[Disclaimer: We are not accountants, lawyers, or financial advisors, so please consult your own team of professionals about the topics covered in this article.]
The Risks of Becoming Uninsurable When Investing in Rental Properties
Investing in rental properties can be a lucrative path to financial independence, but there are hidden risks that many investors overlook—one of the most significant being the risk of becoming uninsurable. As a property owner, securing insurance is vital to protect your investment, but filing too many claims or even making inquiries can jeopardize your ability to get coverage in the future. Here’s what you need to know to avoid becoming uninsurable and the importance of working with a trusted insurance broker.
The Business of Insurance: Profits Over Payouts
Insurance companies operate as businesses, with the primary goal of making a profit. While their service is essential, the less they pay out in claims, the better their profit margins. This incentive structure can sometimes work against policyholders, especially those who frequently file claims. Most insurance companies are for-profit entities, and many of them are publicly traded. However, it’s important to note that while the vast majority of insurance companies fall into this category, some are non-profit mutual insurance companies, owned by the policyholders themselves.
Understanding Loss Runs Reports
One critical aspect of the insurance industry that property investors must be aware of is the loss runs report. This report is essentially a history of claims filed under a policy, showing both the number of claims and the amounts paid out. Insurance companies use this data to assess the risk of insuring a property or a policyholder. A history of frequent claims, even small ones, can make you appear as a high-risk client, leading to higher premiums or outright denial of coverage.
For example, my sister helps my mom manage her rental properties, and after filing three small claims, she received a letter from her insurance company informing her that they would not be renewing her coverage. She didn’t consult me before filing these claims, but if she had, I would have advised against filing these claims. As a result, she had difficulty finding a replacement policy because other insurance companies saw the claims history on the loss runs report and considered her too risky to insure.
The Hidden Risk of Inquiries
Even if you don’t end up filing a claim, just inquiring about coverage can affect your insurability. Insurance companies often track phone calls and inquiries, and these can be recorded in your file. This means that simply calling to ask about a potential claim, even if you don’t pursue it, can be a ding on your record. It’s a system that seems unfair but is a reality in the insurance business.
For instance, I once consulted our insurance broker after a drunk driver tore through several backyard fences, including ours. The broker advised me not to contact the insurance company because the fences were too old and wouldn’t be covered. I followed his advice and avoided even inquiring about coverage. I later found out that my neighbor called his insurance company about the fences. Even though he was told the same thing—that the fences weren’t covered—the call was recorded, and it’s now part of his insurance history. By consulting my broker first, I avoided this pitfall.
Insurance is Not a Maintenance Policy
It’s crucial to understand that insurance isn’t meant to be a maintenance policy. It’s designed to cover significant losses, such as a complete loss of your property due to a fire. Filing claims for minor issues can lead to non-renewal notices, higher premiums, or becoming uninsurable. As our trusted insurance broker often reminds us, the key is to reserve insurance for major losses and handle smaller issues out-of-pocket whenever possible.
The Value of Working with an Insurance Broker
Working with an experienced insurance broker can be invaluable for rental property investors. Brokers act as intermediaries between you and the insurance companies, helping you navigate complex policies and advising you on the best course of action. Unlike direct agents, brokers aren’t tied to a single company and can offer unbiased advice that’s in your best interest. They can also help you avoid pitfalls like unnecessary claims that could jeopardize your insurability.
In the examples I shared earlier, consulting with a broker saved me from potential headaches. When my sister faced non-renewal after filing multiple claims, she had difficulty finding new coverage. Had she consulted a broker beforehand, she might have been advised to handle those small claims differently. Similarly, when the drunk driver damaged our fence, my broker’s advice helped me avoid a negative mark on my insurance record.
If you’re not working with an insurance broker and want a referral, you can work with our trusted partner, click here for an introduction.
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