Insurance Primer for Residential Real Estate Investors

Insurance Primer for Residential Real Estate Investors

Robert Beverly

Contents:
1:  Introduction: Do I Really Need to Know This?
2:  An Investor's View of Insurance
3:  Keep Your Costs Low
4:  Transfer Risk From the Beginning
5:  The Investor's Insurance Armory
6:  Pass Judgement on Insurers
7:  Selected Concepts, Definitions, and Acronyms

Introduction: Do I Really Need to Know This?

This article assumes you own or plan to purchase real estate.  When you own real property and other assets, you should understand how to use insurance to transfer risk away from you (where you do not want it) to large insurance companies.  It also helps to know more than the average person about the types of insurance available to you – and what might or might not be covered.  

This article will focus on residential real estate, or habitational property in the vocabulary of your commercial insurance agent.  This includes single family dwellings, condo units, duplexes, fourplexes, and apartment buildings owned as investments.

If you invest in residential property and are not sure if you should take the time to read this article, ask yourself the following questions:

  1. Would I suffer significant financial loss if my property was destroyed by forces of nature, arson, or accidental fire.
  2. Would I suffer significant financial loss if I had to pay top-rated attorneys to defend me against allegations of wrongful death or bodily injury on my property.  Keep in mind that a lawsuit can take years to resolve, and the cost to defend is not limited by the value of the property that caused the lawsuit.If you can answer “no” to both questions, and do not have any mortgages that require insurance, do not continue reading.  If you answered “yes” only to the second question, feel free to skip the sections about property insurance.  If you answered “yes” to both, you are in the same position as most property investors, and this article is written with you in mind.  Here we will provide basic knowledge and tips, and a taste of more advanced options for insuring your real estate investments.

An Investor's View of Insurance

You own your property; but do you control it?  To some extent you clearly do.  Within the law, you can decide what to build on it, and how to use the improvements you build.  You can decide who is and is not allowed to enter your property.  If you wish to do so, you can bulldoze any buildings and build new ones to suit your purpose.  In owning the property, you gained control over its use.

However, forces of nature have power over your improvements and the land beneath them.  Is your control absolute if a hurricane, a sinkhole, or an earthquake can destroy the investment?  

Governments have jurisdiction over building codes, zoning, and other usage issues.  The county or the state can make it illegal to rebuild your improvements as they were before a loss.  

People who have no interest in your property can exercise control over it.  They can choose to trespass illegally in order to steal or cause damage.  They can set foot on your property, injure themselves, and hire lawyers to go after your assets, even your home and unrelated investments.

To the extent that you insure against loss to your property and incomes, you increase your control over the investment.  Ultimately, an investment is useless if you do not control it; is it any good to own a thing if the ownership or financial benefit can be easily taken away?  Strengthening your control over an investment is one way of strengthening the investment.  Insurance is a means of strengthening your control.

There may be times when the income and building value of a group of coastal properties does not justify insuring them against hurricane and flood, and you might not be able to keep them properly insured.  One simple solution is to have income properties in areas that are unlikely to be affected by the same hurricane and flood events.  You can use geographical diversification to manage risk.  By de-concentrating your exposure to the weather problems of a region, you lessen the effect of a regional catastrophe on your portfolio.  You can be sure that insurance companies diversify their risk across large regions in order to stay solvent.

Above all, remember that insurance is one tool in your tool-chest for managing risk.  Making a study of risk management is important to any investor's success, because selecting the most profitable investments is only half of the investor's skill set.  The rest consists of cutting, offsetting, and mitigating losses.

Keep Your Costs Low

There are two good reasons for knowing how to keep insurance costs low.  The first is obvious: You are an investor, you invest to make money, so spending less money on insurance means you have more money for other things.  

The second reason for knowing how to keep insurance costs low is that you can benefit from the research of highly paid mathematicians without setting foot in an advanced statistics classroom.  Insurance actuaries make six figure incomes, and they mathematically determine the insurance rates that each company must charge to remain profitable.  As you will see, shockingly high insurance premiums often mean that the property you are considering (or already own) is at very high risk for loss.  If you can not afford to lose the property, you can not afford to be cheap about insurance.  Consider all the costs, including insurance, before you decide to buy a property.

Below are some factors that will affect your insurance rates.  They might not change which properties you select for investment, but they should alert you to possible risks and help you determine what coverage you may or may not need.

1. The location you buy in affects insurance rates.

There are several reasons for insurance companies to increase or decrease their rates based on location.  Cities and counties with jurisdiction over your land affect your insurance rates by passing ordinances, zoning laws, building codes, and by building emergency response features.  All of the preceding features of an area can change the frequency of fires, of crime, the damage that a standard building will sustain if a windstorm hits the area, etc.
In most cases, the insurer is looking at a crime report for the area, a report on the distance between fire hydrants, and reports on police and firefighter coverage and response times.  If you want to pay less for insurance, one way to do it is by selecting properties that have good emergency protection, good roads, above average building code standards, and favorable crime rates.

Finally, geographical features will drastically affect rates.  Flood insurance in the Louisiana Flood Plain is more expensive than flood insurance in the Rocky Mountains.  Wind insurance is expensive in Florida, but Earthquake insurance might be included at no extra cost when you buy a “difference in conditions” policy.  Sinkhole insurance is hard to come by in areas that have a lot of sinkhole litigation, or many sinkholes.

2. Your use of the property affects insurance rates.

You might have noticed that insurers charge high rates for vacant buildings, even though they often exclude vandalism, pipes bursting, and other important coverages.  Try to imagine the statistical data that caused them to charge a high premium and apply those exclusions.  

A building is at greater risk of loss if it is not occupied.  Bursting pipes or malfunctioning toilet valves will not be noticed, which is why it is difficult to get coverage for water damage.  Nobody really knows if itinerant persons are living in a vacant house, and children could be playing in neglected appliances and swimming pools, unnoticed by the property owner.  If the property burns and causes the whole block to catch fire, or someone is hurt on the property, you are the most likely party to be held accountable.  Your insurance company is taking on that liability by contract, and they charge for it.  

3. Your loss history and other information about you can affect insurance rates.

When you request an insurance quote, insurance underwriters will sometimes run a C.L.U.E. report.  C.L.U.E. stands for Comprehensive Loss Underwriting Exchange, a database created by Choicepoint.  Companies will also request loss reports or “loss runs” from you, your agent, and other insurance companies.

If you have an unfavorable loss history, insurance companies assume you are bad at managing risk.  That might be unfair; perhaps the natural gas explosion, the fire, and the leaning tree that destroyed your other properties were just a run of bad luck.  But if you are unlucky, it is not profitable to insure you; thus you will either pay more for insurance, or have great difficulty finding insurance.

There is a common axiom in the insurance industry that says “frequency leads to severity.”  If you file many small claims over a period of 5 years, your insurance costs will increase greatly.  Your insurance company is collecting premium in anticipation of “the big one.”  You should also know that every claim you call in costs the insurance company money, even if they do not pay out on your behalf.  One small claim every year is all it takes to make insuring you unprofitable.  The lesson is not that you should never make claims against your insurance, but that insurance is designed for the losses you can not afford to take.

One final note of caution: there are some things that you are obligated to report immediately, or you risk having no insurance for them.  This is usually the case with liability claims.  If someone is hurt on your property, the best practice is to notify your insurance company within the next business day.

4. The building and other improvements affect insurance rates.

The foundation of your building will affect the cost of insurance.  A monolithic slab foundation is usually best for dwellings.  Pilings are sometimes better in high risk flood zones.  Crawlspace is not desirable from an insurance company's point of view, which means you pay more.

The construction of your building drastically affects rates.  The most expensive buildings to insure are, generally speaking, frame or sheet metal.  Masonry construction is less likely to catch fire, and usually does better in windstorms, so the insurance will be cheaper.  Larger commercial buildings use a variety of construction techniques that can affect insurance rates.

The age of a building can affect rates in several ways.  One question is whether the structure is still sound.  Another question is how stringent the building codes were at the time of construction, and whether they were enforced by the local authority.  Beyond the age of the building, companies will consider the age of the building “updates.”  This is insurance-speak for the roof, electrical system, HVAC systems, and plumbing.  Your original 1947 roof membrane (slightly patched) does not invoke nostalgia in your  insurance company.  Look also at the electrical wiring and breaker box, and avoid the term “fuse box” around an insurance underwriter.  Look at the age of the HVAC systems and the plumbing.

If any of the aforementioned elements was updated more than 20 ago, you are either paying a higher rate, or there are companies that would write more coverage for less money if the items above were new.  If you are not sure of the age, order a 4-point inspection (in Florida, make sure it is signed by a licensed electrical contractor).   Forward the inspection to the insurance company or make updates as needed.  If your offer to buy a property is contingent on inspection, the 4-point inspection can be part of that contingency.

Regardless of its age, a building might have added “mitigation features.”  Tell an insurance agent your duplex is built like a fortress, and they will roll their eyes.  Show them documentation that it has hurricane straps, 140 mph impact-rated windows, hurricane shutters, flood vents (depending on flood zone), or a centrally monitored alarm system, and they can probably get a premium reduction.

Finally, there are some everyday things that insurance companies see as “hazards.”  Excellent examples are swimming pools, trampolines, skate-board ramps, and abandoned vehicles and appliances.  The reason all of these unrelated items are “hazards” is because they attract children, and injured children invoke the righteous anger of juries.  Expect to pay more for insurance if you have a swimming pool, and do not be surprised if you are forced to remove any of the other items before you can get an insurance quotation.

5. The cost to rebuild the property will be multiplied against the property insurance rate.  A measure of the liability exposure will be multiplied against the liability insurance rate.

After all this talk about insurance “rates” and “premiums” it is time to point out that they are not the same thing.  Property premiums are determined by multiplying the value to be insured (often the replacement cost) with the company's final rate for that property.  Liability rates use a measurement of the exposure, such as the square footage of a building, number of acres of vacant land, or the number of swimming pools, multiplied against a liability rate for each.  Keeping your rates low does little good if the company has your exposure measured incorrectly; if they have your 2,000 square foot building confused with the 3,500 square foot building next door, your liability premium is 75% higher than it should be.

To determine the amount of property insurance you need, you might want a “cost-approach” appraisal.  In many cases, your insurance company will determine the value of your buildings in the absence of an appraisal.  The replacement cost estimators used by insurance companies are not perfect, and the agents who enter the data do not know everything about your property, so the value may come out either too low or too high.  The best way to make sure you have the correct amount of coverage is to order cost-approach appraisals on the properties you buy.

Remember that materials are going to be more expensive after a large regional catastrophe – roads will be closed, contractors overworked, petroleum more expensive, warehouses exhausted.  If it is important to put the property back as it was before a loss, keep the cost of materials in mind.

Transfer Risk From the Beginning

Cautious stock investors have stop-losses or options in place every time they make a trade.  You have better tools at your disposal; by making sure insurance is in place at closing, you can be sure that you will be indemnified if a fire or other covered loss destroys your property.  That sounds obvious, but every insurance agent has stories of the clients who call them 30-40 days after closing.  Do not be one of these – you are risking a huge part of your investment if you have no insurance on your buildings.  Here is how you can be prepared, and keep up with your insurance even when you have many, many properties.

If you are doing a rush closing, one of the first people to call is your insurance agent.  Unless you are buying a large apartment complex, they can usually have insurance ready in less than 24 hours.  Fax them an appraisal or an inspection, take 5 minutes to talk to them on the phone, and they will figure out the rest.  For a truly last-minute affair, you can invite your insurance agent to the closing, cut a check, and probably get an insurance binder as ownership is transferred.

If you own many properties, there are better ways of preparing to transfer risk to the insurance company.  One way is to buy a policy that covers all of your properties on a schedule.  Even in areas that are notoriously hard to insure, you can do this.  When you have property and liability insurance already in force, it is a simple matter to call your agent, fax them some information about the property and the closing date, and let them worry about the rest.

The Investor's Insurance Armory

This section lists many of the insurance policies that are available as you increase your property holdings.  Some are the basic contracts that all property owners are familiar with, and others are more sophisticated instruments for complex risk problems.  Not all will be useful to every investor in every situation, but you should know what tools are available.

Dwelling policies – A dwelling policy (DP in insurance-speak) can cover a dwelling against direct physical damage, consequential damage, and liability arising from ownership of the dwelling.  There are three common types of dwelling policy: DP-1, DP-2, and DP-3.  Look for the number “3” and the coverage should be decent.  The reason is that the DP-3 covers all property damage except what is specifically excluded (open perils).  Be aware that a DP-1 will leave many things uninsured where you would expect to have coverage; it names a list of “perils” that it will cover, and all others are not covered.  Below is a description of the specific dwelling limits:
ADwelling – The limit of insurance for the building.
BOther Structures – The limit for sheds, gazebos, carports, and other structures that are not part of the main structure.
CPersonal Property – The contents of the building.  If you do not own the contents, you may not have a limit for personal property.
DFair Rental Value – Loss of income in case you can not collect rent after the building burns, blows away, or suffers another covered loss.  Note that if a flood or earthquake causes the loss of income, the dwelling policy will not pay for it.
EAdditional Living Expense – Assuming you live in the building, a coverage that gives you money to rent another dwelling while yours is being repaired.
At your option, the following coverages may be added to a dwelling policy:
Dwelling Liability – This coverage can be added by endorsement and protects you from lawsuits alleging negligence on your part.  It is strictly limited to the insured dwelling. Dwelling liability coverage is an economical way to have some liability protection for a few rental houses, but once you have several properties you should consider a commercial general liability policy (CGL).
Medical Payments – Pays medical expenses for persons injured on your property.  It does not matter if you were at fault.  The limit is usually low, between $1,000 and $5,000.
Theft – Theft is not necessarily included on all dwelling policies.  At issue for investors is not so much the contents, since those usually belong to tenants, but attachments to the building.  The most commonly cited item that can be stolen from a building is an air conditioning unit.
Vandalism and Malicious Mischief – Abbreviated V&MM.  If this coverage is not included on a dwelling quote you receive, seriously consider adding it.  Reading the name, you might think this is just coverage for graffiti and broken windows, but arson is another example of V&MM.  You will find that it is more difficult to get V&MM coverage for a dwelling that is vacant or unoccupied for part of the year.
Water Damage – Coverage may be available for backup of sewers and drains and other types of “water damage” that are not standard property coverage.  This coverage does not replace flood insurance.

Homeowners policies – Investment properties are sometimes insured under the homeowners “form 3” or “form 8,” abbreviated HO-3 and HO-8.  As with dwelling policies, the number “3” means you have coverage for the losses you would expect to be covered for; the HO-8 is much more limited.  An HO-3 for a dwelling rented to others should have better coverage “out of the box” than a dwelling policy, but it still bears watching for the optional coverages listed under the dwelling policy.

The homeowners form 6, or HO-6, covers the contents and improvements to your condo unit.  Do not assume that the condo association's master policy will rebuild your condo exactly as it was, especially if you have nice counter tops, bathrooms, etc.  In Florida, the condo documents affect what the association will and will not rebuild in the event of a loss.  You are always responsible for some part of the loss – usually the appliances, kitchen and bath fixtures, molding, furniture, and anything “from the paint in.”  Make sure you are prepared to pay out of pocket, or you have the insurance.  If you are renting the condo out, an HO-6 may be worth buying for the “fair rental value” coverage.

Flood policies – There is a common misconception about flood insurance, and it sounds like this, “I'm not in a flood zone, so I don't need flood insurance.”  It's Ok, this is how most people think about flood insurance.  Floods can be caused by hurricanes and other storms, and if you do not have flood insurance you are not fully insured against these storms.

In truth, every “zone” is a flood zone.  B, C, and X flood zones, which are not “special flood hazard areas,” still account for 25% of flood claims according to the NFIP.  When you are in a non-required flood zone, it means flood insurance is cheaper.  If $250 per year is going to break your investment in a property, you are already at risk of losing money on the investment; why exacerbate that risk by going bare against flood?  Flood can include overflow of inland or tidal waters, accumulation of water from any source (such as rain, a car running over a fire hydrant, a dam bursting), mudflow, or collapse of the land along a shore resulting in a flood.  With new streets being built and the shape of the land being changed by construction projects, you can not predict where runoff will go 6 months from now.

Commercial Property Policy – The commercial property policy is very similar to the dwelling policy above, but unlike the dwelling policy, you will have to request each limit of insurance explicitly.  This policy is an excellent tool for managing a large number of properties.  You may even be able to put different types of property on the same policy.  

Look for “special form” coverage; if the policy covers “basic perils” or “broad perils,” seriously consider adding an inexpensive “difference in conditions” policy to bring it up to special form or better.  If you elect to only insure basic perils, read enough of the policy so that you know what is an is not covered, and try to mitigate against any losses that would not be covered.

The first coverage most people think of when requesting this policy is the “direct damage” coverage for the buildings and any contents you own.  You should also consider adding loss of income, ordinance or law coverage, and coverage for any other consequential damages you might suffer.  If you are risk averse, look for a separate policy to cover loss of income from flood.  It should not be particularly expensive, and neither your flood policy nor your property policy can cover this loss of income.

Commercial General Liability (CGL) – This is the workhorse of liability policies.  When your investments truly become a business, you will want a commercial general liability policy, and possibly an excess liability policy, over your properties.  Typically, the limit per occurrence will be 1,000,000 for bodily injury and property damage, and there will be some coverage for liability you assume by contract.

Below is a description of the limits you will find on your CGL, and what they cover:
General Aggregate Limit – This is the most the policy will pay in one year (or policy period) for bodily injury, property damage, personal injury, advertising injury, and medical payments, combined.  Think of this as the 'bank account' for these claims on your policy.
Products & Completed Operations Aggregate – The most the policy will pay in one year for claims resulting from your products or your work.  This coverage is often excluded for habitational properties.  As long as you are renting houses and apartments and not producing a product or repairing something for a fee, you will not worry much about this coverage.
Occurrence Limit – The most the policy will pay for one claim of unintentional bodily injury or property damage, either caused by you, your premises, or your business.
Personal and Advertising Injury Limit – The most the policy will pay each time you insult someone, improperly evict them, invade their privacy, falsely arrest or detain them, hurt their reputation, defame their character, copy their trade dress, improperly use their logo, etc., or are accused of doing so. This coverage falls under the general aggregate limit.
Fire Damage – Also called “damage to premises rented to you,” this is the most the company will pay for fire damage to a facility that you rent for your business. This coverage falls under the general aggregate limit.
Medical Payments – The most the company will pay toward medical bills for someone injured by your business, when you are not legally obligated to pay said bills.  This is basically 'good neighbor' coverage, and helps to avoid bigger claims when someone is injured. This coverage falls under the general aggregate limit.

The cost of the general liability policy for your investment properties will most likely be based on the air-conditioned square footage of all properties times the rate determined by your insurance company, plus the number of swimming pools at all properties multiplied by a much higher rate.  Do not be surprised if it costs an extra $150 to insure a dwelling with a pool in the back yard; find out the cost first and charge that much more rent.

Umbrella and Excess Liability – Most of the policies that you will buy to increase your liability limits will actually be “excess liability” policies.  Umbrella policies and excess liability policies both sit on top of other policies, making the limits higher.  However, an umbrella policy can provide broader coverage than the policies under it.

Umbrella and excess liability policies have the advantage of being less expensive than the “underlying” policies.  If you have enough assets that you are a target for litigation, it will be cheaper to achieve high limits using an excess liability policy over the minimum underlying liability limits.

Vacant dwelling – Vacant dwellings can be covered either on dwelling policies or commercial property policies.  The liability portion can be endorsed onto a dwelling policy or added to a general liability policy.  Very often you will find that it is difficult to get full coverage.  Vandalism and malicious mischief (including arson and other “total loss” crimes) and leaking pipes or fire sprinklers are two of the more difficult coverages to find, but they are insurable.

Builders Risk – This is a policy designed to cover a property that is under construction or renovation.  Often your general contractor will secure a policy for you, but if you do your own renovations you probably already have a builders risk policy in force.  Some advantages of a builder's risk policy are that the coverage is broader than other property policies, it is better suited to properties under construction, and the premium is usually less than other policies covering the same property.  One reason for the lower premium is that there is only a short period of time when the total value of the property is there, and materials are typically delivered as the need for them arises.  A proper builders risk policy should cover theft of building materials.

Owners and Contractor's Protective Liability (OCP) – Among the things that is not covered under a general liability policy is what is called vicarious liability.  Vicarious liability refers to a situation where someone else causes damage, but you are legally obligated to pay for it.  A relevant example would be if you hired a general contractor to clear land for you, and his crew injured a passer by while working on your property.  It is your fault the contractor was there, so the jury says either you or your insurance company will pay.

Difference in Conditions – A difference in conditions policy supplements another policy.  For that reason it should be much less expensive unless it adds a major peril such as windstorm.  This type of policy is commonly used to add direct damage from wind and earthquake, and loss of income (or other consequential damage) from flood, wind and earthquake.  It can also be used to turn a DP-1 into a DP-3, or a “basic form” commercial property policy into a superior “special form” commercial property policy.

Wind-only – In states that have problems with hurricanes and other windstorms, there are wind-only policies.  They are usually expensive, and in certain areas you might have to purchase them through a state program.  The deductible for wind coverage is often a percent of the total value of all property insured under the policy.

Deductible buy-back – If you have a policy with a very high deductible for wind, earthquake, or any other peril, you can reduce the deductible using a deductible buy-back policy.  Let's say your deductible is $1,000,000.  Using a deductible buy-back policy with a limit of $900,000, you can reduce your deductible to $100,000.

Excess Flood – The National Flood Insurance Program, which provides most of the flood coverage for buildings in the U.S., has maximum limits it will insure to.  Those limits are $250,000 for single family dwellings, $250,000 per unit for multifamily dwellings, apartments, or condominiums, and $500,000 for commercial properties.  If you have a $1,000,000 dwelling on the beach, you have the option of buying a $750,000 excess flood policy to fully insure against flood.  An excess flood policy can be very expensive for high-risk properties, but ask you agent to check several companies.  Because of the limited data available to excess flood insurers, rates vary substantially from company to company.

Stop-loss Insurance – For very large portfolios, it is sometimes useful to self-insure.  Self-insured and uninsured are very different things; here we are talking about setting aside funds to repair damages and recover from storms or other catastrophes.  At some point, a single investor's funds might not be enough to recover from a true catastrophe, and that is where stop-loss insurance comes in.  You pay everything up to a certain point, and if the losses accumulate past that point in a given period of time, the stop-loss pays up to its limit over and above the losses you have already paid.

Risk Retention Groups – A network of investors already has some of the tools that insurance companies use to spread risk over large areas and many property owners.  With enough property owners, a risk retention group can be formed under the supervision of licensed insurance professionals, and that group can provide insurance to the investor-owners of the group.  One benefit of a risk retention group is that if losses are kept under control, the group members may be entitled to dividends based on excess profits earned by the group.  Risk retention groups can be set up for property or liability exposures.

Captive Insurance Companies – For large investors, corporations, and institutions, captives are a way of owning your own insurance company.  Typically there is a parent company that owns the “captive” insurance company, and the company provides insurance for all of the subsidiaries.  There are many variations of captives, and they can be formed by groups, but they are generally not feasible until insurance premiums are in the millions of dollars.

Pass Judgement on Insurers

There are times when one insurance company is better than another because it is more financially stable.  An insurance agent will usually be fairly quite about this.  Why?  Because if they advised you to buy from an A+ company instead of a B+ company, and the A+ company was the one that was liquidated after a nasty hurricane season, you would not be happy with them.  A+ rated companies do die, and even B- and lower companies survive, bounce back, and become higher rated companies.

There are several rating bureaus that follow insurance companies.  One of the most respected in the insurance industry is A. M. Best.  You can look up the rating of any company that has a Best rating by going to www.ambest.com and creating a free account.

The most important things to consider about an insurance company are claims service, attitude toward your geographic area and your industry (are the non-renewing accounts like yours, or expanding their capacity?), and of course, whether or not they have enough money to stay in business.  There is nothing wrong with a B rated or unrated company, but you might want to look deeper.

Selected Concepts, Definitions, and Acronyms

Below is a list of relevant property-related problems, insurance concepts, and common abbreviations. The list is not comprehensive.

All Other Perils (AOP) – A term typically used when talking about deductibles, when there might be one deductible for wind or earthquake, but another for fire, theft, vandalism, falling objects, etc.  Ex: “The deductible is 5% of the total insured value for wind & hail, and $1,000 for AOP.”

Consequential Damage – Includes loss of income, loss arising out of an ordinance or law, additional living expense, loss of leasehold interest, and other damage that comes as a consequence of a direct physical loss.  It is also called indirect damage.  Consequential damages are among the most commonly overlooked insurance coverages, yet they can easily exceed the cost to repair direct damage.

Direct Physical Damage – Direct damage means any physical force, whether electrical, man-made, falling from space, etc.  Most “catastrophe” losses, such as from hurricane, fall into this category.  Some perils are not included on standard property policies, but can be added through endorsements or separate policies; examples are earthquake and flood.

Loss of Income – A consequential loss caused by the inability to collect rents or other income from a property after a direct loss.  Insurance for loss of income is provided on a property insurance policy. There is no coverage for loss of income unless the policy specifies a limit.  Dwelling policies often include this coverage, but you will have to ask for it on a commercial property policy.

Ordinance or Law – A type of consequential loss arising from changes to building codes, ordinances, or other laws.  If your building is grandfathered into older building codes or flood zones, you might want to buy “ordinance or law” coverage to make up the difference between building to 1940's standards and building to today's.  That could mean raising the building on 10' pilings, adding impact resistant windows, building a larger living area, and any number of other improvements.  The loss you would realize from changes to building codes or other ordinances or laws can usually be insured against, but you will pay a higher premium if the building is long out of code.

Peril – A cause of potential loss, such as fire, flood, or windstorm.

Proximate Cause – An insurance concept that says the peril that ultimately started the loss is the one responsible. You might think “fire” destroyed your building, when in fact “an arsonist” destroyed your building by means of fire. It does not matter in this case whether “fire” is a covered peril, because only have coverage under your policy if the proximate cause is a covered cause of loss.

Total Insured Value (TIV) – A term used to specify the total value of property insured on the policy. It is most often used when a percentage deductible applies to the total value of the property, as opposed to a percentage of the loss.  For example, a 5% wind deductible would be applied to the entire $1,000,000 of property insured, not the the $100,000 loss, so only $50,000 would be paid.