Insurance to Save $10,000 with Andy Faust
Andy: Before I get started, I just want to take a moment in case I forget at the end to thank Rich and Doug for the opportunity to speak in front of you, guys, and I really want to thank you all for many of you are my clients. I have built some really good relationships with many of you over the years, and I really appreciate all of you for all those that you send to our office and to me personally. In case I forget at the end, I want to thank you in advance.
I don't know how I’m going to save you that much money, but just go get right into this. I love this one. I didn’t put this slide together. Doug put this together, but this is great. You really can insure anything that you want to—legs, butt. I probably should have insured my hair. I mean you can insure anything out there that you want to insure at all.
Of course, we all know that insurance is part of an owner’s risk reduction. How many of you have insurance in this room? Everybody! I guess I’m in a good business, right? But there are certain things you can do, Homestead Acts, which a lawyer would obviously handle, and setting up different entities like LLCs or real estate trusts. But insurance is really your frontline to anything. That’s your first defense that someone is going to come after.
Most common types of landlord claims. I could talk about claims all day long. you would not believe some of the most bizarre claims that I’ve had in the history of my 34 years of insurance—33 years.
You see this one—I don't know how this thing works, but I saw Doug with this little arrow here, this little red thing. But the property casualty with wind and hail, water damage and freezing, those probably where I would say 80 percent of our claims come in. Freezing pipes in the winter. Wind and hail damage, we all remember the hail damage we have about 5 years ago, everyone in Auburn and Millbury, the claims were nonstop.
Doug: This little button, right there.
Andy: That little one right over there?
Doug: That’s for your slide.
Andy: Okay, anyway. There we go. I just want to go back to that. Water damage and freezing, every winter a lot of frozen pipes. We’ve had some pretty cold weather lately over the past few years in our winters. The other thing, too, is liability slips and falls. I can get into the slips and falls right now regarding preventing those things. Does anybody have any questions on that because there’s a lot of slips and falls claims that come through? You wouldn’t believe what the insurance companies will pay. They don’t even want to go on defense. They don't wan to hire a lawyer. If someone sends in, hires a lawyer simply for falling for $5,000, the company pays it so fast now without even investigating it, and I suggest everybody get cameras, put up lighting, fix your sidewalks, put up can wheels. You’d save yourself a lot of claims in the future, and the thing about cameras, pictures don’t lie. They tell everything. Yes?
Audience: [inaudible 0:03:25]
Rich: Okay, hold on. I bet it’s an awesome question. We’re going to hold off on questions—
Andy: All right.
Rich: For about 50 minutes. We’re going to take a break, so if you want to make a note of it.
Rich: Don’t forget, okay?
Andy: Okay, all right.
Rich: You promise you won’t? Okay [laughter].
Andy: This right here, hired and non-owned auto, this is a very, very important coverage. If your properties are in an LLC or corporation and you have any employees or even your own vehicle, if you have an employee that works for you and he is going to make a deposit or he’s going to Home Depot, or he’s going to do a job and he gets in a really bad car accident, and he has minimum coverages on his policy, lawyer comes into play. “What were you doing?”
“Well, I was working for Rich, and I was going to Home Depot.” Well, they’re going to call up Rich, and they’re going to take his company in to help settle that claim.
If you have hired a non-owned auto, you can put $1 million of coverage on that for about $78 a year for hired and non-owned coverage. It’s so cheap I recommend that everybody have it. If you get that, it will cover you for $1 million if you have an LLC. Otherwise, if it’s in your personal name, if your building is in your personal name, then your personal insurance in auto will pay for that anyways.
Rich: If I decided not to invest that $78, how much would it cost me if I had a claim?
Andy: It could be $1 million.
Rich: A million dollars!
Andy: It could be whatever the number is going to be, how bad the accident is, who knows. But hired and non-owned auto is a very, very cheap coverage. like I said, if you have your buildings in a corporation, or if they’re owned by a separate entity other than yourself, you should check your policy to have hired and non-owned coverage. It’s about $78 a year for $1 million. If your master policy like a business owner policy, whatever it is, corporate policy, if you have $1 million in liability, it’s about extra $78 for hired and non-owned depending on the number of employees you have. It could be a little bit higher, but it’s really an expensive coverage.
Okay [laughter]. That’s actually a pretty good picture. You know one of the things here decide whether your replacement costs or actual cash value. Does everybody know what that is? Everybody knows what replacement costs and actual cash value is? The actual cash value takes into consideration depreciation. If you have a building that’s insured on an actual cash value basis, say you have $100,000 loss, you’re going to get anywhere between $60,000 and $70,000 depending on the age of the building because it’s depreciated just like an automobile you all know you walk off. You buy a brand-new car for $30,000, a year later, it’s worth $20,000. You total it, you get $20,000 from the insurance company. That’s depreciation.
The same way if you have an actual cash value policy, you’re going to get an actual cash value instead if there’s actually depreciation.
This actually goes into this. Does everybody have this form in a minute? Please look at that for a second, and if you look about halfway through—
Rich: Let me trade with you.
Rich: This one is stronger.
Andy: If you look about halfway through, you’re going to see replacement cost estimates firm, one of the insurance companies that I did. It says replace costs estimate right on there. Are there rebuilders in here by the way? Any contractors that put up buildings? If you’re going to build a ranch for me, a small ranch 1,000 square feet, how much are you going to charge me for it?
Male Audience 1: Where?
Andy: Auburn, Oxford, wherever.
Male Audience 1: You need construction, reinsurance [inaudible 0:07:20].
Andy: [laughter] I’m poor! I have no money. I’m destitute. I got 8 kids, $150 a foot?
Male Audience 1: Well, being in insurance man, first I am going to go to [inaudible 0:07:30].
Andy: Whenever anyone buys a house, three-family this happens, not everybody, a lot of people do understand this. They call me, “I bought a three-family for $320,000 or $250,000,” and every insurance company has every placement estimate. We go to their website. they’re all very close, within 5 percent or 10 percent of each other.
We plug in the square feet. You can look it up down there, when it was built, how many stories, hardwood floors, everything that goes with it, and they always come up with I would say $600,000 and $750,000, and everybody says, “Wow! Why do I have to have some insurance?” because the contract that you want to have is written on a replacement value basis.
They say, “Well, I won’t pay $300,000/ I’m going to go someplace else, and I’m going to go someplace else, and I’m going to insure for $300,000.” Take this for example. replacement value on that house is $600,000 and whatever, $8,000. This just cost $600,000. You have a $100,000 loss. You can look at these numbers, and the math is the same.
You’re insured 50 percent of value. Without getting all the detail of the numbers, you are going to get roughly 50 percent of your claim if you don’t insure it on a replacement cost basis and you insure it to at least 80 percent of the insurance value. In this particular case right here, $608,000, 80 percent of that is roughly $480,000. That’s the minimum you would have to carry to avoid a coinsurance penalty. Does everybody understand that?
Female Audience 1: I don't know [inaudible 0:09:06] talking about [inaudible 0:09:08]
Rich: It’s not on the screen. It’s in your handout.
Andy: I was going by this right here. This is a replacement cost estimator.
Rich: What page is that on, Andy?
Andy: I don't know the number, but it’s right in the middle.
Rich: It’s in the middle page.
Andy: I want everybody to understand what the difference is on a replacement policy and an actual cash value and coinsurance penalties because that’s really important. If your building is not insured to 80 percent of replacement value, and every age, and I don’t care whoever your agent is, when you bought a building, they filled out a replacement cost estimate and they send out to the company. Maybe you didn’t say it, but they definitely did this online in that company’s website, and if you’re not insured within 80 percent of that amount, you’re going to suffer coinsurance penalty at the time of loss, even a small loss, even a small loss.
If you’re 70 percent insured to value and you have a $10,000 claim, you’re going to have a $3,000 coinsurance penalty because you’re not within the 80 percent guidelines.
Rich: Let’s trade with you again. I was told that was a bad move on my part.
Female Audience 2: That’s [inaudible 0:10:08] insurance laws.
Andy: Coinsurance? Is that—
Female Audience 2: Is that a coinsurance guideline?
Andy: It’s a coinsurance guideline, yes. You have to be insured to within 80 percent of the replacement value, so you do not incur a penalty at the time of loss.
Rich: Good tip. If somebody had a $600,000 building—
Rich: And they didn’t do that—
Andy: Like this, like this estimate. Let’s take that [crosstalk 0:10:39].
Rich: How much do they lose when it comes time to put—
Andy: Whatever. If you’re insured 50 percent of value, you could have a 50 percent coinsurance penalty.
Rich: Yes, of how many dollars? Is that $300,000?
Andy: Let’s just say you had a $100,000 claim, you’re not going to get $100,000.
Rich: Yes, I’m going to get $50,000.
Andy: You’re going to get $50,000.
Rich: That’s horrible.
Andy: It is horrible. That’s why I’m a real stickler for details on that.
Rich: I can’t believe you do that to people.
Andy: I know, but I’m a real stickler for that stuff, and I never had none of my buildings are ever insured, ever, ever.
Male Audience 2: The price went up.
Andy: [laughter] Right. The price went up. Does everybody get that point? It’s very, very important. If everybody gets it, we’ll just move on.
Female Audience 2: What’s the name of the penalty again?
Andy: It’s a co-insurance, C-O-insurance, penalty. That only happens if you’re not insured to 80 percent of the replacement value on your building. Yes?
Male Audience 3: What’s—
Rich: We can’t take questions because it—
Andy: You said I have 2 hours.
Rich: I didn’t know [laughter]. We can’t take questions without a microphone because it doesn’t show up on the tape online.
Andy: Okay. this is in the printout here at the end. This is a very, very important coverage. They call it casualty ordinance coverage. It’s actually called ordinance and law coverage. Do a lot of people in here remember Vinny DiLeo?
Audience: Yes, yes.
Andy: Okay, perfect example. He called me up Christmas Eve, I think it was about 6 years ago. He had a big building up on Merrifield Street. It was a six-family, and there was a gentleman smoking up in the third floor at the cause of fire. It was a six-family dwelling, third floor was destroyed, most of the second floor was destroyed, and that’s where I spent my Christmas Day about 6 years ago.
He had what was called ordinance and law coverage on his policy. Does everybody know what that is?
Andy: Okay, so it’s a code enforcements, code upgrades. When you have damage to a building depending of the amount of damage, the city or town is going to make you bring everything up to carbon code. See, the insurance company is only obligated to give you what you had. They’re not going to give you anything more, they’re not going to give you anything less. They’re going to give you exactly what was there. If you had just standard wiring in there based upon the 1970 standards, they’re going to give you what’s available today, but they are not going to pay for any upgrades due to carbon codes. The same thing with your electrical, your plumbing, your wiring, and if there is enough damage to the building, you need to install a sprinkler system. They’re not going to pay for that either because that wasn’t there before. Your insurance is going to put you back where you were according to the contract.
Now if you have ordinance and law coverage, that gives you extra money for a sprinkler system, for code upgrades.
Rich: Andy, you do have the sprinkler system, how much do these things normally cost? Does anybody put in a sprinkler system and how much did it cost, sir?
Male Audience 3: One hundred twenty-five thousand dollars.
Rich: One hundred twenty-five thousand dollars.
Andy: How many buildings?
Rich: Wow! How many—
Andy: How many buildings?
Rich: Did that come with an entire water park?
Rich: Okay, $125,000. Can anybody $125,000? Phil? Forty thousand. That’s a lot.
Andy: How big is the building?
Rich: I don't know if it would cost if you have to break open the street and you have to run new plumbing and stuff like that, but the point is it sounds like you’re saying that if the city says your triple-decker has been two-thirds burned, you have to put in sprinklers now—
Rich: You’re on your own for that part?
Andy: You are on your own for that if you do not have ordinance and law coverage, okay. Now, but that doesn’t cost any money for that coverage on a lot of policies. If you have a regular dwelling fire policy, which is covered in there, it’s called the DP3, which is probably what a lot of you have. You automatically have 10 percent of coverage A for ordinance and law coverage. In that replacement cost estimate, you come into my office, we insure that three-decker for $600,000, you automatically have $60,000 of coverage for ordinance and law.
Now that six-family that Vinny DiLeo, his code upgrades were almost $50,000. They were like $48,000, and that was whatever 7 years ago. That included a sprinkler system and electrical plumbing and heating upgrades. That is kind of a safety net if you have a standard market policy, you got 10 percent coverage for that. If you have bigger buildings, I always add it some of the policies included. If it’s not included, I always add it. It’s a pretty cheap endorsement for $100, $200, you’re going to have a $100,000 of ordinance and law coverage. It’s a very cheap coverage. Any questions on—
General liability, we all know what that is. That gives you premises liability for your property. Umbrella is that liability that goes over and above your basic policy. Yes, one thing a lot of people don't know is a lot of policies will give you some coverage for attorney’s fees. Look at your contract, your policy, it does pay for some defense cost. Some of the common exclusions assault and battery, contractors or employees of contractors, anything that’s related to a business outside of this particular piece of property.
Rich: I just have a real quick question for umbrella policy.
Andy: Sure, yes.
Rich: Because this was actually covered in our June meeting to a certain extent. I’m just going to put you on the spot, Andy. At what net worth would you generally start recommending to people to get an umbrella policy? Because if you probably just have a duplex, you’re probably fine, but if you have 200 units, you definitely need one.
Andy: You definitely need one.
Rich: Where’s that line?
Andy: I don't know. I bring it up to a lot of people, and that’s their choice whether or not they want. I can’t make them buy it, but it’s pretty cheap coverage, too, umbrellas. They’re not expensive. I mean on your homeowner policy for example, you can get $1 million umbrella coverage on your home that will cover you with 2 autos and just your primary residence, $200 for $1 million. It’s well worth the money. I think a three-decker might be like $450, $500, $3 million.
Rich: Okay, that’s an individual thing.
Andy: It is. But if you start to accumulate a lot of assets, I mean an umbrella is certainly well worth it, and in fact, you know what’s really funny about the United States here, mostly around New England, everybody has $1 million of liability coverage, $1 million of carriage, $2 million as an aggregate. I insured one of the restaurants down in Shrewsbury Street, and the investor happens to be from England. They were in my office, this was about 5 years ago. We said, “You got to have over $1 million.”
He said, “Over in England, everyone has $5 million.”
I don't know if it’s true or not, but that’s what he wanted for coverage. He said, “A million dollars doesn’t cover.” Maybe they have a lot more lawsuits in England, I have no idea. I’m from the United States, but this is yes, you need at least $5 million, so that’s what they got.
Rich: Okay, so we’re going to go around to collect a couple of questions if that’s okay with you.
Andy: Sure. Yes, yes, fine, yes.
Rich: You promise that you remember.
Male Audience 3: I told you I’m old. I forgot. No, it always puzzles me. We live in New England, we get snow, we get ice. You go to bed at night at 60 degrees, you wake up in the morning that’s 4 below zero. People have claims for slip and fall. I mean really? You get up in the morning, everybody watches the weather. I don’t even go out in the morning, and I watch the weather, and there’s ice and there is snow, or we get a dusting of snow. People are falling down stairs. They’re falling on the sidewalks. How can they collect on these slip and falls when this is nature? It’s God.
Andy: Yes. This is a real good claim to answer you because it almost cost too much to fight a case, but I had a client, I think this had to be 15 years ago. He owned a four-family in Worcester. The person on the first floor was in charge of maintaining the property. That was his job, the sanding, the salting, the shoveling, the lawnmowing, whatever needed done. He got a reduced rent for that. Well, he slipped on the sidewalk that he didn’t maintain, and the insurance company gave him $72,000 [laughter].
Rich: That’s way more than he was making maintaining it.
Andy: Exactly! Go figure.
Rich: What’s the address? Is there an apartment available there in the first floor? All right, Sandra has a question. I’m coming!
Sandra: I just want to know if there’s a way to fight these kinds of things. I just find these absolutely outrageous that people can do these horrendous kinds of acts, and that it falls back on us later on. Then all of a sudden, you find out that you got to go find another insurance company because they don't want to insure a property that you just had a lawsuit on. What do we do at that point when we got something like that, and it’s hanging over your head and you have to have insurance no matter what.
Andy: Right. Some of my customers now have cameras, hallways and exterior 24/7, and they put up a lot of lighting. I was in one of my customer’s offices the other day, and I happened to look at his camera. I don't know how many screens [unintelligible 0:21:05] screens and you can rotate between all of his buildings at any given moment, anytime, and it’s all backed up. In case something does happen, he does have proof of what actually took place there.
Rich: Good tip.
Andy: Yes. I don't know how much camera equipment costs. I have no idea, but that’s what he does. Interestingly, he’s got about 40 buildings, and he’s never ever had a claim. No slip and falls, no frozen pipes, no nothing. Yes?
Female Audience 3: I have a question about how insurance relates to discrimination. Each of us in this room, we’ve been trained on how not to discriminate against people, but if something like that were to come up from an insurance perspective, can you explain how that would work, how the insurance company would treat that, or if there is any specific type of coverage we would want to have, or could our policies be cancelled if we’re found to have discriminated?
Andy: Your policy won’t be cancelled unless there was an actual claim for discrimination and who knows if they would cancel it anyways. That is getting to be a bigger issue, tenant discrimination. If there’s somebody here that will ask me about property management—was it you who asked me? Okay. I’ll get into that right now because it’s all encompassing.
For those of you who are property managers or landlords that help manage property for other people, you can get a basic property management policy, which will cover you for maintaining the property. That’s mowing the lawn, that’s shoveling, sanding, salting, doing some small trash movement, and things like that. depending on how many units you have, it’s not that expensive. This guy has 15 units he takes care of. I think it costs him $1,300 a year.
Then you can get into like professional. It will cover that. Then you go into the professional part of it. if you are placing tenants and evicting tenants and doing all of those things, you really need some professional insurance. That policy for him I think was about $3,300.
Now let’s talk about claims. He called me about a year ago, and he said, “I just want to run something by you. I had a claim about 8 months ago. Now it was 8 months after the claim because he didn’t think there was coverage for it. He told me that he had to evict some tenants out of the building he bought because he was going to change the use of the building, he needed to vacate it.
These people, the tenants got a lawyer, you know how the whole scenario goes, right? It cost him about $125,000 between what he had to pay the tenant and lawyer’s fees and everything else.
Rich: You could buy a whole water park next to that guy’s building for that.
Andy: Right [laughter]. Anyways, because we have to keep very good records as insurance agents because someone could sue us if we didn’t provide someone with the right coverage or made an omission or whatever, someone could sue us easily. I’m feeling bad, I’m getting back to the office, and I’m going through his file, through his file, and through his file, and lo and behold, 2 years ago when he bought his property and insurance policy, the one to manage properties to do the general maintenance, with that in the same file was an E&O quote that I had given him that was fixed $3,300, and he opted not to buy it, so at least I had that protection saying that I did offer this to him because if I had not offered this to him, he would go back and say, “You never offered me that coverage.” Next thing you know, [unintelligible 0:25:11] is getting a phone call from his lawyer saying, “Hey, we want some compensation for this because he was never offered this type of coverage.”
I would suggest all of you keep very, very good records. I mean what we have to do in our business, I don't know what anybody else does here, but you got to keep – I would imagine Sandra, being a property manager, you must have to keep meticulous records? You have to, right? With all the tenants and applications and everything else that goes along with it.
Rich: E&O stands for errors and omissions.
Andy: Errors and omissions.
Rich: Real quick, what are like the top 3 or 4 most common errors or omissions?
Andy: Not answering the application correctly.
Rich: Okay [laughter].
Andy: I just look at properties for someone that has a trampoline or dogs on the property, someone walked into my office, they say, “Yes, I told my agent that before.” There’s no way that you told your agent that you have a pit bull on your property. Now the dog bites someone, and it’s a pit bull. The insurance company would never have been on that risk to begin with. That’s an error. An omission is really when you forget to—
Rich: Except when the pit bull is a service animal, we all know that’s totally separate issue.
Andy: My gosh [laughter]!
Rich: An emotional support pit bull is fine. The informed consent is not going to cancel your [crosstalk 0:26:28].
Andy: I wouldn’t allow any dogs on my property if I were a landlord. I just absolutely wouldn’t do it. Maybe nothing over 10 pounds if it’s a Shih Tzu or a chihuahua, or I don't know. I wouldn’t even go down that road. I just wouldn’t even entertain it. Everybody’s dog is wonderful, trust me. They all are. I have a boxer. He’s great. He’s exhausting, but I would not allow dogs on my properties. Yes?
Rich: Okay, hold on! We’re going to go back to questions.
Rich: We’re going to let you go through this stuff.
Andy: Okay, yes.
Rich: We’re going to go back to questions for another 5 minutes as we wrap it up.
Andy: Wrap it up? My gosh! All right. Here is the hired and non-owned auto we were talking about. You got to have it. If you have in your property is a separate entity, you got to have that. All right, fraud dishones