Believe it or not, having too much insurance can be a bad thing for homeowners and property investors. While insurance can protect your property, getting the wrong insurance policy may cause you to pay more than what is necessary.
What is Over-Insurance?
Over-insurance occurs when an insurance policy covers an amount that exceeds the actual value of the risk or property that is insured. In simple terms, over-insurance describes the situation wherein a party purchases too much insurance coverage, that it surpasses the actual value or replacement cost of the property.
For instance, a car with a market value of $36,000 that is insured for $100,000 is over-insured. Similarly, a single-family home with a market value of $280,000 that is covered under an insurance policy of $300,000 is also receiving too much coverage.
Over-insurance is a typical occurrence among property owners. As a result, they end up paying more in premiums for coverage that their properties do not even require.
Why Should Over-Insurance Be Avoided?
No policyholder wants to pay for more than what they need. If you are experiencing over-insurance, you are essentially paying an amount that is significantly higher than the value of your property. Simply put, you’re wasting money.
Aside from the cost, over-insurance also tempts the policyholder to make false claims to realize a profit. This is what constitutes a ‘moral hazard’ among policyholders and ‘insurance fraud’ among insurance companies. There have been instances where homeowners deliberately set their properties on fire, staged accidents such as break-ins, and so on, to collect insurance and to receive compensation. Keep in mind that the state of Florida punishes insurance fraud based on the value of the property — if it exceeds $100,000, that would be categorized as a first-degree felony.
Steps to Avoid Over-Insurance of Property
Getting the right insurance policy for your home is like finding that cup of coffee that’s not too hot nor too cold. If your property is under-insured, you risk suffering from devastating losses due to flood, theft, fire, and other disasters. Under-insuring your property increases the chances of you not being able to get back on your feet.
If you’re in-between insurance policies, we’ve rounded up a few tips to help you make sure that you don’t end up over-insuring:
#1 Review Your Insurance Policy
Insurance policies may have the same name, but not all insurance policies are created equal. Take the time to review your entire insurance policy to make sure that it meets your investment property’s current and anticipated needs. A great place to start is by understanding the types of perils that are covered. Typically, homeowners insurance covers risks such as damage caused by lightning, hail, hurricanes, fires, and other natural disasters.
You may also consider hiring a property manager to help you understand the different insurance policies especially if this is your first time acquiring insurance for a property.
#2 Determine the Replacement Cost of Your Property
Many people make the mistake of insuring the property at its market value. Ideally, your insurance policy should cover only the replacement cost of the home. The replacement cost refers to the amount that it would take to replace the home in the event that it is destroyed. The market value is much higher, as it is the total value of the home including the land that it is built on.
Have your property assessed to determine its replacement cost. By doing this, you can significantly reduce your premiums.
#3 Consider the Construction Costs
The replacement cost and current construction costs go hand-in-hand. Asking construction companies in your area will help you determine the probable replacement cost for your property. Try calling local builders to ask for your area’s average construction cost per-square-foot. If the current rate is $150 and your home is 1,000-square-feet, then you’d need to purchase $150,000 in coverage.
#4 Get Insured for Liability, Too
There are so many risks involved with owning a property. Aside from ensuring that your insurance covers structural damage, you also need to ensure that it covers bodily injuries too. If your guest slips into your swimming pool and breaks their ankle, you’ll be glad that you paid attention to your insurance’s liability coverage policy.
#5 Hire a Property Manager
Insurance can be complicated. If you’re finding it difficult to keep track of your insurance policies, it may be time to hire a property management firm. By doing so, you can leave the stressful work of renewing policies, filing claims, upgrading the coverage, and more, to a trained team of professionals who know the ins and outs of your property.
How is Over-Insurance Different From Overlapping Insurance?
Overlapping insurance describes the situation wherein an individual acquires multiple insurance policies that provide the same coverage for the same perils.
When this happens, neither the policyholder and the insurance provider are necessarily at a disadvantage. In fact, both parties can reap the benefits of overlapping insurance. The reason is that when a claim is filed, the amount could be divided among different insurers. This means that one insurer will not have to cover the full amount.
On the other hand, the policyholder will have multiple insurance policies to fall back on. This is especially useful in cases wherein an insurance provider suddenly declares bankruptcy.
Keep in mind, however, that when your home insurance policies overlap, making a claim can be more time-consuming and complicated, as you will be detailing with multiple insurers. While you are allowed to have more than one homeowners insurance, the problem arises when insurers do not want to get involved and attempt to pass on the responsibility to the other insurers. If you have multiple insurers, the ideal course of action would be to file the claim with only one of them.
Ask the Professionals
Luxury Property Care’s property managers have decades of experience in the real estate industry. If you’re a property investor and you need help managing your investment, we offer a wide range of services that will help you grow your rental business.