Episode Transcript

Welcome to Episode Four of Season Four of the Growing Empires show. Today I’m here with my guest, Ryan Daubert, senior partner at Daubert, Shannon & Associates. And we’re going to talk about how to protect yourself with the proper insurance policies. So stay tuned.

00:17

Welcome to Growing Empires hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.

00:35

So welcome, Ryan to the Growing Empires show. So glad that you’re here. Yeah. Thanks for having me. Let’s kick off this episode about you sharing a little bit about the work that you’re doing now and how you got into the insurance industry? Sure. Yeah, absolutely. So I founded the agency – Daubert, Shannon & Associates, we’re an agency that focuses on working with real estate investors, how I got into the insurance industry, so right when I graduated college, I took a job at ADP, the payroll company, in an insurance sales role, and at that time, was specifically focused on workers compensation insurance for businesses. So I did that for about a year and definitely kind of got the feeling that I could do a little bit better on my own, as far as providing our clients with a better kind of experience. So going through the sales process and offering what I would consider to be a better suite of products. So about after a year, I kind of went out on my own and started Daubert, Shannon & Associates from scratch, didn’t really have any clients to speak of for about a year. And, you know, obviously, since then we’ve done pretty well. But really, after about two or three years I became a real estate investor myself and kind of developed a knack for working with real estate investors. And that’s kind of where we tailor our business. So when we started looking at carrier appointments, we were focused on those that were most competitive for real estate investors, and, you know, property management companies, realtors, and kind of went from there. And that’s kind of where we’re at today. Fantastic. So this season, we’re talking about risk mitigation. And you know, what a better way to mitigate risk than by protecting yourself with a proper insurance policy. So today, we’re going to talk all about insurance policies for real estate investors. And I’ve asked Ryan to join me and share his wealth of knowledge on this topic. So today, we’re going to discuss what is the difference between insurance for personal home and your investment property? What additional liability coverages are available above the standard policy that we should think about? What rider or additional coverage options should be considered? What’s the most common misconception or mistake that investors make when obtaining policies? And what should you avoid to prevent coverage denial? So why don’t we jump right in and get started.

02:49

So tell me a little bit about the difference between a personal policy for a home that you live in and a policy for your investment property? What are the main differences? Yeah, so depending on the property, they can be pretty closely related or drastically different. So generally, when we’re looking at properties, we want to determine if it’s going to be on a quote unquote, commercial foreign policy or more on the personal line spectrum. So generally speaking, anything that’s one to four units, all residential, can be placed on a personal lines policy. And what I mean by that not like it’s a homeowner’s policy, where you’re living it just on the personal line spectrum for insurance. So it’s a different policy form. Anything that’s mixed used so say you have a two unit property – the first floor is a commercial tenant say it’s a hair salon, and the second floor is an apartment. That’s a mixed usage property that will always be placed on a commercial policy form. Generally, anything that’s three units plus can usually be placed on a commercial policy form, anything that’s greater than four units, is almost always going to be on a commercial policy form. So the kind of difference is, so say, it’s that one to four unit property that’s going to be in a quote unquote, personal lines form, that’s going to be what’s called a dwelling fire product. Dwelling fire products look almost identical to a homeowner’s policy, there’s coverage for the home itself, any type of, and also your liability is going to be included on there as well. And they almost look identical. The main difference between that policy form between a personal and personal line rental property policy, and then a homeowner’s is there’s generally never going to be any contents coverage on the rental property. Unless you’re furnishing it, there really isn’t personal property coverage. And you obviously don’t have an insurable interest in your tenants personal property that’s covered by their renter’s insurance policy if they were to purchase one. And then the only real other differences on a homeowner’s policy product you’ll have what’s called loss of use, which is if you say your home suffers a fire and you can’t live there for two months why it’s getting repaired, they carrier will pay for you to go buy groceries, clothing and then put you up in temporary housing or hotel room until it’s remediated. On the rental property side on the personal lines form that becomes loss of rents. So if your tenant is displaced for two months by fire, you’ll continue to receive your rent from the carrier as if the tenant never left. So what that allows you to do is continue to make your mortgage payments, banks usually actually require that line of coverage is you can kind of go on as business as usual with a minimal interruption, kind of switching gears to commercial lines, anything that’s again mixed usage, or larger than four units or larger, that’s almost always going to be in that commercial lines product. And then what a commercial lines product is they’re called business owners policies. Generally, there’s a little bit more coverages on those type of products, there’s a lot more stuff that’s built in that doesn’t need to be added by endorsement. And then there’s a lot of kind of what we call boilerplate coverages that, you know, you’ll never really probably use, like, for instance, if someone would pay you with a counterfeit bill, or you can technically claim that on a commercial policy, but the loss would be too low wouldn’t be advantageous to do so. But they’re just a little bit more comprehensive, generally a little bit more expensive, then a personal lines product, but the coverage is a little bit more comprehensive.

06:24

The episode will continue in just a moment.

06:28

To keep your real estate investments working hard at growing passive income, you need to have the right resources to help reduce risk and exposure to over taxation. Having the right attorney, tax advisor and insurance protection is critical to assuring your investments are safeguarded and set up for success. Knowing tax laws and legal regulations while securing experts who care and understand your goals will allow you to prosper. If you need help finding the right resources to mitigate risk and maximize your tax advantages, let’s talk. I can help you know what to look for and how to scrutinize new or existing resources that you have the right fit and get the best protection. Schedule a call with me today and I’ll listen to your goals and make recommendations. To get even more information that will make you a smarter real estate investor, be sure to sign up for the Growing Empires Advisor Guide at GrowingEmpires.com, that’s GrowingEmpires.com, and I’ll help you get the right resources to protect your investments and your future.

07:22

So what additional liability coverages are available for an investor above like whatever is included in the standard policy? Yeah, so there’s a number of endorsements that can be made on to either a personal lines product or a commercial lines product. So your liability coverage itself, so if anyone slips and falls, it’s always going to be included on your base policy. But there are other endorsements for additional property coverage that you can place on to that product. So one that’s fairly popular in this area is sinkhole coverage. So if there’s a sinkhole that damages your home itself, that’s something that you can add an endorsement to cover depending on where you are, it might make sense to do that or not. That’s kind of something we look at, depending on where the property is. Also, one thing to keep in mind with sinkhole coverage, too, if you own 100 acres, and then the middle of the you know, the woods on a property a sinkhole happens, that’s not something you can claim – it has to damage the home itself. So it has to be pretty close to the foundation. So that’s one pretty popular endorsement. Another one which is coming up more and more as you know, properties, especially in urban areas are getting older and older is service line coverage, which extends coverage to the service line, any utility line, your sewer line, your water line, anything that’s buried out to where it connects to the street. So generally, unless that’s added by endorsement of personal lines product or a commercial lines product right at the area where it leaves the foundation and moves out and connects to the street, that all wouldn’t be covered under standard insurance policy. So service line coverage is something we’re starting to see a lot more. And probably the two other key endorsements that we see are going to be water backup coverage, which covers in case something goes wrong with your sewer line and water backs up or sewage backs up into the home generally that’s also excluded under standard policy unless that’s added by endorsement. And then the last one, which is probably my favorite out of this group is what’s called Equipment Breakdown coverage. So Equipment Breakdown coverage functions kind of like a home warranty. Whereas if any of the major home systems, so and mainly a heating and cooling system is probably the most common, breaks down for any mechanical reason the endorsement usually has a separate $500 deductible, and any repair replacement above that amount would be covered. So this is pretty popular especially for new investors. Because you know, if their portfolio is small, and then you know, they have a $5,000 heating system repair, you know, that can be quite a hit to take kind of your first rental property. So for about, you know, depending on the carrier – $20 to $30 a year with a $500 deductible – you can add that Equipment Breakdown, which can help mitigate that risk. And so those are probably the four most common, and certainly the ones that we probably recommend the most. And then the only other thing to think about when you’re talking about endorsements is at scale, some of these endorsements might not make sense to add. But if you have 100 rental properties, and you’re talking about adding service line coverage to each one at, you know, say $50. At a certain point, it might make sense to self insure and essentially think that you’re pocketing that $50 every year. So should you have to make a five or $10,000 service repair. As long as you’re not having one or two every year, you can usually pull that the funds for that repair from savings. So that’s definitely a conversation we’ll have with our clients when we’re going through their portfolios, and, you know, we make recommendations on what they should or shouldn’t carry as far as optional coverages, that’s probably the number one thing we look at is, is scale. And then, you know, risk tolerance. Some clients are definitely more conservative, and, you know, they don’t want to carry essentially over insure their properties. And they’re okay with higher deductibles, which, you know, a lot of cases make sense. You know, that’s kind of a conversation we’ll have as well. All right. I assume, though, that, you know, most people wouldn’t know about a lot of these coverages. Right. So is that something that when somebody is coming to you for insurance, they, you know, you kind of sit down with them and talk to them through like, some of these options and whether it makes sense for their situation or not? Yeah, absolutely. And, you know, kind of number one being investor myself and focusing on this market, I feel we have a, probably a greater knowledge and a lot of agencies out there as far as what investors need, and not only what they need, what they should have, as well. So yeah, those are conversations that we have with every client to make sure that we’re making suitable recommendations, and a lot of things that they might not even thought of, or thought that, you know, insurance could cover like that Equipment Breakdown coverage, you know, probably 90% of people that we talk with don’t even know that that’s an available option, or they’ve never been told about it before. So yeah, we absolutely have those conversations, you know, from a business standpoint, we want to make sure we’re making suitable recommendations and appropriate recommendations. So every client that we chat with will kind of go through kind of a what we call like a needs assessment.

12:27

Okay, and what about just strictly liability coverage, like, you know, some people purchase in an LLC to kind of shield some of that extra liability. But what do you recommend for investors that maybe financially it doesn’t make sense to purchase in an LLC, but they want like additional liability coverage above and beyond what the standard policy covers? Sure. So on a personal lines policy form, generally, the max liability a carrier will allow, with some exceptions, is roughly $500,000 per occurrence. But a commercial line, the sky is pretty much a limit – standard policies are going to come with at least a million or 2 million. We’ll always try to recommend, again, depending on the client’s their needs, essentially, typically what we call an umbrella product. So any personal lines policies can be placed on an umbrella liability or listed as an additional location on an umbrella insurance product. Umbrella products are sold in increments of 1 million up to 100 million, if your heart desired it that generally most common probably being one to 2 million. What an umbrella product is it’s additional liability that would sit on top of your rental properties that are considered on a personal lines form. So one to four unit properties essentially, and also sit on top of home and auto insurance. Sometimes investors get hyper focused on, you know, making sure they have, you know, their LLC set up and you know, it’s impenetrable from a liability standpoint, but they don’t really consider what would happen if they get sued personally. It’s actually pretty rare to see a six figure claim coming from the rental property side, generally, there have to be some a pretty large degree of negligence on the owners side to create a situation where someone can get hurt and suffered six figures worth of damage or more. But it’s actually very, very common from a personal line side. So think if you’re just driving down the road, and you’re not paying attention, you blow through red light, and God forbid you seriously injure or kill somebody. There’s a very specific mathematical calculation of what that’s gonna cost you essentially. And it’s what’s insurance, we call it human life value, which is essentially that person’s annual salary to age 65. So say that person was 50 years old and making $100,000 a year and God forbid you killed that person in an auto accident that can be 1.5 million in liability. Now, what can happen if you’re sued personally, even if you did everything right, and you have your rental properties and LLCs – those are just business assets, it’s very difficult for a creditor to come after your primary home, you know, no court really wants to make you homeless. But if you just have the bunch of rental properties in an LLC, and you’re not living in one, those are just business assets and it’s a lot easier for creditors to come after. So when we structure an umbrella liability product, we take that into consideration and we’ll make it sit on top of your home/auto so to protect what we call kind of backdoor liability, and then list your rental properties as well. Now typically umbrella products, if it was just on home and auto, they’re all pretty homogeneously, priced, you know, roughly $150 a year for a million. And to add rental properties on that maybe each unit could go, you know, maybe anywhere from five to $10 in addition to that base policy at that 150. So it’s really quite a bit of coverage and can even if for investors that have their properties in LLCs, it’s usually a good idea to kind of structure an umbrella product just to protect from what we call it again, that backdoor liability. Great information – that’s really, really helpful. Make sure you tune in next week when Ryan and I will continue with part two of our insurance for investment property segment. Until next time, take care.

16:15

For more information about how Jennifer can help you plan, develop, and manage a strong real estate investment portfolio, visit GrowingEmpires.com.

Contact for Ryan Daubert:

Phone: 610-440-1524

Email: ryan@dsainsuranceagency.com