occupied investment properties, whether there’s a tenant in there or not. Those properties and those policies are underwritten very differently than a homeowner’s policy is, so they’re higher risk.
Obviously, when you look at insurance companies that play in the homeowner space, a lot of them aren’t playing where we play in the investor space because they have a very different appetite on what they’re comfortable with in terms of risk.
The carriers that we partner with are going to be ones that understand the risk, know that a tenant is probably more likely to burn your house down than what you are as a homeowner.
So they’re underwritten differently. The coverages provided can be very different. The deductible structures can be different. There are some limitations on the policy, but the uniqueness of the policies that we provide and the carriers we work with is there’s a lot more flexibility there as well, so it works both ways.
Homeowners kind of is what it is. This is few riders but one-size-fits-all. We’ve got some flexibility with our carriers to be able to tailor those insurance needs and those products directly for what each investor wants, needs, or is required to have by a lender, so very, very different.
Clint: Can you give me an example of when you mean tailoring a policy?
Shawn: Each state and each region of the country have very different exposures. If you look at a property in (call it) California, those properties have an exposure to earthquakes. Maybe you don’t have that on a property in Cincinnati.
The way NREIG built their programs, the way we did this is we were able to attach different coverages and make those recommendations for those investor clients in certain parts of the country to accommodate for the exposures they have.
Ohio may have a different set, whether it’s flood, whether it’s terrorism, whatever it is. Different parts of the country have different exposures. The same thing with Florida with named windstorm. We have about eight different ancillary products that we can help our investors with to help mitigate those risks, depending on where they’re investing in the country.
Clint: That seems like property coverage there and not necessarily liability coverage, so I understand that. How about on the liability side when it comes to the insurance? What are some of those areas that investors need to know that are typically not covered under a policy? They may think, hey, if this happens on my property, my tenant’s injured and I get sued, my insurance company’s got my back.
Shawn: When we built NREIG and we started it, there were a couple of things that we knew that we were starting to get into the investing space as well. We knew that we didn’t want to have those exclusions because it could be harmful to us potentially being able to continue in business.
One of those is pollution coverage. That’s a big one that we always preach on. A majority of policies that are available to investors on the liability side, pollution coverage is excluded. When you think on the liability side, think of it as carbon monoxide poisoning, so pollutants that would emanate from a heating source inside the home. That is excluded almost everywhere.
But knowing what we know when we started this, and it’s just evolved over the last since 2008, is we didn’t want that. We don’t want our investors to have that. So we include that coverage up to the policy limits.
As you can imagine, if a tenant gets sick or God forbid they pass away from carbon monoxide, that wrongful death lawsuit is going to get extremely expensive very quickly. We don’t want that investor having to have that liability or not sleep at night knowing that they’ve got that exposure.
It’s not just on old houses. That’s such a common misconception. But before I moved to Kansas City, when we moved in right here to KC, I was in Cincinnati. We were renting a house just because we were transitioning. I had a house I was living in, it was built in 2006 with a carbon monoxide leak in the fireplace.
Fortunately, my kids were there, my wife was there, carbon monoxide detectors went off, we got out, fire department came in. Those are things that we don’t want our investors to have as an exposure, which is why we built the forms and policies the way we did. That’s a very important one to consider.
Clint: Okay, so that’s one of them. We’re thinking about pollutants. There’s been a lot of claims and lawsuits stemming from fentanyl. How would that be classified under? If I had an Airbnb tenant, for example, come into my place, the prior tenant left the drugs in there, there’s fentanyl, the baby ingests it and dies, what happens?
Shawn: Wow. That’s a loaded question. It really just depends on the policy. In that situation, if it’s an Airbnb rental, I would have to look at the Airbnb liability policy, which acts as primary to see if there would be coverage there. If there is and that gets exhausted, there’s potential there that a liability policy could pick up additional exposure.
At the very least it could be duty to defense costs, making sure that their investor clients themselves were not at fault. It would really depend on the situation, unfortunately. I hate to give you a gray answer. That’s one thing with liability. It is what it is. It’s not black and white. It’s very gray.
But there is potential. There would be coverage there for that as a pollutant. It specifically lists in the policy that it’s emanating from a heating source inside the home, but that would not necessarily get the insurance company off the hook for the duty to defend.
Clint: Got it. Yeah, because there’s been quite a few claims that have been brought as a result of fentanyl. Another one, too, that I think’s really interesting is toxic mold. There’s actually a courthouse—I believe it was in Virginia—that they had to shut down because of toxic mold poisoning. There’s a lawsuit over it. Can you speak to that?
Shawn: Typically, those are exclusions off of liability policies. On the property policy, we can go back and forth. Our property policies do have limited coverage for mold that would provide some relief for the investor client. On the GL side, those types of exposures are excluded.
Clint: That’s why I think people don’t realize that toxic mold is one of those that it’s hard to prove or disprove at the same time. So it comes up to the jury to determine whether or a person’s affliction is a result of the toxic mold or the 30 years of drug, alcohol, and smoking abuses they’ve ingested into their body, that miraculously had no impact on what they’re suffering from.
Shawn: Exactly.
Clint: And it’s a very common claim. How many times have you seen it, though? I’m curious with your policies.
Shawn: Not often. It’s a handful. And just because I say that it’s not included on or would be typically excluded from a liability policy doesn’t mean the coverage isn’t available. There are policies that you can buy. There are pollution-specific insurance policies that you can buy if you feel like you may have that risk. As long as there are not preexisting conditions that you know about and you’re just going out to buy it if a lender requires it.
In some other areas of the country, some do. But you can always supplement your main coverage with a pollution-type policy, both on the property and the liability side. It’s just usually on a premises or a general liability form that wouldn’t be something that is typically covered. In our program, knock on wood, we haven’t seen many of those, so it’s been a non-event for us. It doesn’t mean it doesn’t happen because It certainly does.
Clint: What are some other things that you want to bring up that aren’t covered that people need to be aware of?
Shawn: I would be very, very careful on dog bite coverage. It’s another big one that we see. It’s almost always going to be sub-limited if there is coverage at all, so think on your premises or your primary insurance liability policy you have. If you’re written the right way, you have a million dollars per occurrence of liability coverage with a $2 million annual aggregate limit.
Think of $2 million as the maximum amount of liability coverage that policy will pay over a 12 month period for any number of losses that may occur. And that resets to a new limit each year at your renewal.
For something like dog bites, it’s typically sub-limited. It won’t give you up to a million dollars per occurrence, but most will do $50,000 or $25,000. Where you have to be careful, though, is that a lot of them have breed exclusions buried in there. Where it used to be 10–15 years ago, there would be 5 or 8 of those vicious breeds which would be excluded. Now there are 20. Some of them that I haven’t heard of. I had to Google to see what they look like.
Clint: […] terrier.
Shawn: Yeah, but apparently they bite a lot of people, which would not be needed if your tenants actually listen to you. If you put it in your lease you can’t have any pit bulls, they move in with poodles, they just obeyed and followed the lease, that would be fine. But we all know that doesn’t happen unless you have eyes on the property constantly. And even if you do, you drive by six months later and they’ve got pit bulls hanging from ropes in the front yard.
That’s why we have the coverage included in our form with no breed exclusions, because we don’t want our investors to have that exposure that maybe they don’t even know they exist through no fault of their own. Tenants can do some questionable things.
Clint: Check this out. When I was young, I worked for my father. People know about this. He’s a landlord. I would go in and whenever a tenant moved out, we would turn the apartment. I’m in one of these buildings one time the tenant vacated, I walked in, and I heard a hissing noise. I looked down to my left and there was a small alligator. It’s probably about three or four feet long. It looked at me and it was hissing, its jaws were coming near me.
Thankfully, I have my bags on and my hammer, because it didn’t make it very far once I got that hammer on it. But I was just wondering. In a situation like that, we’re talking about dogs. Let’s say you have a tenant that has reptiles in their property. They bite people and someone dies as a result of that. Are they covered?
Shawn: It is usually limited to canines, to dogs. The exotic pets, there are standalone liability policies that we can offer that the tenant can buy. That they would list the investor as additional insured to cover those exotic types of pets. If you’re allowing your tenants to have those in your house, you should absolutely make them buy liability coverage that lists you as additional insured. That’s what’s going to happen.
I had a similar story. My dad had just bought a farmhouse probably 20 years ago, and it was one of the old farmhouses in my hometown. It had the old oil tank in the basement. The guy was a woodworker down there. We went down there, we were cleaning the wood out, and same type of thing. We heard a little bit of a hissing noise. We looked up in the rafters above us, and there was about a 12-foot python laying across the rafters.
I always thought it was weird. We were ripping out the walls. I said, we’re in the middle of a field. I see no mice. What’s going on? The first time I went down into the basement, there was an aquarium and a black light on it, but it had been tipped over. I was like, Well, the glass had been broken to the house, to the door. I was like, maybe kids were in there growing marijuana, something like that. No, they had a snake and it got big. That’s why we didn’t have any mice. We looked up and it was a very large snake right above us.
Clint: Did you have a shotgun?
Shawn: No. One of the guys that worked for my dad came in and pulled it out by its tail—it was in the middle of the winter—he threw it in a garbage can, bungee corded it, and threw it out in the field. They just fall asleep right when they get too cold. But yeah, I got out of there. I’m not a fan, but…
Clint: No doubt. That would be unnerving to see that snake over you. I always remember when people are watching, oh I love snakes. That’s fine. You can love snakes, but I know I don’t.
Shawn: Nope, I want nothing to do with them. That thing was right above me and I just like, I got to get out of here right now.
Clint: Yeah. So, what else? What are some other ones?
Shawn: Not so much of exclusions as it is making sure you know what the loss experiences are. You can look at things like tenant discrimination, wrongful eviction. Those are two that we see popping up more often than we used to. And we have solutions for those as well. Whether it’s on a standalone policy that would be annualized or as a part of our program.
Tenant discrimination is one that we see quite a bit. And I say quite a bit, it’s a handful of times, but it’s popping up more to where it can be just between two potential tenants that are vying for the same unit. It can be something as simple as you choose one tenant over the other, and that tenant you didn’t choose has a complaint. If that’s a coverage that you haven’t purchased as a part of your package, then those costs are out of pocket to you to defend that claim and potentially pay if there’s something to it.
Seeing some of that, a wrongful eviction is one that you need to be super careful on. That started to pop up during and after COVID when all the restrictions were raised. That can be included on some general liability policies, on for some larger types of real estate or retail type shops. Even apartment complexes, maybe have some of that in their personal advertising injury coverage. Not typically on a premises policy you would need to purchase that extra or in addition to.
So wrongful eviction is another one to be super careful about. The process following to a T, and making sure that you’re talking with your attorneys and your legal team before you start to make those moves. Make sure you’re doing the right ones, doing it the right way.
Clint: We had a client, had a lot that he was planning to develop but then flip. Some kids went out there on ATVs. They’re just running around on their ATVs, and then crashed. They were injured, so they sued him. In a situation like that, what happened to the raw land in your policy?
Shawn: We cover vacant land, whether it’s to be developed or development has started. In that situation, then yes, coverage can be afforded for that situation to help those injured parties become whole again, even if they’re trespassing and shouldn’t be on that land, unfortunately.
Even if you’ve got fences and signs up saying no trespassing, depending on where you’re at in the country, there’s a pretty good likelihood that you’re going to need insurance. You’re going to want insurance and it’s potentially going to pay. And yes, there would be coverage for that.
Clint: Do insurance companies ever use the fact that you did not post the sign up that says no trespassing as a reason not to insure you?
Shawn: Not that I’ve seen. It’s highly recommended that you do that as another deterrent. There’s nothing in the policy that says that that’s a requirement. At least not in ours. I can’t speak for all of them because there are hundreds of thousands of them out there. But at least in our program, no, that’s not a requirement.
It’s strongly suggested that you do so. You want to make sure you’re mitigating loss any way you can anyway. That’s just another way to do it. But no, it’s not a requirement.
Clint: One thing that a lot of people are not aware of with many insurers is that if you have residential real estate, it’s my understanding with a lot of policies that if I’m going to do a turn or maybe I’m going to upgrade the property, I want to take it and turn it into a duplex or do some construction on it, that the policy I have, the landlord policy, if that property is vacant (I’ve read) for more than 30 days, somebody gets injured while we’re doing some work on it, then I’m not covered.
Shawn: There’s a lot of truth to that. Some of those vacancy provisions or clauses are different by carrier. Many of them are 30 or 60 days. That is the advantage of working with a program like NREIG. Again, the monthly reporter that accommodates for locations through all phases of occupancy, you just have to notify us of the change.
You can do that either if you want to call in one of the client service reps and talk to a live person or do it through our client portal where you can self-serve. It’s just a flip of the switch for us. You change the occupancy, the coverage remains the same. It is notifying the carrier of the actual exposure at the time.
That’s what you want to do. You don’t ever want to give an insurance company a reason to decline a loss, and misrepresentation of material facts is a way to do that. Telling them it’s occupied, it’s been vacant for a while, something happens on site, that’s a way that an insurance company could potentially decline a loss. They don’t always do it, but they could.
Clint: Earlier you talked about high risk and excluded events, I believe, when you’re saying that you guys insure against things such as floods or wind, things like that. In order to obtain that type of insurance, you really have to know your area.
If I’m investing out of state, for instance, let’s say I live in California and I want to invest in Texas, there are issues down in Texas. I invest in Houston that I didn’t even know about until after I started investing down there. How does someone go about figuring it out? Well, maybe I should get this type of coverage. Is that something NREIG would […]?
Shawn: That’s one of the benefits of working with someone like us. Again, going back to at the beginning of the call, you would get set up with an advisor that actually is an expert in that space and say, hey Clint, these are the exposures you have in Houston and these are things you need to think about. If you have a lender, we look at the lending requirements.
Oftentimes, those are going to help you because they have a good idea of the area, but they miss things at times, too, so absolutely. You as the investor have to make the decision on whether you’re okay with self-insuring, meaning not having any insurance coverage and taking that risk, and what you want coverage for.
We use a lot of tools here being a national program, and investors always being turn-and-burn at the last minute, trying to fully underwrite a property like you would get at a Nationwide, State Farm, or any of those companies, which by the way are all phenomenal for what they do. But for investment properties, we use technology quite a bit to give us a leg up.
We pull from different data points from different companies that give us upwards of a thousand data points for each location that could be potentially onboarded into our program, and that helps to drive the conversation with the investor.
It’s not just property exposures. It could be crime. One of the things we look at is a crime score. We can say, hey Clint, this is okay, the property’s fine. But as an A through F score, this location scored a D crime score and this is what this means.
It doesn’t mean it’s in a bad area. It could mean proximity to the highway. It could mean the closest police station is too far away. There are several factors that go into it, and that’s part of the education process that you get with us.
Clint: Got it. What are some of the optional coverages or add-ons that people should be thinking about whenever they take out a policy? Assume they weren’t working with you and they’re working with one of the larger carriers. What should they be thinking about?
Shawn: Let’s start on the liability side. Liability is not one-size-fits-all. It’s really what helps you sleep at night. I can tell you that at the bare minimum, you need to carry a million dollars per occurrence for each location. Anytime you get an offer where they’re bundling limits of liability among your entire portfolio, run. Because that potentially leaves you very exposed if you have one or two bad events at one or two of your locations with the rest of your portfolio being bare for the rest of the term. It makes it very difficult and unaffordable to buy additional coverage as well in the form of an umbrella or excess policy.
So a minimum of a million dollars per occurrence with a $2 million annual aggregate limit for each and every insured location. Then above that, you want to look at defense costs, making sure that your defense costs are outside the limits so it doesn’t eat away from the aggregate or the per occurrence limit. And then you need to look at an umbrella in excess.
Every investor, every conversation I have is different. We have investor clients that have tens of thousands of locations insured with us and they carry a single million dollar, $2 million limit for each and every insured location. We have other investors that will buy properties in bulks of three or five. They buy a $5 million umbrella for each one of their entities.
So it’s whatever helps you sleep at night. Just know that the umbrellas and the excess liabilities are cost-effective ways to garner additional liability coverage above and beyond what your primary liability provides. So if you don’t think that $1 million per occurrence is enough, or maybe you’ve had an experience where it wasn’t, you have those additional liability policies you can purchase up to $200 million per location if you want to. That’s the first one I would look at.
Really have the conversation with your agent on what is the right limit. If they tell you what the exact limit is, they don’t know. You have to answer that question. I can gear you any way I want to and say, hey, Clint, you need to buy this. But it’s what helps you sleep at night. It could be a million, it could be $10 million, it could be $100 million. Know that that’s probably on the liability side is one you would certainly want to look at.
Then depending on what your business model is, whether you have employees, whether you have them running errands, whether you’re a contractor, or the properties under construction, there are all kinds of things that you can look at as factors where you may need to potentially buy some supplementary or standalone coverage to round out your liability exposure.
On the property side, again, a lot of it is driven towards appetite for risk. What you as the investor are okay, self-insuring what you feel is an exposure or not, and some of that is driven by where you’re investing. If you’re in the Houston area, we can talk about special versus basic form.
One of the drivers of special and basic form is water damage coverage. Water damage isn’t flood or backup of sewer and drains. Water damage is coverage for burst pipes. They freeze in the winter and they burst. That’s not happening a lot in Houston.
That, along with a couple of other things we say, Clint, we can look at special form. This is by all means the most comprehensive form you can purchase. But if you’re okay with these three or four exclusions and you’re comfortable with taking on that risk, you can save 20%–25% per year by buying basic form.
Now if you start to invest in Montana or Wyoming, we have a different conversation. So it all depends on where you’re at. We certainly want to look at flood coverage. Wind and hail is going to be included on every policy.
Named windstorms are a little different, though. If you’re in the Houston area and you’re north of I-10, a lot of times investors self-insure the hurricane piece. They’ll buy wind and hail coverage, but exclude named windstorms.
Because Harris County is so massive, by the time it gets north of I-10, those houses are usually built to withstand those winds. I’m not advocating that you do that. I’m saying that a lot of investors choose to. But if their lenders say you have to carry it, you have to.
Earth movement again, like if you’re along the fault line, which if you look at the latest maps almost the entire country could be hit with an earthquake, so seeing a lot of movement there with earth movement.
Terrorism, all these little things that aren’t included on a typical property policy really anywhere you go that we have solutions for, and have those conversations with the investors to help educate them to know what their exposures are and are not.
Clint: Let’s assume that something does happen. Are there issues or things that landlords need to be aware of if they’re going to file a claim, to make sure that they’re preserving everything properly?
Shawn: Absolutely. Obviously getting the information as quickly as possible, doing it safely after a major disaster, sometimes that takes months. But mitigating against further losses is certainly something that your insurance carrier is going to require that you do.
That’s always on the front end of the communication with us. We’re a retail agent, so we don’t adjudicate claims, we don’t settle claims, we have no bearing. We work as an advocate on behalf of our clients to help them navigate through the claims process and communicate with the carrier partners that we have.
One of the first things that we do in the communication is what can you do to mitigate against further loss, and help to give those suggestions? That’s part of the responsibility through the insurance contracts.
Clint: Got it. I want to switch gears now and talk about limited liability companies and land trusts. We’ve been working together for many, many years, and what originally attracted me to NREIG was the fact that you guys pride yourselves on working with investors who utilize the techniques that we recommend, that I use on my own portfolio to protect my assets.
For people, at first there’s a disconnect. They think that if I take a property and I put it into a limited liability company or a land trust, my insurance provider is just going to step right up the plate and say ‘no problem.’ Could you talk about some of the issues people may face with their current carriers when it comes to using LLCs or land trusts, and obtaining the requisite amount of insurance?
Shawn: That’s a big problem from a lot of insurance companies out there, particularly if you bring the policy out in your personal name and a loan is in your personal name. Trying to get your insurance to cover or change or endorse the policy to your LLC or your land trust, a lot of them can’t do it or they choose not to. It could be through their reinsurance contracts where they don’t have the ability to do so.
But really what that would tell you is they’re not investor-focused. Many of them out there are not. Again, going back to how we started it, that’s why we built it the way we did. We were protecting ourselves as well, do the same thing, and do a lot of the same things that you’re teaching.
We again, pride ourselves on being able to help an investor get as creative with their investment strategies and be able to ensure for those. But you’ve got to be with the right insurance company to do that.
Again, going back to not giving an insurance company a reason to ever decline a loss, the first named insured being incorrect on a policy is a very quick way to do that. So think about if a tenant has a slip and falls, breaks their leg at your property, the lawsuit they’re going to file is going to be who they write their rent check out to.
If they’re writing the rent check out to the LLC, but your insurance policy is in your personal name, that creates tension. Because then when you file, when you take the lawsuit, and you hand it over to your insurance company to start the process of helping with the liability claim, that named insured doesn’t match.
That insurance company could look at that and say, there’s no insurable interest here. Our named insured is Clint, it’s not Clint Koon’s LLC. You’re out of luck. It’s just another way an insurance company could potentially get out of paying a loss, which you’re paying insurance premium for a reason. Don’t let them do that.
Clint: What you just said is the entity needs to be listed as the name insured, correct?
Shawn: Correct.
Clint: Now, for some carriers, that means if I have five LLCs, I have to have five separate policies. With you, we can get one policy that would cover all five LLCs, correct?
Shawn: Yes. We set you up as an account. So you have a master account holder and underneath you have sub-accounts. You’d have each LLC listed with individual policy declarations, pages, evidence of insurance and certificates of insurance that are tied to each one of those locations with the LLCs that are associated with it.
By doing that, we’re able to leverage Clint, your entire portfolio size, to keep your property rate and liability rate stable over time. The more leverage you give us, and we can leverage again the underwriter to keep your rate stable. Size of portfolio is one way to do that.
Regardless of how dynamic it is or different, the fact that you’re involved in all of those should give you a competitive advantage in terms of pricing over a new investor that maybe comes in with one or two locations. It’s all leverage play. It makes for ease of use for the investor clients.
Clint: What happens then in a situation, if I kept the policy in my own name because I have a loan, and I don’t want the lender to know that I’ve transferred my real estate into the LLC because I’m concerned about to do on sale clause, then finding out that there’s been a property transfer maybe accelerating.
But I want to name my LLC as the additional insured. I come to you and say, here’s what I need. I want to stay on as a primary, but I want my LLC listed as the additional. When the lender verifies that I have insurance on the property, they still see my name on it and they don’t see my LLC. Can you speak to that?
Shawn: That’s something that’s a very easy add to do. It’s not the preferred, but in that situation where you don’t want the loan call due, and certainly there’s got to be some sensitivity to that, then absolutely. That’s an email to us, hey, add LLC as additional insured. It extends the liability coverage to your LLC in addition to your personal name. So if you’re both named in that lawsuit, coverage would extend to both.
Clint: Perfect. All right, now you don’t have to answer this next one, but I want to know it. One of the issues that has been coming up with subject-to investors. They’re buying the property subject to an existing mortgage. That homeowner, of course, is out of the picture now. I bought the property.
Typically, I’m taking title in a land trust when I buy that, and again for the same reasons that we just discussed, being sensitive to the fact that we don’t want that lender to be alerted as to the fact that there’s a property transfer.
If I would’ve want to go out and insure the property, and the property was originally at a loan under your name—so it’s under Shawn’s name but I’m the owner—is there a way that you can keep his name on the policy if I said hey, since I bought this property from him subject to the existing mortgage, he still has an insurable interest, because if something were to happen on it and the bank came after him, he could still be sued.
Can you keep his name on the policy, because I say hey, the person I bought it from, bought a subject-to, I still need Shawn’s name on there as a primary and I want my LLC or land trust to be an additional. Is that possible?
Shawn: The way you want to set up a subject-to deal—this goes back to one of the first things we really started to specialize in because it was massive in the Cincinnati market where Tim and I started NREIG—was you need to be careful on subject-to.
The way to do that to where the loan doesn’t get called due is we always list the prior homeowner as additional insured on the liability policy. If they are in your example, dragged into a lawsuit, your liability coverage, that’s you as the owner will extend to them. What you don’t want to do is have them listed on the property coverage at all.
You’ve got to remember, on a property claim, what happens? Property burns to the ground, the check’s written out to who? The named insured, and any of the mortgagee, lost payee, additional insured. You don’t want them having any right to that money because it’s not their property, but you do want to extend the liability coverage to them so in the event they’re pulled into that lawsuit, and by the way, it satisfies the lender for what’s needed for the subject-to.
Clint: What I would be looking at if I was buying the property subject-to, I would list my trust as the named insured, and then the seller as the additional insured. When a bank looks at that, they’re going to see a trust there. They’re going to still see that seller’s name on the policy as you just described, so it flies more under the radar screen.
Shawn: That checks the box form, yup. And that’s on the liability only. Do not let that prior homeowner be listed on the property anywhere in the property coverage.
Clint: What you just said right there, I hope the people that listened all the way through the video at this point the video they’re buying subject-to, because that is crucial. It’s been blowing up deals, left and right for investors because lenders are accelerating notes. It was like, I’m going to get out of that 3.25% interest rate loan because the property has been transferred. Now I can put them at 8% because it’s an investment property. It’s higher.
Shawn: There are a couple of things you have to look for, Clint. You have to do it the right way. The amount that you’re insuring the property for has to meet or exceed the existing loan value. That’s the other mistake people make. You’ve got $1.5 million outstanding on it, and you come in and try to ensure it at $800,000. That’s not going to work.
They need to make sure that they see the prior homeowner’s name listed, which we do on the liability, and then the mortgagee clause has to remain the same. That bank has to be listed there.
That’s another mistake that people make. They remove that or they don’t get the right mortgagee clause. Whatever it is, it draws a red flag and draws attention to it. So you’ve got to do it right the first time through. But those are the three things you really need to look for.
Clint: Awesome. Is there anything else that you would say, legal considerations, financial considerations, your expert recommendations you would make as far as insurance for landlords that we’ve been talking about?
Shawn: The one thing I always try to end with, or at least really highly recommended is do your due diligence on these properties. Insurance companies are all—I joke—like big brother. They all like to share data. They all know what the previous experience was with the prior owner, or they can get it very easily.
If you’re going into a property blind and you don’t know what the exposure was prior—maybe there was a frequency of flood losses, or maybe there was arson at the property—all of these things can affect your ability to get and keep cost-effective insurance. They can come in and they can change things after the fact.
Now working with a program like us, again, our carriers don’t do that. We do that due diligence for you through our technology tools that we utilize to snapshot the property. But just know going in what your risk is, know what the surrounding area is, which we’ll do all that for you through just the proposal process. Just to call in and talk to us.
Clint, you call me and say, Shawn, I’m thinking about picking up 123 Main Street. The first thing I’m going to do is gather a little bit of info you have, pull most of it myself, and say here’s what you’ve got, here’s what the exposures are, this is what the surrounding area looks like, go for it.
Or if you do it, this is what you’re looking at, and you’re maybe going to pay a little bit more. Maybe you need to look at higher deductibles. Just know what you’re getting into.
Too many investors make that mistake, especially the first time through where they’re a passive investor, they’re buying in another area of the country, they trust someone, and it doesn’t work out. They think they’ve got a great policy.
They buy something for $600 a year. A month later, the insurance company sends a notice, saying, hey, you didn’t tell us about these three flood claims that happened four years ago. We’ll stay on risk, but now you’re going to pay us five times a premium.
Or here’s your cancellation. Now you need to go find replacement coverage, which now becomes more difficult because you know about those losses. You have to disclose those. So it’s better to do that upfront and just know what you’re getting into.
Not every property is a good property. Not every risk is good. Just know going in what the exposure is, and we can help you with that.
Clint: What you just said right there is really what we talk about a lot. You have to have a team around you. You have to have a legal team. You need a tax and accounting team. You need to have your insurance team.
Before you make that purchase, it’s like you just said, talk to these guys. Maybe there’s something you’re going to get out of that and you realize that this isn’t the best thing for me, because you don’t know what you don’t know, and the experts can help you there so they can help drive your investing.
That’s a great nugget and I hope people understand that. They take advantage of it, they reach out to you, they form a relationship, because I know it’s been great for us and our client.
If they want to get a hold of you, we’re going to put it in the show notes a link to that so that they can reach out to NREIG and hopefully start a relationship. So many of them that we’ve been working with brought their whole portfolios over to you. They get everything insured.
The dashboard is what I think is key. Where you set this thing up is so easy, you can just add and subtract properties. It is a landlord’s dream from the insurance side.
Shawn: Thank you. I appreciate you saying that, and happy to help anybody that comes to us especially through you, Clint. That’s what we’re trying to do. Insurance is the last thing anybody wants to deal with until it’s time to deal with it. We try to make this as seamless and as easy as possible, so they can deal with what they’re better at, and that’s going out and finding deals
Clint: Absolutely. Shawn, thank you.
Shawn: Anytime, Clint. Thank you, sir.
Clint: Take care.
