Real Property Insurance

Real Property Insurance

Real Property Insurance

Insurance plays an important role in property ownership as a tool for managing the risks associated with ownership as well as reinforcing the collateral value of loans against the property. These risks include:

  • Property loss - the destruction of property due to fire, vandalism, nature (wind, water, hail)
  • Loss of use of the property - the opportunity cost from the loss of use and additional expenses
  • Liability loss due to negligence on the part of the property owner

Insurance coverage is predicated upon the law of large numbers and the individual's risk aversion. By pooling risks, individual policy holders pay premiums based upon a large, diversified portfolio which will reflect the probabilities of an event occurring where each policy holder pays based upon the average loss per property, as opposed to an all-or-none event affecting their own particular property.

Insurance policies can protect against both direct and indirect losses. Direct losses represent the costs of replacing and repairing property that is destroyed or damaged. Indirect losses include the additional expense of renting other facilities and the loss of profits resulting while the property is being restored. Liability insurance protects against lawsuits alleging negligence on the part of the property owner resulting in injury to others.

Homeowner's Insurance provides coverage for homeowners.

Section I

ADwelling - excludes land

B Other structures - detached structures on the same property, unless used in whole or in part for business or rental to anyone not a tenant of the dwelling

CPersonal property - can be off premises and includes guests' personal property. Excludes pets, motor vehicles, personal property of unrelated tenants, business data (although data storage/processing equipment is covered)

DLoss of use - includes additional living expenses, fair rental value

Section II

EPersonal liability - for bodily injury or property damage. Excludes that resulting from intentional acts or related to business activities as well as motorized recreational uses (ATVs, motorcycles, etc.)

FMedical payments to others

Other specific exclusions apply, including damage from floods (a separate policy) and molds in Texas. Coverage is typically for actual value, although a separate endorsement can be purchased for replacement cost. Numerous factors influence policy premium rates, including

  • Location - severity of losses based upon historical experience, including distance from safety services (fire department, fire hydrant)
  • Type of construction - wood, metal, brick, including discounts for nonflammable materials and premiums for more expensive materials
  • Amount of deductibles - the more risk the policy holder assumes (through higher deductibles) the lower the cost of the insurance (since lower expected losses). The homeowner is said to be a coinsurer in this case since more than one party is assuming the risk.

Liability Insurance - the limits on liability insurance are typically quite low in comparison to the potential liability. Additional insurance can be obtained through an umbrella policy that covers damages beyond the coverage provided by the primary policy.

Flood insurance - generally obtained through a government program

Mortgage Life Insurance - provides for payment of mortgage balance in the event that a family wage earner dies prematurely. It is essentially a term life insurance policy for the owner with decreasing coverage as the mortgage is paid down. This is not the same as mortgage insurance required by the lender when a down payment is less than 20%.

Business owner's insurance - Insurance policy for commercial property. Similar to homeowner's insurance, but much more complex.