- June 20, 2019
- Posted by: august19
- Category: Podcast
There are many FAQs from note investors as they venture into real estate investments. The most prominent ones concern insurance companies. Beth Boisseau-Coots, CIC, the Vice President of J.B. Lloyd & Associates, LLC, joins Chris and Gail to go in-depth on the worries every real estate investor and note investor have when it comes to loans and funding. J.B. Lloyd & Associates traditionally specialized in insurance for financial institutions, but has now extended their services to real estate investors as well. As they dive into queries starting off with the coverage of insurance, get educated on the difference between a real estate investor policy and a lender-placed or force-placed policy, liability exposure, the two different types of policy for real estate investors, the best kind of insurance for landlords with rentals, claims made policy, occurrence policy, and more.
Listen to the podcast here:
The Most FAQs On Insurance From Note Investors with Beth Boisseau-Coots, CIC
We’re joined by the lovely Beth Boisseau-Coots from J.B. Lloyd Insurance. How are you, Beth?
Beth is someone we’ve been trying to get on our show for a long time. She’s a very busy person, not just because there are a lot of natural disasters going on all the time it seems, but you moved.
Yes, we are now residents of Austin, Texas.
Dallas to Austin. How are you settling in?
Pretty well. We’re navigating the boxes. Moving is horrible.
I’ve been living in my house for 30 years. I vowed I would die in the south so my children will have to deal with everything.
It’s worth it. I didn’t know we have too much stuff. We’d been in the house for thirteen years.
I don’t open the boxes for the first thirteen years. It’s convenient to move them on to the next place. We asked Beth to prepare a little bit, and you were kind enough to say that you have a list in mind already of the most frequently asked questions that you get from note investors. Tell me, first of all, how much of your business is note investors as opposed to other kinds of investors or regular people?
In J.B. Lloyd & Associates, we traditionally specialize in insurance for financial institutions. The breakdown now is about 50/50 from me personally between the banks and real estate investors. It’s interesting how we got involved with it. On the bank side, there are two sides of the house. There are the professional lines and then there’s the lending side. On the lending side, they need lender-placed insurance. During the Great Recession, the banks were offloading great giant pools of distressed assets and real estate investors were born, and they were buying them. I was getting calls because people needed an insurance policy similar to the lender-placed form. That was how I fell into this. Over the years, we’ve adapted as your space has grown, we’ve tried to be responsive and grow with it. We’ve adapted the form to be a little bit more customized for the real estate investor.
Beth revealed something that I have never heard. You are the heiress of the J.B. Lloyd family.
I am Jim’s daughter and J.B. Lloyd is my father. We laugh in this business. Nobody sets out thinking, “I’m going to grow up and be an insurance agent.” Most of us who are in the business became part of it because of a parent or a family member. I started doing this several years ago in March and I love it. If you had told me as a teenager that I would say that or even be in this business, I would have laughed at you but it’s always interesting, there’s always a challenge and something to learn.
What did you think you were going to do when you were growing up?
I majored in art and I had an art business for many years. I had a change of life and decided to do something different and went into sales. My father saw that I could be a good advisor to people and hired me away. That’s how I landed in the insurance business and it’s been wonderful. It’s been the most challenging thing I’ve done but that’s why I have never gotten bored with it, and I work with great people that are the best part of it.
I have to say you are very easy to talk to and you’re very good about explaining things because I have had a fair number of brushes with insurance claims. I still don’t totally understand what I own and what’s going to happen. I’m glad you’re here because I have as many questions as people who are newer to this.
Nobody knows a lot about insurance if you’re not in it. It’s like eating cardboard reading the policy. It’s necessary and important.
The policies are 200 pages long.
Most of the information can be found on the declarations page. If you do nothing else, read the declarations page.
You had said you could share with us what the most common questions are that note investors are asking you. I’m curious to get what they are.
There’s quite a few and it varies. One of the biggest questions I get is, “What’s covered? What do I have? What is this?” People want to know what real estate investor insurance is. There’s a lot of confusion. People will say, “Use the term lender-placed or force-placed insurance interchangeably with real estate investor insurance,” and there is a difference. Real estate investor insurance is a little different than force-placed insurance. There’s a lot that’s similar in their traditional form, both are master policies, which will allow the insured to add properties or assets as needed.
Both will allow, in most cases, the insured to pay monthly and only pay for what they use. The biggest difference is that a real estate investor policy will have liability coverage on all assets regardless of the status of the property whereas a lender-placed or force-placed policy is only going to cover liability on foreclosed properties. The other one is that a real estate investor policy will have a coinsurance penalty built in. Those are the differences between the two policies. They’re very similar and a lot of you use the terms interchangeably but there is a distinct difference and the main one is liability.
Lender-placed and force-placed are where the liability difference is.
Lender-placed and force-placed are the same things. That’s an insurance policy that lenders and banks that lend on real estate will have. It’s very similar to a real estate investor policy but there are some key differences, and the main one is the liability coverage. Liability coverage is included unless an insured opts out. It’s included on all of the properties a real estate investor has.
Is liability missing from one of those?
On a bank policy, the force-placed policy liability coverage is only included on foreclosed properties.
One of the things I like about J.B. Lloyd that you hit upon, one is you can pay monthly on your policies with you where other firms charge you for the full year. If you’re investing a $100,000 property, that policy may be caught $1,100 to $1,200 a year, with your program we can pay monthly. On every other program, you’ve got to pay the $1,200 out. The other thing is the force-placed insurance. When I used my servicer, I asked that question about liability and stuff. Sometimes they say, “It’s not a liability,” but also once you foreclose and take the property, they say, “That policy is canceled and you have to go get it somewhere else,” because they’re not servicing anymore. Those are the two things I want to mention to people who may use a servicer or lender-placed to get their insurance to be careful of. Know enough and talk more about that.
I have many contracts for deed and we own those houses. They’re in our names and our entity names. If they have borrowers in them, do they not have liability?
They do if it’s a real estate investor policy. The reason it’s set up this way and that it’s evolved to be this versus the force-placed is because a real estate investor has any number types of investments. Sometimes, somebody will specialize in one area or another but oftentimes you’ll find an investor will have a contract for deeds. They’ll have some buy and holds. Maybe they’ll do a few fix and flips and maybe they’re acting as a private lender outright to a long-term tenant or something. You’ve got a lot of different types of things going on in some cases, all of which the investor has an insurable interest but it’s not as cut and dry. Whereas a force-placed policy is speaking to a bank’s need simply to cover their interest in a property should the borrower let their insurance policy lapse. In that case, the borrower would still be having all the exposure for the liability. Should there be a liability claim, whether they have insurance or not, the exposure is still on them, not the bank.
Once the bank forecloses, that shifts and the exposure is on the bank. That’s why the force-placed is set up that way. With a real estate investor, you have the exposure all the way around. If you’re a landlord, you have the exposure, you’re on the deed, you own that property, you have some peril that causes a kid to cut their hand off or whatever. You still have that exposure. If it’s a contract for deed, even if you’ve got a contract in place with your borrower, you’re still on the deed. You’ll have that tie to the property. On a fix and flip, it’s the same thing. There’s a liability exposure in any of the scenarios you can think of as a real estate investor. A bank or a traditional lender doesn’t have that same type of exposure. That’s the reason for the difference in that.
Chris and I were discussing at what point you have an insurable interest in a property. The classic scenario for us as note buyers and contract for deed buyers is that, we pay them money and then it’s usually a wait of a couple of weeks to even a few months before we get the deed and the transfer documents to us. What is going on during that time? At what point do we have an insurable interest on a contract for deed?
As soon as the contract is signed.
Our purchase contract for this asset.
Even while in that interim, you’re waiting for the deed, you still have that insurable interest because that contract is complete.Nobody knows a lot about insurance if you're not in it. It's like eating cardboard reading the policy, but it's necessary and important. Click To Tweet
I have a moment on that. That’s when I emailed you. I’m like, “When does that occur?” I think if that’s the way to a deed, I am in this big limbo. I was talking to Gail about you do an inspection or you do a BPO on a property but you don’t close until a week later. One of the things I mentioned was, “Why do these contracts don’t say that the seller’s going to keep insurance on the property until the sale date?” I may have looked at that property, I’m closing on it and there’s that two-week lapse and I’m like, “There’s that month before it gets recorded.”
I had another version of that because I famously bought a church out of a commissioner’s sale. There’s a long period of time where you’ve paid the money. I went to an auction in Indiana but first, there’s a tax sale. Everybody has tax sales but then if you’ve ever wondered what happens to all the properties that don’t sell in a tax sale, they get bumped to another sale, the commissioner sale. Once you buy at auction the property and pay the money to the county, there’s a four-month redemption period and after that sale’s over, you apply for the deed and the court can take up to two months to give it to you. There are six months where you’ve paid a bunch of money, but I wasn’t sure that I had an insurable interest yet.
As long as you’ve got something to prove that you have paid the money, then yes, your insurable interest starts there.
Can we only get the amount of insurance that we’ve spent, the value that we spent or can we go up to the actual value of the property itself?
The answer is it depends. There are two different types of policy in the real estate investor world, DP-1 and DP-3. On the DP-3, that is a replacement cost policy. You don’t have to cover it for replacement cost but if you do not when there is a claim, then there would be a coinsurance penalty attached to the claim.
What does that mean a coinsurance penalty? Can you give us an instance of what would happen?
Coinsurance is a percentage of the replacement costs. If your policy has a coinsurance clause of 80%, 80-20, then if you insure the property on a replacement of DP-3 for less than replacement costs, if it’s an 80-20 coinsurance clause and the carrier at claim time determines that you have insured the property for less than 80% of that coinsurance, there is a penalty. They will take that claim amount and reduce it accordingly to the same percentage as the 80%.
Sometimes insurance or real estate investors want to only cover their interest in a property, which is understandable. They say, “The replacement cost is $200,000. I spent $30,000. There’s no way I want to pay this premium on this property.” That’s fine. Know that in the event of a claim, you’ll have some coverage but you’re also going to be self-insuring to a degree. Do you want to pay more up front or do you want to pay more at claim time? Look at it as, “Do I want to self-insure and have a bucket of money set aside for this coinsurance clause later and saving money or do I want to pay more now and then have a better settlement at claim time?”
That is confusing as we buy these contracts for deed properties. The values are all over the map. They are low-value houses for the most part, to begin with. A lot of things can extremely affect their value and it’s hard to even assess the value if you have realtors who only like to sell pretty houses when you send them to look at one of these and give you a value. I had someone sell me a house in Indiana that was only worth $10,000 because it was beaten up but we put a little bit of fix up money and we sold it for $49,900 after putting $5,000 into it. What is the value of that house and how am I supposed to determine that?
First, the difference between a DP-1 and a DP-3. The DP-1 policy allows you to cover a property for only what your interest is in it but the replacement cost, the way to determine it varies from area to area. The most recent figure I got is $100 per square foot. I had an investor in West Texas, there was a hailstorm and 26 of his properties had to get new roofs. He went into it knowing the situation. He went into it knowing there would be a coinsurance penalty at the time when there was a claim. He was like, “I’m not paying replacement cost on these $20,000 bungalows I’ve gotten in West Texas because that’s ridiculous.” He went into it knowing and well aware of what he was doing but of course when 26 roofs had to be replaced, that coinsurance penalty did kick in and after the deductible, he did have to pay coming out of pocket more than he would’ve otherwise. The replacement cost for that guy in West Texas was $117 a square foot. Replacement cost varies from area to area. To know specifically, you can contact a local agent, they’ve got access to Marshall & Swift but you’re pretty safe if you stick with $100.
The very first contract for deed I ever bought was at the end of 2016 and on March 9th of the following year that house burned down. It was my first note experience.
Is there a price difference between a DP-1 and a DP-3, as one more expensive typically per thousand or per hundred than the other?
Typically, the rates per 100 are going to be exactly the same. The difference is if you are doing replacement costs, that rate per 100 is going to be much higher than if you’re doing the amount of interest you have in the property. $30,000 versus $120,000 you break that down but the coverage is better on a DP-3 in general, which brings me to one of my things I was going to talk about the difference between a basic form policy and a special form policy. I’ve had people come to me because they had a real estate investor policy that they thought was everything they needed to be and then the claim happened and they found out they had a basic form policy with a hefty coinsurance clause and a high deductible. When they had that tree fall through their roof, they got $2,000 on a $20,000 claim and they were not happy. It’s fine to have one but know that you have it. A basic form only insures for what is named, what is listed on the policy and nothing else.
Typically, it’s five basic perils, although some of them endorse for some more. The five basic perils are going to be fire, lightning, explosion, smoke and windstorm, sometimes they will add hale, riot and vandalism but anything outside of the things listed are not covered. You can see where that would be very limited. A special form policy or a broad form or all-risk, it’s all the same. Those policies are just like they sound, they’re special and they cover everything unless it’s specifically excluded. That’s going to be a much more comprehensive policy than something that’s only covering for what’s listed because there can be a whole lot outside of what’s those five or ten or whatever they put on their perils. That’s an important thing to know when you’re shopping for insurance, “Is this policy you’re offering me a basic form or a special form?” If you get a quote from Joe down the street and they’re like, “Beth, this is a third of the cost of what you’re offering me. I’m going with him,” that’s fine. Know what you’re buying, know what your coverage is, that way you don’t end up with paying for your new roof when you thought you had coverage.
If the claims made was an occurrence-based type of policy you hear people talk about, one of them can be a “gotcha.” Is that correct?
Yes, surely, they both can be gotchas but one more so than the other. Claims-made policy only will cover claims made during the policy period, anything that happened after that policy period ends or if let’s say the policy period ends and you find out that a tree fell through the roof, you’re out of luck. With an occurrence policy, if you find out a tree fell through the roof during the previous policy’s coverage period, potentially a claim can still be made going back to that policy. They’ll still honor it even once the policy is no longer in effect.
There’s a time limit though for reporting it.
It depends from policy to policy and some more so than others. I had a roof claim that I was able to go back five years on a house I owned.
I wonder what prevents the policyholders from finding out for five years or something like that.
It was a rental and I didn’t know how bad it was. You learn the hard way sometimes but I was able to get a new roof because my previous policy was occurrence. That being said, there are some caveats. It’s not cut and dry even with the occurrence policy. For example, you have to have an insurable interest. Let’s say you buy a property from Chris and he has the policy and it’s an occurrence policy and then you’re the owner. Chris cannot make a claim on his insurance policy that was an occurrence policy if he no longer has an insurable interest in it. Like many other things, there are some ambiguities, especially in the real estate investor world. I know that there are a lot of private deals that go on.
There are a lot of things. Chris may still have his name on the deed, which then designates him having an insurable interest even though you guys have signed some contract that gives you some ownership in the property as well. In a case like that, he would have insurable interest and the claim could be made. Another example would be let’s say you had your property covered under a servicer and then you moved it over J.B. Lloyd then the servicers policy because you feel you’re involved with both, the insurable interest would still be there. Wherein at an occurrence policy, you would still be able to make a claim. It’s not an across the board all the time. If Chris sells the property to you, his name has nothing to do with it anymore. You can’t go make a claim in Chris’s old policy.
We need to find out before we transfer it whether anything has happened that needs to be addressed.The five basic perils in real estate are fire, lightning, explosion, smoke and windstorm. Click To Tweet
I’m working with another investor and an attorney on some language and verbiage for the contracts. It’s so important to do your due diligence on these things. I know a lot of them are distressed, but to know if there are any preexisting conditions, you go in with your eyes wide open. We’re working with this attorney that will put some language in the contract that will hopefully hold the sellers accountable if they’re selling something knowing there are some preexisting conditions.
I’m selling a house in Birmingham. I put it up for sale for $500 on Facebook Marketplace because it’s a terrible house. The headline says, “This house totally sucks and that’s why I’m selling it for less than the price of an iPhone.” I have many interested parties.
Be sure to say, “I’m giving it to you as is.”
Let me interrupt you to say that you have the best portal and the ability to add your own coverages, add your own properties, change coverages, cancel policies. It’s genius and it probably keeps people from bothering you, too.
Thank you. We try. My dad said when we put it together, it had to be Jim-proof because he’s very nontechnical and he said he had to be able to work it. That’s been our litmus test.
It seems very Jim-proof to me. If I’m going on there and putting force-placed insurance on things, do I have DP-1 or DP-3 or is that not where it gets established?
It depends. On yours, because we’re changing you up, your original policy was an actual traditional force-placed policy which sometimes with real estate investors, we do. When you and I originally talked, the real estate investor form was not as evolved as it has become since then. You have a traditional force-placed policy which has its pros and cons. You do have very good coverage.
Maybe I shouldn’t mess with it. My rates are going up. I used to have a whole bunch of properties under one entity name and I’m chucking them out into smaller things. My rates went from $1 per hundred to $1.15.
Let’s talk and look at what the differences are and you can make the call on it.
There are a few questions I’ll ask you that came through. What kind of insurance is good for landlords with rentals?
Real estate investor policy works very well for landlords with rentals. You can add loss of rents to it and that’s always good. Some lenders of real estate investors require a loss of rents but the master policy is a very good policy for that. It allows the investor that is a landlord to manage the insurance on the properties in one place.
Another question that came through was what if the value of the home is less than the UPB? The house was worth $50,000 and the unpaid principal balance is $100,000 and it burns down. Is the claim based on the amount of replacement costs or the property value or the unpaid balance? If somebody has $100,000 on the mortgage and the property’s only worth $50,000, how does that work in those situations?
That’s the financial considerations and they’re connected, but that’s not the insurance. With insurance, it doesn’t matter what the unpaid balance is, and it doesn’t matter what the property is worth, what matters is what it would cost to rebuild the property. Let’s say, in that example, the unpaid balance is $100,000. The property is worth on the market $50,000 but because the property is 1,000 square feet, the replacement cost is $100,000. If you’re using replacement costs and you insure that property for $100,000 at the time of a claim, then after the deductible you will get full replacement cost.
You’re going to come out even. A better example might be, let’s say the unpaid balance is $150,000 and the property is worth $50,000 but the replacement cost is $100,000. At the time of a total loss, you basically be out the deductible. Let’s use $2,500 as an example, but you’d also be out that $50,000 of unpaid balance and you’d be upside down. Insurance isn’t a tool to recoup your investment. It’s to protect your interests and it’s different. You’re not supposed to profit from insurance. You’re supposed to be made whole.
Say Gail had this house burned down and had insurance for $100,000, you collect $100,000. Do you have to rebuild that house for the borrower or can you say, “I’m taking my money from the insurance claim and see you later?” What rights does a borrower have? They don’t have their own insurance. You have the insurance covering your asset in the property, but do I have to go back and build that home for that borrower again?
In that case, it depends. That’s another famous line in insurance. Some of our policies have specific language that if you do not repair or replace the damage within 90 days or some of them have other specified numbers of days, 90 is the one that’s coming to mind that’s on the great American policy, then the claim amount is reduced with the settlement amount is reduced from a replacement cost settlement to an actual cash value settlement. That was on my list to go over those terms. Replacement cost is the cost to rebuild. The actual cash value or ACV is you take the replacement cost, you deduct depreciation and that would be the amount less the deductible and any coinsurance. That can hit hard. In a case like this, let’s say the investor doesn’t want to rebuild, he wants to take the money and run with some of the policies, that’s fine.
He would get a lesser settlement than he would have otherwise. On some of the other policies we have, it wouldn’t matter. It would be the replacement costs. There would be no penalty for not rebuilding. That being said, as the policyholder, the real estate investor has no obligation to the tenant or their borrower unless they have some other type of legal arrangement with that person. We have a program and I know some other insurers do as well that will allow homeowners that perhaps are not on the deed, like a person who’s involved with a contract for deed they’re in the house but you as the investor have the deed. There’s a program that will get them their own insurance and that’s going to be in the best interest of the borrower tenant to have their own policy, whether it’s a tenant liability, renter’s insurance policy or a homeowner’s policy that’s suited to them and their particular arrangements. You guys don’t have the obligation. You don’t have to rebuild, you don’t have to replace their stuff, you are the named insured, the check is being written to you.
In the case of my house that burned down, I hadn’t even connected with the borrower enough to know whether they had their own insurance. I had my own insurance and it turned out that they did have their own insurance. The first thing is that you can’t collect on two policies. It’s not life insurance where we can have multiple policies. I assume that maybe the second policy would have filled in any gaps or there was nothing that I could get from the second policy.
If they had their own insurance policy, that would be primary. That would be the one that kicked in. If they have their own, then yours would not kick in. If they’re a tenant though and they have renter’s insurance, then yours would kick in. Theirs would only cover the contents.
I was a new note investor. Of course, I went to the most experienced people that I knew in the business, and it’s surprising and probably good how few people experience a fire in their lifetime even owning a lot of houses. The thing that was weird about it is that because it was the contract for deed borrower’s policy, I was very surprised that the insurance company was going to give all the money to the borrower and I was going to have to chase them for it. My servicer initially was talking to the insurance company to say, “Let’s send separate checks. You send us a check for the balance. You send her the check for the remainder,” and that was not what they did. It turned into a very big cliff hanger about whether I would have to chase her for the money.
There’s some gray area there with the whole contract for deed thing. If the borrower has the insurance, even though they’re not on the deed but they decided to take the money and run, then the investor is out. That would be a legal question. I don’t even know if I can answer that because at some point you would hope that your coverage would kick in if they did do that.
I was lucky that she agreed to let them pay me separately.Real estate investor policy works very well for landlords with rentals. Click To Tweet
Somebody asked a question, “If there’s a minimum requirement to work, would you avoid those? There was a rumor that you must have four properties to insure before we can work with you.”
We can still work together if you have fewer than that. It’s not always worth the investor’s time. It’s three or four depending on the values of the property. Sometimes the underwriters like to speak five if they’re all very low-value properties. The underwriters want to see if there’s going to be a basis for a premium to offset the risk of the policy. We have access to a carrier who will do the one-off type of properties and it’s pretty good. The thing is the premiums tend to be a little high. If an investor is starting out, they have one or two. The first thing they should probably do in that case is to go to their local agent and see if they can get some quick coverage that’s reasonable. When they build it up to a place where they’ve got three to five, depending on the values, then we can talk. If they can’t get coverage through their local agent, we can get it for them. It’s not the master policy and the premium is a little high. Sometimes the coverage is not great. It’s better than nothing, but we can help them. It’s not my preference and I don’t believe it’s in the best interest of the investors.
When you say depending on the value of the house, do you have in your mind a dollar amount of how much house you need in whatever number of properties?
I don’t and I don’t think that the underwriters have a very consistent view of that either because I have found no consistency in it. It depends on where they are and how busy they are, they’ve got a lot coming in. They get a little pickier if they don’t. They’re like, “Two of them that are valued at 50,000 each. We’ve got this, we’ll give you the best rates.”
$50,000 is a very nice contract for deed house.
That’s what I usually tell people on their first note. If they’ve got so much going on, get the insurance from your servicer for the time being. They’ve got so much in it to get the policy through and all the paperwork and everything. You tell the servicer, “Put this on your insurance for this much,” and let them know whether it’s contract for deed or not. It has a liability component to it.
I like that. I love business and I love working with people, but I want to be able to work with people fairly and give them the best product for the fair price. It’s better to educate and say, “This is what we have available. When you get to this place with it, it’s going to make the most sense for you, and this is how it will work at that time.”
I know you still got your list and we got a few questions. There are certain things that would be a priority for you to cover.
To quickly address flood problems, especially in Texas, California and a few other areas. We can add that to policies, which is all part of the portal. It’s a separate policy but it’s seamless. You log in, add it, pick the flood option and go from there.
You have to go find a flood map and see what zone you’re in.
Yes, to know if it’s going to be covered. Our flood policy is covered at the national flood rates. It’s good for a stop gap to get the coverage but sometimes you’re going to find better premiums doing individual flood policy. Say you get a property tomorrow, you realize it’s in a flood plain, you need that coverage immediately, put it on the online system, and you’ve got that covered and then go shop and find a better deal. That’s my standard advice on the flood.
You didn’t use to have that as a self-selecting on your portal and you’ve added it, but one of the things that you do ask in a dropdown box is what flood zone it is. Do the rates vary according to how high risk?
It varies according to the flood map, the national flood rates according to what flood zone they’re in. We don’t make the determination of what those rates are. They’re told to us but private flood insurance can be a lot more affordable.
I attempted to sign up for flood insurance in an X zone, which is not flood risk and it kept coming back as my premium was zero.
One question that came up was about buying a partial and if they need insurance. On partials, it depends who you’re buying them from, but check your contract because usually that person who’s managing, still should be responsible for the insurance, you shouldn’t have to get a separate policy. It’s something you’d want to check your contract and stuff. I know when I sell partials to somebody, I am the one who manages and holds the insurance. Basically, that investment doesn’t have any insurance requirement or anything additional in that sense.
Let’s say you sell a partial, you can add the person who you’re selling it to as an additional mortgagee on that specific property on the online system and then print them. You’re having an interest in that property but not the entire policy and not all the properties that are on the policy. It’s similar to how you would if you had a lender.
Do you write policies in wildfire zones?
We do. In fact, I do with my banks. I do a whole lot of work in California.
If there are less than ten properties, is there a setup fee?
No, there is a policy fee that covers the cost of filing the policy in the state in which investors can file but there’s not a setup fee.
This one’s a brain teaser question. He foreclosed on a non-owner-occupied property from a second position. There is a tenant who’s in there that the lease expires in November of 2020. He did not pay off the first lien foreclosed. He becomes the landlord paying the insurance premium that the borrower purchased every month as part of the escrow. How does he add his entity as insured to the current policy? Does he take a new policy and inform the senior lien holders? He foreclosed and he took over the first mortgage. The first mortgage probably has an insurance policy covering the place, but he wants to ensure his rights is what he’s looking to do.
It sounds like the insurance policy that is in place does not have him listed as the named insured, is that correct?'It depends again' is another famous line in insurance. Click To Tweet
Yeah, and he wants to know how he can get named.
The named insured would have to contact his or her insurance company that has that insurance policy on that property and add him as an additional named insured or cancel that policy and then he needs to get his own policy. It would be one or the other.
He probably has to name the first position lien holder as an additional insured. He then said, “What if the borrower doesn’t cooperate? I foreclosed on her.” It doesn’t matter if she cooperates or not because you foreclosed on her.
That’s when you get the attorneys involved.
How can he get a policy number and carrier info?
From the first lien holder. I was assuming there would be a relationship and communication there.
It’s got to be negotiated.
I don’t have a problem bringing him on. We have a question, “How much should the borrower be insured for the value of the collateral or the loan amount? What percentage of the insured amount is paid out in case of fire or flood?” We covered that in the sense that you should protect your interests in value. The property and the borrower aren’t the ones being insured.
The first time a tree crashed on a roof of mine, I was not aware of the depreciation deduction. That was a little tough.
This property is in Connecticut, “I foreclosed from the second position. Should I get the insurance information like the policy number, the agent number and the phone number to call from the senior lien lender? How should I do it?”
If you’re not the named insured, even if you have the policy information and you call them, they cannot talk to you. You need to speak to the named insured. If you can get that person’s contact information, that’s who you need to talk to.
I have the information. What happened is when I foreclosed and borrowed, I don’t have the number and the tenant gave me the previous landlord’s name and number. When I called him, it was Cash for Keys kind of thing. I foreclosed on her and took the property, getting the insurance information, they don’t have to essentially disclose that info.
Is the borrower the one who’s the named insured?
This would be a case where if you had a force-placed policy or a real estate investor policy, you would then send them a letter saying, “I need to be added as a named insured on your policy and I need proof of this by this date.”
Do I need to call for a different insurance agent and basically tell them that I want to buy force-placed insurance?
If a claim is going to be filed, will the two insurance companies be fighting against each other, like who needs to pay what?
No, because as long as you’ve sent her the letters that state what you’re doing, if she doesn’t comply with the requirements which is that she adds you as the lender on the policy as an additional mortgagee, then you’re going to force-placed coverage on her and you give her a timeframe. It’s typically 30 days, and then after 30 days you then send another letter and you’ve got two weeks. At the end of that two weeks, if it doesn’t happen then you can force legally, and you would be the primary because she did not comply with the insurance requirements as stated in the contract.
You should have copies of those letters too because those are CFPB tech letters.
In a situation where you foreclosed, any borrower when you first take over a loan and demand proof of insurance, if they don’t give it to you, you send these letters. As soon as you do the required two letters 30 days apart, then you’d be able to add the cost of your force-placed insurance to their loan. It’s a beautiful dream that you will get that money back. In most cases, more and more I see that we get these houses back and there’s never any reimbursement for the insurance.
You have to go through the steps of the regulations and inform them, give them fair warning that this is what you’re requiring, this is what’s going to happen if you don’t get it and that pertains to proof of coverage that they should send you. It pertains to adding you as the lender, as an additional mortgagee. It can pertain to the best rating of the insurance carrier. You can say, “I will not accept insurance from anything less than a B rated carrier.” It also can pertain to the limits. You can require limits. You can say to your borrower, as the insurance companies do, “I need you to have at least 80% of replacement costs with this deductible.” You can put all that in there and if they don’t follow any of those things, you can force.
They ignore us, Beth.
They think that they are covered because you have coverage.
Those letters very specifically say that what we have is probably not going to be that helpful to you. You should get better coverage at a better price yourself if you went for it.
Beth, you have a portal that a borrower can go on and apply for insurance.
Yes, that was what I was referring to for those homeowners that may not be on the deed, yet they are homeowners in the contract for deed situation.
As long as they have to be the borrowers or any borrowers can go onto your portal?
It’s a homeowner’s policy for anybody who has a hard time getting homeowner’s insurance. It came about prior to the financial collapse, back when you could have a 400-credit score or FICO score and still get a stated income only mortgage for $700,000. I worked with a lot of mortgage brokers back then on this program. They could qualify anybody but those same borrowers could not get insurance because their credit score was so bad. One thing I was going to address and we did was how to handle REOs. On a real estate investor policy, it’s no different than handling any other property you have an interest in because the liabilities are there. Gail, yours is a force-placed policy. You need to be very cognizant that you change the status when you go into foreclosure because you want to be sure that liability gets added.
I better go check all my things. When we get houses back and they become REOs, then lots of times we’re renovating. Is there a builder’s risk that we should transition into and how does that get arranged?
It depends on your policy and it’s not if, it’s when. Some of my carriers have builder’s risk built into the policy. You don’t have to do anything. It’s covered. Some others we can add it as a separate like a flood. It’s an additional policy and you don’t see any difference. You have an additional option on the dropdown for builder’s risk. If it’s more than 80% complete, it’s not considered a builder’s risk.
I was going to ask you how much do you have to be doing to need a builder’s risk? How much renovation? If we’re ripping out a kitchen and putting in new cabinets and stuff, is that a builder’s risk situation?
Anything less than 80% completion is builder’s risk. A kitchen remodel may or may not be, but if you’re going in and going to the studs throughout the entire property, that would be builder’s risk. It’s that 80% and then you’re pretty safe.
If we take back properties as REO and keep them as rentals and stuff, we can keep the policy with you if it’s a real estate investor policy, correct?
Yes. In fact, some real estate investors have nothing but rentals and use this policy. Be aware that if you don’t add loss of rents and you’re doing a rental, then if the house burns down and you have no tenant in there while you’re completing the repairs or rebuilding, unless you have covered it for loss of rents, you will be out that income during the time that there’s no tenant there. Consider loss of rents in that situation or if you’re not going to do it, be aware that you’ll be out that income.
Some of us are saying, “What if there are two policies?” There’s an existing policy and then you take out a policy.
The first mortgage has a policy. Can the second get a policy as well to cover their interests or if they’re not additionally insured on the first and the person’s not paying, should they in the second position also have a lender-placed or force-placed or their own investor insurance on a property?
They could if the first position person is not covering them and that agreement has not been made between the two parties, then the second lien holder could put a DP-1 policy where they’re only covering their interest in the policy or in the property.
If they owed you $20,000, you could get a DP-1 for that $20,000 balance or something.
Can the insurance that covers rents be added on to her regular insurance?
Yes. We call it loss of rents. Renter’s insurance is what would cover a person that was renting. Loss of rents can be added to a landlord policy and that would kick in after 30 days after the loss and cover the amount of rent that is what they would normally get for up to twelve months or during the time of repairs if it was less than twelve months.
Beth, if people would want to reach out and contact you to get stuff set up. Do you mind giving people your contact information?
My cell phone is (972) 342-4280 and my email address is at EBoisseau@Lloyd-INS.com. If you think of any questions that we didn’t cover, you wake up at 10:00 AM with this burning desire to know more about replacement costs insurance, please email me. Don’t call, email me. You can call me after 7:00 AM Central Time. If you think of any other questions, I’m happy to answer them and feel free to reach out. You don’t have to be a client to do that. I’m happy to help.
A question did pop up for force-placed insurance. Is it true it needs to be monitored weekly?
No, only if there are changes. If you have a change in the amount you want coverage, change in the occupancy or the change in the status, you can go online but as long as it’s on there, it’s on there. It doesn’t go off until you take it off.
This has been a very information-packed session. My takeaway from this is that as things happen, I’m going to keep needing to ask you situational questions for probably a couple more years until I feel like I get my arms around this subject. I’m a slow learner when it comes to insurance.
Two things I’ll comment on, to understand insurance and once you get a certain sized loan, I recommend going to a company like J.B. Lloyd because when you’re using a servicer, when you have to file a claim, it’s a pain. You’re dealing with the servicer and the insurance and there’s a lot of miscommunication. One of the things that I like about J.B. Lloyd is the fact that how simple it is to add and remove loans. With other carriers, sometimes you have to fill out a form, send in the check for the year. When you sell the loan for months later, you have to email them or send them a letter that then they’ll mail you the refund and things like that. Here you can pay everything on a monthly basis, you can go in and have a portal to see what’s insured and what’s not. If there’s a question, “Did I ensure that property or not?” open the system, you can then check when it’s put in, you can print out the declaration page and send it to your servicer. They have it, they can start collecting the escrow and start sending you the money back.
You always let people go back, but how far back do you let people go? Is it as long as there hasn’t been a disaster, you don’t care?
You can go back to the policy inception. If you’re in this policy period, you could go back. Let’s say your renewal date is January, you can go back as far as January but if you go back that far, Misty is going to have to go in and click her little button to get it out of pending status.
Thank you so much, Beth.
Thank you for having me. I have certainly enjoyed this, and I appreciate you all having me on here. If anybody thinks of anything, please let me know.
We covered a lot of great content. Nobody likes insurance but it’s a necessary evil. When people are sitting there trying to evaluate what they’re going to insure properties for, don’t go cheap and insure it for what it’s worth because a lot of times, it’s getting charged back to the borrower. In a nonperforming note, it’s the cost of doing business. You want to make sure you protect your interest, especially using other people’s money.
Thanks for joining us, everyone go out and do some good deeds. We’ll see you on the next one.
About Beth Boisseau-Coots
Over 13 years of experience in sales, management, and marketing in the property and casualty insurance industry. Specializing in insurance coverages for financial institutions, mortgage servicers & lenders, real estate investors, and the multi-family housing industry.
Coverages & programs include Financial Institution Bonds, Directors & Officers Liability, Employment Practices Liability, Fiduciary Liability, Lender Liability, Professional Liability, E&O, Cyber Liability, Property, General Liability, Auto, Umbrella, Lender Placed Insurance, Full Outsourced Insurance Tracking, and Real Estate Investor Insurance Programs.
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