Read the episode transcript
Aaron (00:00)
Hello everybody and welcome to the Speaking of Insurance podcast. My name is Aaron Bollinger, another banger. We're going to be talking about California landlord insurance. We're going to be talking about the things that you should know before you go invest in that ADU construction that you're considering, before you consider renting out your current home and going and buying another one, before you make any sort of decision when it comes to your property and either a short-term or long-term rental, what you should know about your insurance, your exposure, your liabilities, and
Aaron (00:30)
All of the common things that kind of get glossed over in terms of the regular insurance broker approach to, it's just a landlord policy, everything is the same. There's so many things that need to get touched on. I believe people should get educated on. So hopefully y'all will stick with me for however long it takes for me to go through the the adequate amount. I wanted to start this, start this off with a funny story. So it was a month or two ago, and I got a call to my cell. I don't know how he found my cell usually calls our team, but
Aaron (01:00)
He called me directly and he said that he was considering investing in a landlord property. I think it was Oak Park. let's call it, let's call it Westlake Village, though. Nice area. He said that he wanted to buy a place for a few million dollars, rent it out, you know, get the tax credit, all that good stuff. And he told me, you know, it's gonna have a swimming pool. And I was like, okay, that's gonna have its own set of liability exposure. And he said he called a few other brokers about another property that he was considering purchasing. And the property that he was considering purchasing had a rock.
Aaron (01:30)
slide to go to the you know the nice pool that they also had at that property. And I I almost was like, you know, people are still investing in that. So that that was kind of just a little bit of a reminder to me that I mean, honestly, if you're investing in a property and you want to get that high ROI, sure you might want to have a few things that you can pitch, like the, you know, playroom or the, you know, swimming pool. But when you start renting out a property, either it's Airbnb, which is a whole nother thing, short-term rental, or it's a long-term rental.
Aaron (02:00)
Insurance companies are going to take a peek at that diving board of yours, at that rock slide, whatever it is. They're going to look at it. They don't like those types of exposures. And I don't think you would either if you were an insurance company looking to make money on a on a home on insuring an investment. Because imagine the liability that goes along with that. One person, you know, I don't know, maybe Uncle John wants to, you know, go over on the diving board and show kids how to do a flip, goes wrong.
Aaron (02:27)
That's hundreds of thousands of dollars right there in potential claims on the on the liability side. Maybe you're renting it out as an Airbnb and there's, you know, a bunch of people coming over, bunch of family. You know, every week you get that new level of exposure, renewed level of exposure with the short-term rental. People are going down that rock slide. They get, you know, turnt wrong way, fall off, whatever it is. It it can be catastrophic. It can be horrible. And so that's where part of it, the umbrella insurance comes into play, the millions of dollars of, you know.
Aaron (02:56)
on top of the landlord insurance, but also the landlord insurance has to know about that rock slide of yours. And you should know about the rock slide and what it means for your insurance. And so we're going to go through all these things today. Just wanted to, you know, preface it with a little funny story, you know. Lighten the mood a little bit. Landlow insurance is serious though, because as you invest in more properties, as you increase your real estate investment portfolio, if it's just your first as well, I mean, no matter what it is, it's it's really important to understand the
Aaron (03:24)
The risk because I I would say the money is great and the profit is great from the rent and the tax credits, et cetera. But if you lose all of that due to a you know a lawsuit or X, Y, and Z event happening and having to file a claim, that kind of ruins the whole point of having that investment in the first place. So let's talk about the process of moving out. So as you move out of your property, you might be doing some light renovations, you might be doing full renovations to get the property ready to be rented out.
Aaron (03:56)
make sure that the person who's doing your renovations has adequate insurance. If it's some big level project that's really important, determine whether or not it's just going to be a room that you'll be renting out, the whole place level of distinguishment is really important. And there's that cohabitability exposure as well that a lot of people don't think about. So if you own a property and you're living in the ADU and the ADU is attached, let's say you're living in the garage, because a lot of people do that because it's like house hacking or whatever it is.
Aaron (04:24)
They they live in the other unit of the place that they own and they rent out the bigger place for for that consistent passive income, as they call it. You have to have a understanding with the insurance company of the co-habitability exposure. If you're in a separate address, like let's say there's a back separate ADU, that's completely different. They don't share a roof. A lot of insurance companies will look at that and they'll say, okay, we can write you as a homeowner on your current insurance plan on that back unit.
Aaron (04:50)
Given that the address is also different and that they're not on the exact same property, could be the same parcel, you know, but just different property and address, not sharing the same roof. And then that front unit would be insured under that landlord insurance policy that we're talking about. Renting out a room, again, it's inside the house, shared sharing the same roof. Make sure insurance company knows about that. We have a new one who we've had a lot of people who have decided to do that, that renting out a room sort of thing. And it's usually an excess lines insurance company all.
Aaron (05:19)
For those of that don't know, bullinsure.com, you know, you can get a bunch of education. You can email me, call me up. I'll, you know, have my contact information at the end of the episode. If you do have any questions about the nuances that are working with that insurance company or what an excess insurance company is, but I mean, if y'all are listening to an insurance podcast, you guys better know what an excess lines insurance company is by now. obviously I'm just joking and teasing. But again, renting out a room is completely different from, you know, leasing the entire home.
Aaron (05:48)
And changing tenants is a big exposure. So if you're buying a property and you want to go in and you want to kick out that tenant and go get another one, that is a really big liability exposure that can be hundreds of thousands of dollars litigation on the back end. And you can't just go do that, go buy the insurance before you buy that property and expect the insurance company to pay out because I bet that they're gonna have some sort of exclusion for that. So understanding, you know.
Aaron (06:16)
Changing tenants is a really risky business, especially as a new investor. And there's a lot of lawsuits and personal, you know, liability that goes into that, which goes into the umbrella portion of coordinating your coverages with your umbrella. So if you get sued, if something bad happens, it's covered. You get that extra millions of dollars of cushion for pennies on the dollar, pretty much. So identifying what will be changing about the property, who will be changing that stuff on the property. If you're one of those people who
Aaron (06:45)
Love to do home projects like my dad. Shout out, dad. make sure you're doing the work right because if you make a mistake and wiring the plumbing up for the sink and something happens, gosh, it'll lead on, that's not gonna be good. yeah, it'll be pretty negative. So I recommend people to always go to the professionals for things. But again, if you're licensed and have experience and you wanna save some money, it's the way to do it. But understand the risk that goes along with that. Second thing is the
Aaron (07:14)
little bit tied in is the homeowners versus landlord insurance. So your broker is going to need to determine the exact occupancy of that property. They're going to need to know, okay, you know, we have a tenant on this sort of, you know, renting agreement. And that goes into long-term versus short-term rental, where a short-term rental is like an Airbnb. And these homes can get higher margins possibly on the renting side, but definitely cost more, at least on average, for insurance.
Aaron (07:44)
From my experience, if you got a place in Big Bear, and obviously that'll be either with a fair plan or an excess insurance company. They have to identify that you're actually renting it out on a short-term basis. If it's you know week by week, if it's you know night by night, things like that really add up the cost. And we see the premium dollars multiply two, three, four X, depending on how short-term that rental is. And you guys got to do a bunch of applications for that process.
Aaron (08:13)
If you are an Airbnb owner, hopefully you understand. If not, and you're just under a regular landlord policy, 99%, please check up, please make sure, because all that money could be going to waste if they are not aware of the Airbnb exposure on the short term rental. Long term is usually ideal with insurance companies. They kind of just write it as a landlord policy. And there's no real other thing about it. Obviously, they'll have the standard exclusions, but as long as they understand.
Aaron (08:40)
Hey, this is being rented out on a month to month basis. You know, most people stay for a year. This is what we consider long term, giving them the rental duration, you know, property management, understanding, and maintenance, all these things kind of tie in. And so again, homeowners insurance is not landlord insurance. If you're currently on a homeowner's policy and you have somebody living in your place, renting a room, please get that looked at. I can almost guarantee that.
Aaron (09:08)
There is a big liability exposure there, and possibly property exposure if you had lied on the application or maybe misrepresented something, even if it's unintentional, where an insurance company can go and say, Hey, you've been renting out this room to this person, they're the person that caused a loss. We're not gonna pay. Even though you've been paying thousands of dollars a year, we're not gonna pay. Get screwed. And obviously, that would not be very good or ideal. A whole point of paying for insurance is to make sure that you're covered, hence my emphasis on this.
Aaron (09:38)
Biggest thing other than liability is the building. Kind of goes without saying, but dwelling limit valuation methods and deductibles are things that I will always emphasize. I want to get into the nuances of specific landlord coverages though, because of course you have to satisfy the mortgage company's expectations and also your own. Make sure that your own interest in it is is adequately covered. And so reviewing your dwelling limit is something that I highly recommend people to do. If you don't want to do that yourself,
Aaron (10:09)
basically that's just looking at your coverage A amount, determining if that's valued on how much your home would cost to rebuild, or if that's how much your home is worth cash minus the value of the land. So not including the value of the land. And those are two really big numbers, usually. Usually the actual cash value basis, ACV is what they call it in insurance, hugely different from the replacement cost value.
Aaron (10:36)
We recommend everybody be on replacement cost when they can be. Thing is with insurance companies like the Fair Plan, if you are in high brush, a lot of times they will not actually write you on replacement cost. They have requirements for updates to roof. I think it's the nineteen eighties or something, that the roof has to have been fully replaced since and they'll go do a a gauge of the property on a usual inspection report that they do and confirm that it's eligible for that. But
Aaron (11:03)
Make sure your valuation method is locked in and correct and that you understand what it is. Because again, maybe some of your brokers are going to have you on a valuation basis of actual cash value. but then they're gonna put the estimate higher for the coverage A at the what it would cost to actually replace your property. And so if you think about that, let's say the actual cash value of the property is $500,000 and you're valued on ACV, actual cash value.
Aaron (11:30)
But your broker puts you at $900,000 thinking, it's the same thing as replacement cost because that's how much it would cost to replace it. Could be a little nuance there, a little wrinkle. You could get only paid out $500,000 in the event of a total loss. And this entire time you've been paying for double. Just something to think about. Not saying your broker's not awesome. Just saying that they need to make sure that they're giving you a rundown and understanding of your valuation if you reach out and you decide to ask them. Deductible as well. Talked about it last episode. We'll always emphasize it.
Aaron (11:59)
Big thing I would say for landlord insurance is that a large part of the liability exposure is a large part of the insurance. If you're on a short-term rental, I would say the bulk of the reasoning behind the higher pricing is the liability coverage, 1 million percent. You think about different people, different families coming into that place, not knowing all the ins and the outs of it, maybe, you know, having their own set of ways to approach that rock slide. And some of them will go down it.
Aaron (12:29)
Slower, others will go down it faster. And obviously metaphorically, but the level of liability exposure the insurance company takes on when they're letting pretty much hundreds of people every year go onto the property. It's one of the reasons why that cost is higher. And so I I want to pose a couple questions to y'all who are thinking about maybe renting out your place or thinking about buying a place to rent it out. Great financial decision. What exposures
Aaron (12:57)
Do you guys think are the big ones? I mean, because there there's a bunch. There's the stairs for starts. If you're an Airbnb wrenching it out to grandma and grandpa, what what's gonna happen if they fall down the stairs? That's on you. If it's a pool. I mean, is there a slide? Is there a diving board for I don't wanna keep picking on grandma and grandpa? Maybe little Jimmy and little Sally to to jump on, do a little flip and then hurt themselves. Cause obviously, gosh guys, that sounds really cynical. And
Aaron (13:27)
Horrible, but I mean it's a reality. It's the reality that you're paying for insurance for if something like that happens. And if you're getting 60, 70, 80k plus maybe even more, maybe in the hundreds of thousands of dollars from that rental income, one loss and it wipes it all out. One loss and it wipes it all out. That's the truth. And maintenance as well. So check up on all those things, check up on the stairs, the pools, pets.
Aaron (13:55)
People don't think about the animal liability exclusion. I know I'm talking about this, like this is like a sports team. It's like I'm so passionate about, you know, team landlord insurance. But like, gosh, guys, pets. Think about it. You you have an Airbnb, you're allowing pets. Maybe you say you allow smaller ones. Maybe somebody sneaks into Doberman or a Pitbull or something and bites somebody. Who's who's that covered by? I don't know. Depends on the policy wording, but could very well be you.
Aaron (14:24)
property features that we had talked about as well, like the slide and the diving board, and maybe the electrical panel is exposed on the side. Maybe, you know, we we stated this Airbnb in around Yosemite area, and you know, there were bunnies there. And I'm like, is that covered? Is that a liability exclusion? I would not be surprised if it was, but I think that it it should not be. And I think it'd be worth paying extra thousands of dollars if you're pitching a part of.
Aaron (14:54)
You know, the reason why you should stay at our place is because we have bunnies. Please, please, please insure the bunnies, not with pet insurance, with your landlord insurance. So your liability and your assets are covered. Seventh thing that I want to talk about. So I know these aren't really questions. I feel like it's just thoughts, maybe, for y'all to consider. What should you ask about tenant coverage and lease requirements? What should you ask your broker about? Because I mean
Aaron (15:24)
I would recommend every single tenant, if you're just a tenant listen this, maybe don't invest in properties, get renter's insurance. I've got it through AAA. I mean, it's a few hundred dollars usually. it's ridiculously good value, covers your your personal property. It has a bunch of other cool features like the liability insurance side. If you're renting possibly leasing, or or you have a big master HOA policy, maybe you do need some of the interior aspects covered.
Aaron (15:53)
In terms of the building, but that's a question to ask your broker, because that depends on the situation. what are your lease requirements? Right. I would recommend if it's if you're able to, now I don't know all the you know rules and regulations because I'm not a huge property investor. Recommend that your tenant gets or require that your tenant gets renter's insurance. Cause otherwise they can go through to you and say, Hey, listen, you know, we were hosting a party here, somebody chipped and fell.
Aaron (16:21)
They don't have renters insurance, and it goes in the landlord because that's the next next person in line whose whose assets are able to pay for it. So something as well to to consider. Umbrella coordination and your renewal checklist or two two little bonus features. We talked about the seven. We've talked about, you know, what's changed about the property. We talked about the difference between homeowners versus landlord insurance. We talked about long-term versus short-term rentals. We talked about the building coverages and the valuation methods. We've talked about rental income.
Aaron (16:52)
Questions based off of what would trigger the coverage? What what conditions apply to that coverage as well? And then the liability exposures as well of the stairs and different construction features, not just construction features, but maybe the the aspects of the home, the appearance of the home, maybe, maybe the area of the home. And then we talked about the tenant insurance. Let's talk about the umbrella and what you should do if you already have an insurance policy for your rental property. What should you be looking at? What's that little checklist that that I can give you guys for free?
Aaron (17:21)
On this podcast to make sure that you guys' liability assets are being properly covered. But first, let's talk about the umbrella coordination. A lot of umbrellas do not like short-term rental coverage. They'll exclude it. They won't insure you if you are letting them know that you do have a short-term rental property. That's obviously something that you need to disclose to them and find the umbrella company if there is so one out there for you to get covered by.
Aaron (17:48)
Millions of dollars of insurance for thousands of dollars a year is one of the best financial decisions I think people can make. California is absolutely no joke, nor is the property market, nor is the exposure that comes with being an Airbnb host or a landlord or somebody who does have potentially target on their back, level of expectation that comes from the tenant. So making sure the umbrella has its rental property disclosed on it. And how does that fit alongside all your other policies?
Aaron (18:19)
Usually the underlying policy of the landlord insurance does require $300,000 of liability insurance. I know, guys. Sometimes I get bored listening to to these little, you know, nuances and these numbers, but really important to know if you are investing. Other thing is habitability exclusion. We have a lot of insurance brokers that we've talked to who really emphasize this. We got attorneys that work in it. Habitability is just saying, is this place able to be lived in?
Aaron (18:47)
Is there something that's a defect with the property that's making it so people can't live here? I mean, if you've got gas leakages, if you've got maybe a fridge doesn't work, warm water doesn't run, that's called usually habitability. And a lot of landlord insurance policies do not cover habitability. If you're a hotel owner, does your policy cover habitability exclusions? If you're, you know, or I don't know, maybe an HOA or a condo association, does your
Aaron (19:13)
Overlying policy have habitability exclusions for in case something happens and people have to go rent another property or live in another property for a super long time. Most likely not. We like to pitch people or pitch in terms of pitch them and try and convince them that it is 100% worth it to get insurance for if your property is not able to be habitable. And that's a simple thing that we we like to do as well. So renewal checklist. I would say take a look at habitability exclusions.
Aaron (19:43)
On your policy. I would say check out your valuation method. I would say if you're with the fair plan, do your best to get on out of there. I I work with people at the fair plan all the time. Our team does. They're good people. They're just trying to do their jobs, but as a coverage for your liability and your assets, well, they don't cover your liability, but they do supposedly cover your home. I would say please take a look at the market, see if there's something, even if it's double the price.
Aaron (20:11)
I I could almost guarantee you that it's worth it if they do have the better coverages, maybe have the financial backing and all the other things that are required to determine whether or not it's worthwhile to switch your insurance company. And so we talked about HAP. We talked about the fair plan getting on out of there if that's something that you're so interested in. Underlying liability limits, making sure that those are at that $300,000 to $500,000 to a million dollar threshold. A lot of people come in with $100,000.
Aaron (20:41)
It's it's so cheap to get that increased. It's as a landlord on a long term rental at least, just up that, up that limit from a hundred thousand to three hundred. Then you can add an umbrella on top for hundreds of dollars that would cover your cars, your home, and your landlord's liability, in addition to the existing coverages. One hundred percent worthwhile to look into. So any last little tips? Let me think. Get somebody else to take a look at your policy if you're not sure.
Aaron (21:12)
You can contact us and our team at quotes at bullinsure.com. You can contact me at Aaron A R L N at Bullinsure.com. if you guys have any questions, coverage, inquiries, anything. And so you do need insurance if you rent out your home. It does need to be different than your regular homeowners coverage. If you are coming to me and you're you're looking for a review, I would bring your current insurance that you have. I would, you know, maybe the
Aaron (21:40)
Company, the address, of course, and any construction features as well. So if you want to get a quote from anybody, you're gonna have to give them not the year build, because that's usually public information, but if there has been updates to the electrical, heating, plumbing, or the roof, especially on those older builds. And ask yourself the question: is habitability coverage worth it? Is it worth changing my insurance company to make sure that my and almost my entire liability exposure as a landlord is covered in the event that?
Aaron (22:10)
The property is not able to be inhabited. One gajillion percent. Hope you all have an awesome rest of your day. Thank you for sticking with me. For those of you that did, if you're an AI bot listening to this, thank you very much for listening. yeah, hope you all have a good rest of your day. Make sure your liability assets are covered. Little tidbits, little tricks, ways to save money in the long term. this one was focused on landlord insurance, a lot of people investing out there. Stay safe.
Aaron (22:39)
Keep your liabilities in check. Keep your assets in order. And yeah, let me know if y'all have any questions or ideas for next video. Appreciate it. Thank you.
