Although it often goes unmentioned, appropriate insurance coverage is a crucial part of any real estate investment deal. Hard money lenders will typically require you to provide either a quote from an insurance company or proof of insurance coverage as part of the application process. 

If you are not properly insured, a property loss (partial or total) or liability lawsuit could spell disaster for your entire real estate portfolio along with your investing career. Proper insurance can help you protect yourself against large losses that can wreak major consequences. 

However, there is a fine line between too little and too much insurance. If your insurance costs become a financial hardship, you need to re-evaluate whether you are over-insured or if the investment is simply not worth it. 

Here are the ten types of insurance policies that are most relevant to real estate investors and rental property owners.

Hazard and Fire Insurance

Both hazard and fire insurance are always needed and will likely be required by your lender. 

Hazard insurance specifically covers the structural elements of a property, protecting against natural and man-made risks like storms and vandalism. For investors, hazard insurance is essential as it preserves the investment property’s physical integrity, helping cover repair or rebuilding costs if a covered event damages the property. Without this insurance, a severe weather event or other hazard could lead to substantial financial losses.

Fire insurance, often included as part of hazard insurance, protects against losses from fires. It covers damage to the building’s structure and may include certain personal belongings if the investor also occupies the property. Fire insurance is vital for investors because fires can render properties uninhabitable, resulting in costly repairs and lost rental income.

Liability Insurance 

Liability insurance is essential for real estate investors to protect against legal and financial risks from accidents or injuries that might occur on your property. If a tenant, visitor, or contractor is injured on your property, liability insurance helps cover medical expenses, legal fees, and potential settlement costs if the investor is found responsible.

For real estate investors, this insurance is a safeguard against unforeseen liabilities that could lead to significant out-of-pocket expenses and financial strain. Additionally, liability coverage can protect the investor’s assets in the event of a lawsuit, offering you peace of mind and stability in maintaining rental or commercial properties.

Liability insurance is also necessary in most situations; it can be purchased to cover the physical property as well as your actual business. 

Sewer Backup Insurance 

Sewer backup insurance is almost always needed and can typically be added on to your hazard and fire insurance for minimal fees. This provides coverage for damage caused by the overflow or backup of sewers, drains, or sump pumps. This type of insurance can cover repair costs for walls, floors, furniture, and appliances affected by water damage due to a sewer backup.

For real estate investors, sewer backup insurance is essential because a single incident can lead to costly cleanup, repair, and even replacement of materials within a property. Sewer backups are unpredictable and often stem from weather-related surges, aging municipal systems, or blockages, none of which are typically covered under standard property or hazard insurance. 

Having sewer backup insurance can ensure you are financially protected from these incidents, allowing for a quicker recovery.

Flood Insurance

 Flood insurance is needed if your property is in a designated flood plain, has a propensity towards flooding, or if there is any chance that a catastrophic flood could destroy your property or the buildings on it. 

It is important to note that typical hazard and fire insurance will only cover flooding caused by internal sources such as a burst pipe or other interior leak; it will not cover flooding with an exterior source such as a hurricane or other large storm event. Flood insurance protects against substantial financial loss, especially in high-risk areas, ensuring your investments remain secure after natural disasters. 

Terrorism Insurance

Terrorism insurance provides coverage for property damage resulting from acts of terrorism, which are often excluded from standard property insurance policies. This specialized coverage can include damages to the structure, equipment, and contents of a building, as well as lost rental income due to disruption. In some cases, it may also cover costs associated with decontamination or repair if there is damage due to hazardous substances. This insurance is only needed if you are concerned about damage as a result of an act of terror.

Builder’s Risk Insurance

Builder’s risk insurance is essential for real estate investors involved in construction or significant renovation projects, as it protects against damage to buildings under construction. This coverage includes protection for materials, fixtures, and equipment on-site, in transit, or at temporary storage locations, safeguarding against losses from events like fire, theft, vandalism, or weather-related damage.

If you are buying mostly vacant, distressed properties with the intention of rehabilitating them, then you will need this insurance until your property is able to qualify for hazard and fire policies. This insurance can be two to four times the cost of normal coverage, so it’s important to factor these costs into any project estimates.

Loss of Income Insurance

Loss of income insurance covers lost rental income if a property becomes uninhabitable due to covered damage, helping real estate investors maintain cash flow while repairs are made. This insurance is typically only needed by those who make long-term investments in rental properties and can be added on to your hazard and fire policies at an additional cost. It is generally not necessary for investors who are simply planning to fix and flip a rental property rather than hold onto it.

General Contractor Insurance

You will need this insurance if you want to become a licensed general contractor and control your own permits for your properties. General contractor insurance provides essential protection for general contractors covering risks like property damage, bodily injuries, and potential lawsuits arising from your work. For real estate investors, this insurance can be highly valuable because it minimizes the financial risks tied to construction and renovation projects, especially for those managing multiple properties.

Workers’ Compensation

Workers’ compensation insurance provides coverage for medical expenses, lost wages, and rehabilitation costs if a worker is injured on the job. This is needed if you have any employees or contractors working under your insurance policy (e.g., superintendents, maintenance staff, construction workers, or receptionists) as it protects both the workers and you from financial and legal consequences related to on-site accidents.

Umbrella Policy

This is never required, but can be a good addition to your policies as it usually offers extra liability coverage beyond the limits of standard insurance policies, providing extra protection against major claims and lawsuits. This type of insurance can cover legal fees, medical costs, and damages that exceed the limits of general liability, property, or auto insurance, making it valuable for investors who want comprehensive protection for high-value assets or multiple properties. 

This list provides a foundation, but it’s essential to consult with your insurance agent before deciding which types of insurance coverage you need for each new real estate investment because each property presents unique risks and coverage requirements that may not be fully addressed by a standard policy.

Protecting your investment is crucial, and the right financing can make all the difference. If you’re looking for flexible funding options for your real estate investment projects, contact Montegra to learn more about our hard money loans. Contact us today, apply online,or email Bob@montegra.com or Kim@montegra.com.