The type of policy available to property owners varies based on the type of building, the building occupancy type and the frequency of the building being occupied.
There are six categories for insuring investment properties, but we will look at only DF1 and DF3.
The DF1 policy is a base policy with limited coverage for the building. It can be used for vacant (rehab/flip), rental or owner occupied properties, but the coverages are generally very limited, usually to:
- Fire and lightning
- Explosion
- Windstorm
- Hail
- Riots
- Smoke damage
The risk to any insurance policy is the exclusions. This list is usually rather lengthy and is “required” reading. It explains in detail the various conditions for which the policies offer no coverage, Some of the common EXCLUSIONS include:
- Flood and water damage
- Frozen pipes
- Roof damage due to sleet or snow
- Falling tree damage
- Ordnance or law and government action
- Earth movement
- Power failure
- Neglect
- War
- Nuclear hazards
- Intentional loss
- Mold
Some policies may allow you to “purchase” these coverages, for a fee.
Generally, a DF1 policy has coverage as actual cash value. In the event of a claim, this means the reconstruction value is calculated and then depreciated for age and condition.
If your goal is to recover what you’ve invested, this may be a reasonable option. If the goal is to have the building rebuilt to its “original” condition, this is not the right policy for you, because the amount reimbursed will not be sufficient to rebuild the building.
Some policies allow reimbursement as an “agreed-upon value” which allows for reimbursement up to the policy value (coverage A), with no depreciation. Your agent needs to explain if this condition exists for you.
The DF3 policy expands upon the coverages of a DF1 policy. Typically a DF3 policy is listed as a comprehensive policy, meaning that any damages are covered unless they are specifically excluded.
One quirk to coverages – MOST policies will not cover damages caused by a tenant or their guests. The reasoning is that you, the owner is responsible for determining who is in your building. The statement was that “you should make sure you have good people in your building, and those people are responsible for their own guests”
A DF3 policy may offer coverage as actual cash value, agreed-upon value, or replacement cost. What you decide to use as the valuation is dependent on several conditions, such as:
- You want the building totally rebuilt in the event of a claim
- The mortgage/finance company requires “full replacement” reconstruction
- You just want to recover your investment
- You want a building rebuilt but it does not have to be the same as the existing building
None of these scenarios is right or wrong. You, the investor, need to decide how you wish to have the building insured.
Typically “occupancy” classifications are listed as: Vacant/flip/rehab, rental, vacation/short-term rental, or residence.
The vacant policy is for a building that is not occupied for 30 days or more, whether it is for sale or being rehabbed. Usually, malicious damage and vandalism coverages can be added to this policy because the building is empty. Typically this is a DF1 policy.
A rental policy is for a building being rented on a lease of longer than 30 days. Typically this is a DF3 policy, buy could be on a DF1 policy, depending on what valuation of the building is being requested, whether there’s any furnishing in the building, and if the building is financed.
The vacation/short-term rental and residence are almost always DF3 due to the furnishings in the building and that you typically want the building completely rebuilt, in the event of a major incident.
There are many optional coverages that are available on both of these policy types that can enhance the properties of the policy, including sewer and water backup, service line coverage, equipment breakdown coverage, loss of rents, building, and ordnance coverage, outbuilding coverage, and theft coverage. Depending on your deductible amount, these coverages could make excellent additions to your insurance policy.
Insuring your building comes down to how you want to “protect” your property, in the event, things go wrong. There is not a “right” policy. The policy is based on your needs and goals.
We are glad to review any policy and discuss what coverages could be right for you. Our goal is to identify any potential gaps in your coverage(s) and determine a way to help you fill those gaps.