MYTH: A claim made by the property’s previous owner shouldn’t affect the subsequent owner’s insurance rate.
How great would this be? Not having to pay for the “sins” of the past owner(s). Well, up until about 5 years ago, this was the case. Anyone could go and purchase a new investment property without having to research or provide any details regarding past insurance claims to the new insurance company. Unfortunately, insurance carriers are all becoming like “Big Brother” and are sharing claim history information. It is now on the potential buyer to complete their due diligence and provide accurate loss information to insurers for the past three to five years, depending on the specific carrier requirements.
Let’s Take a Look
A new investor is picking up their first property. They call their agent, get a quote, and bind coverage prior to closing. The investor thinks they’re all squared away, until 30 days down the road, they receive a notice from their insurance carrier stating either:
- The policy is being cancelled because previous loss history was not disclosed.
- The insurer will agree to stay on risk, but the investor’s annual premium is increasing from $500 to $1,500 due to the increased exposure.
The point of this example being; every buyer should do their due diligence prior to purchasing any property or location to know exactly what is being purchased.
How can my investor client obtain prior insurance loss history on a location they are considering purchasing?
If they are purchasing the property from the current homeowner, they will need to obtain a C.L.U.E. (Comprehensive Loss Underwriting Exchange) report. One of these can be purchased from LexisNexis – a data collection company – for $10 to $12 per report. This report will provide the prior insurance claims filed at the property, the type of claim and the approximate total payout.
If your investor client is purchasing the property from someone who is already using it as an investment property, they need to ask the seller to obtain a Loss Run report from the insurance carrier on risk. The seller will have to get this report from their insurance agent or current insurance carrier. This typically takes two to four days to receive. This report shows the same loss information as a C.L.U.E. report and provides the claim history of the property and an idea of what can be expected moving forward.
Things to look for on C.L.U.E. and Loss Run reports:
- The frequency and severity of losses are looked at as the same by most carriers. Several nickel-and-dime type losses or one catastrophic loss could both be seen as high risk.
- Controllable losses are looked at very differently than “Acts of God.” Meaning fires, (specifically tenant-caused), theft, and water damage are looked upon negatively as compared to a wind/hail loss or even a lightning strike.
- Investors should look carefully at locations that have suffered flood losses. These locations are prone to suffering these types of losses again. Once a flood occurs and a claim is paid, it is both difficult and expensive to obtain this coverage in the future. It also makes it much more difficult to sell the property in the future if there is a history of flood losses.
- If liability losses are present, your investor client should look at the cause of loss and consider if the same tenant is living at the property who caused the claim.
These are just a few of the items investors need to strongly consider when reviewing the claim history at a location in question. If your investor client is still sold on purchasing a location that has some negative loss history but wants to keep coverage costs affordable, consider the following: A higher deductible for the entire policy or at least for the perils that have been loss issues for the past owner. For example, if frozen and burst pipes have been an issue in the past, suggest a higher deductible for that specific peril. If the past loss had a payout of $8,000 then suggest a $10,000 deductible for that peril. This will offset the risk and “cover up” the loss altogether. Make it clear to your clients that they should not jeopardize their business by taking on a higher deductible than what they can stomach as an owner. Your investor clients are better off looking for another property to purchase or paying the higher insurance premium.
To report an incident or view our claims process, click here.
