by Chesky Klein
First time buyers fall into one of three categories. One is the new investor, another is a first time homebuyer (whether multi-family or not) and the third is a first time property buyer. All three will need to insure their properties. What follows are some basic tips on what to look out for, what kind of policies to get, and making sure the right coverage is in place.
First, it is always a good idea to check the rating on a company that you intend to do business with. With regard to an insurance company, you want to look for one that is “A” rated.
Amount of Coverage
The way insurance companies look to insure a property is based on the amount needed to rebuild the house in the event of a complete catastrophe. This amount has nothing to do with market value. For example, you can buy a house in central Manhattan for $5 million, but, if that house were to burn down to the ground, it would only cost you $500,000 to rebuild. Take that same house and put it in upstate New York, you might be able to buy it for $150,000 but the cost to rebuild the house may still be $500,000. The cost of construction may vary slightly depending on the area. In both cases, despite the disparity in market value, the coverage amount would be around $500,000, the amount it would take to rebuild the house.
Replacement Cost vs Actual Cash Value
Replacement cost is the amount it would cost to replace an item if it were brand new, as opposed to actual cash value, which is its current value. For example, you purchase a couch for $2,000 and have used it for 5 years. If you want to sell it, you’ll get about $500 for it. If you don’t have replacement cost and the couch was destroyed in a fire, you are only going to get the current value of $500 from the insurance company. If your policy has replacement cost, the insurance will give you the full amount of $2000, which is what it will cost to buy a brand new couch.
Deductible:
Every insurance policy has a deductible, meaning that the first amount, whatever that deductible may be, is the responsibility of the owner. The balance will be paid by the insurance company. Especially with a first time homeowner who is not necessarily familiar with coverages, someone will try to sell them an insurance policy that has a $5,000 deductible. While the premium will be less expensive, people don’t realize that if you have a claim, the first $5,000 will be your responsibility to pay out-of-pocket. If your damage is small, let’s say a $10,000 loss on the property, you are only going to be getting $5,000 from the insurance company. The balance is up to you.
The preferred amount for a deductible is $1,000 – $2,500.
Liability
As a home or property owner, whether first time or not, you are responsible for maintaining that property. If someone gets hurt on your property, you are responsible, or “liable” for that injury. Most insurance policies will automatically give you liability within their policy, however the amount of liability can differ from company to company and from situation to situation. My recommendation is to take the maximum liability the insurance company will offer, which is usually $1 million. Not all companies offer it, but when they do, it is best to take it.
Mixed Use Property
If someone is looking to purchase a mixed use property or any sort of property, it makes a very big difference on the insurance if the units are going to occupied, going to be vacant, if there is construction going to go on.
Construction/Renovation
Any time someone is purchasing a property and planning on significant renovations to the property, whether it be a home, commercial property, mixed use property or just a two family dwelling which you are planning on renting, a regular insurance property will not provide coverage on the property. You must get a policy which will cover the construction. A regular policy will exclude a loss which occurs in the course of construction. This does not necessarily apply to just a minor paint job or replacing a little bit of sheetrock. This would be for significant renovations being done on the property. However it’s best to discuss this with your insurance broker to know the exact guidelines for your specific insurance policy.
Construction Insurance is a separate insurance and comes in two forms, a builder’s risk for the property portion and a liability policy for the liability portion to cover while you are under construction. If they just purchase a regular homeowner’s policy or a regular property insurance policy and there is a fire while the construction is going on, the insurance company will not pay the claim. The same applies to liability; if someone doing construction on the house is hurt, the insurance company does not have to pay the claim.
This is extremely important if someone is purchasing a property and is planning to renovate it in any way. Discuss with your broker the exact scope of what you will be doing so that the broker can advise you as to what kind of policy is necessary.
Once the construction is finished, then you would purchase a standard insurance policy. You don’t want to have two policies at the same time because, 1) you don’t want to be paying two companies for the same coverage and 2) it will cause a delay in getting a settlement and payment from the insurance companies, so it is best to not have two insurance policies on a property at the same time.
Condos and Co-ops
Condo/ Co-op insurance works very differently. The condo association has what is called a master policy which insures the buildings, the hallways, the plumbing, heating, boiler; the actual structure of the building. However what is inside of the condo unit, such as your personal belongings has to be insured on your own personal policy. In some cases, the personal policy should also cover the internal portion of the condo, such as the kitchen, the bathroom vanities, the flooring, light fixtures, kitchen cabinets, things like that. It sounds simple, but is not necessarily so.
The way condo insurance works, the insurance company pays according to the bylaws of the Association, meaning if the bylaws state that the master insurance policy, the policy that will cover the actual building, agrees to also cover the floors of each individual condo unit, then the master policy will pay for that. If it does not because the bylaws say the each individual owner is required to purchase coverage for such items, then the condo owner’s insurance policy will cover that. It’s very regulated by what the bylaws of the Association say.
Are you a first time home or property owner? Will your coverage and liability limits be sufficient in a crisis or catastrophe?
Chesky Klein
Property & Casualty Insurance Broker
718 Insurance Agency
Phone: 917-767-2474
Email: chesky@718insurance.com
Mendy Lipsker
Mendy Realty Inc. 822 Montgomery St
Brooklyn, NY 11213
Phone: 646.662.5454
email: info@mendyrealty.com
website: mendyrealty.com
