Basic, Broad, and Special are the three industry-wide property coverage forms available to investors. There can be up to a 30% difference between these policy forms. Ultimately, it is up to the investor to decide if the additional exclusions associated with the cheaper coverage forms are worth the risk. However, before deciding on a coverage form (basic vs special form), it is essential to understand the policy options and consider more than just the cost difference with your investor clients.
REInsurePro offers Basic or Special Form Coverage options. Broad Form is not offered nearly as often, but we will cover it as well.
Special Form Coverage
As the name may suggest, Special Form is the most comprehensive and in turn, the most expensive coverage form available for purchase. It is considered “All-Risk” coverage, meaning that unless there are specific exclusions listed within the policy, coverage is afforded in the event of a loss. It falls on the insurance company to prove that the policy specifically excludes the peril that caused the loss. There are standard exclusions that come on every Special Form policy, some of which can be purchased as an endorsement or stand-alone policy.
Standard exclusions on Special Form:
- Mold & Fungus
- Wear & Tear
- Sewer & Drain Back-Up
- Earth Movement (including earthquakes and sinkholes)
- Intentional Tenant Damage
The investor should review their exclusions and endorsements pages to be sure of any other exclusions on their policy. Insurers often exclude Theft.
Basic Form Coverage
Basic Form is the second coverage form most carriers (including those in REInsurePro’s Program) offer to investors. This coverage form can save investors approximately 25% – 30% per year (depending on the carrier) but comes with some additional exclusions to those listed above, that the investor will need to consider. These additional exclusions are:
- Falling Objects
- Theft (keep in mind, this is for things you own such as the air conditioning unit and the copper pipes in the wall, not a tenant’s belongings)
- Weight of Ice, Sleet, or Snow
- Water Damage (most known as coverage for frozen and burst pipes)
With Basic Form Coverage, the investor carries the burden of proof that a loss was caused by an included peril.
Broad Form Coverage
Broad Form coverage is the in-between form not often used by investors. The reason for this is that the cost savings are typically not enough for it to make sense to purchase. It mirrors Special Form with the exclusion of Theft. It typically saves investors 10% compared to a Special Form policy. For the additional 10%, it is a better option to purchase Special Form.
Things investors should consider when deciding on Special or Basic Form coverage:
- Is the property in an area where Weight of Ice, Sleet, or Snow and Water Damage are considerable risks? If not, Basic form might be a better option.
- For a flip, will the property still be in the investor’s possession when the temperatures get cold? If not, Basic form might be a better option.
- Is theft coverage a concern? If the location is occupied, that threat may be diminished as theft most often occurs at vacant locations. If the location is a flip or undergoing renovation, will there be enough owned materials and appliances at the location for carrying theft coverage to make sense? Keep in mind that investor policies do NOT cover general contractors’ tools and materials.
The coverage an investor chooses to purchase may vary from location to location. Agents and their investor clients should consider exclusions, appetite for risk, and cost differences when deciding between Basic or Special Form coverage for investment properties.