Insurance feels, in many ways, to be a necessary evil. Not only is insurance largely required, whether on a car or a property, but it can also seem like paying for nothing until you actually need it. And even then, many of us have experienced the headache of trying to make a claim and get a promised payout.
And then your rates will probably go up. Yikes.
So when should real estate investors bother to make insurance claims? On the one hand, we’d like to get what we’ve been paying for, but there are wise and unwise ways to wield your policy. If you often debate this question, it may be time to reassess your investment. It may not be in a good location, or other issues may be affecting your liability. When your rates go up, your cash flow is impacted. So be mindful!
With that said, here’s how you can best evaluate whether or not to make a claim for your rental property:
If the cost to repair the damage exceeds the deductible and is significant, filing a claim makes sense. Large claims for major incidents like fires, floods, or storms are what insurance is designed for. Minor losses, though? If you’re close to or near your deductible, paying out of pocket is likely wiser. Smaller issues can usually be handled with your emergency fund. While you must replenish your resources, you won’t contend with increased monthly expenses.
Multiple claims, especially within a short period, can cause your insurer to raise rates or even drop your coverage. Be prudent when making claims. Yes, it’s frustrating when you can’t freely access the coverage you’re paying for. However, you want to run the numbers and weigh for yourself which solution is best for your finances in the long run. If you save claims for truly impactful losses, it avoids some of these risks.
Ensure the damage caused is covered under your policy (such as fire, theft, or water damage from burst pipes). If it’s not covered, filing a claim will result in denial, and you may still suffer premium consequences. Oof.
Some policies exclude certain types of damage (floods, earthquakes) unless you have specific riders or separate policies. This is why it’s so important to understand the scope of your coverage. Read the fine print. Get a lawyer to read things over if you must.
Keep your policies up to date and adequate for your needs!
Weigh the immediate cost of repairs against the long-term costs of higher insurance premiums. If a claim is likely to result in a significant rate increase, paying for repairs yourself might be more cost-effective. Remember, rates are already going to go up with inflation. Thankfully, real estate values do, too.
Here’s another consideration: your rates will also go up when your property is more expensive to cover. Be prudent with your renovations. You want a balance of high-quality, durable materials that are also reasonably priced. More expensive to replace means more expensive to insure.
It might be worth it if you’re in a solid real estate market, and a claim helps you maintain or enhance the property’s value. However, avoiding claims that could lower your property’s profitability through higher costs may make more sense in weaker markets. Remember, this affects your profit margins and cash flow – whichever metric you prioritize. Sometimes, it’s worth it to go through insurance. Other times, it’s simply not.
If someone is injured on your property or files a lawsuit against you, filing a claim is almost always advisable. These situations can result in serious financial liability, and insurance can protect you. That said, don’t rely solely on insurance to do this. It’s better to ensure your properties are within a business entity like an LLC. This means anyone who sues you relative to a property can only target the LLC rather than your personal assets.
As an investor, deciding on necessary insurance coverage, policy details, and potential claims is up to you. Do your due diligence.
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