The Coverage Gaps Most Real Estate Investors MissReal estate investing can be lucrative, but as a general rule, the more money is involved, the greater the risks. Having adequate real estate insurance in place can help you avoid losses and protect your gain, but real estate investors often miss common coverage gaps.
Coverage Gap #1: Renovation Risks
A completed property faces vastly different exposures than a property undergoing construction.
During the initial construction process, builder’s risk insurance provides coverage for damages to the property. Although real estate investors may be aware of the need for this coverage, they do not realize that builder’s risk insurance is also important during major renovations.
What should real estate investors do? If you’re relying on standard property insurance during renovations, you may have coverage gaps that could lead to uncovered losses. Don’t take the risk. Ahead of renovations, talk to your broker about your insurance needs.
Coverage Gap #2: Water Losses
Standard property insurance covers certain types of water losses, such as a roof leak caused by a storm or a sudden burst pipe. However, other types of water losses are excluded from standard coverage. If you’re relying on standard property insurance, you likely don’t have coverage for floods or sewer backup damage, and both of these events can lead to major losses.
What should real estate investors do? Although standard property insurance does not cover floods or sewer backup losses, you can secure coverage for these perils. For flood coverage, you need a stand-alone flood insurance policy. Keep in mind that flooding is possible anywhere, so even if you’re in a lower-risk area, you could benefit from coverage. For sewer backup coverage, you can typically add a sewer backup and sump overflow endorsement to your property insurance policy.
Coverage Gap #3: Income Disruption
When your income stops, you don’t get a break from expenses like property taxes and maintenance costs. Income disruption can stem from many issues, from natural disasters that leave properties uninhabitable to tenants who don’t pay the rent they owe. Real estate investors can plan for some income disruption and set aside reserves to provide breathing room, but securing insurance is also a smart move.
What should real estate investors do? Business interruption insurance can make up for lost income after certain covered events, such as storms or fires. Landlords may also want to look into rent guarantee insurance, which provides coverage for losses caused by tenants who don’t pay rent.
Coverage Gap #4: Nuclear Verdicts
Liability coverage protects you from lawsuits – but what if a jury verdict exceeds your limits? Jumbo-sized jury verdicts, known as nuclear verdicts, have been on the rise, and they can leave businesses exposed to uncovered losses.
What should real estate investors do? The liability limits that seemed sufficient in the past may no longer be adequate in the face of rising litigation costs. It’s a good time to reassess the limits on your various liability insurance policies and consider increasing them. You can also add a commercial umbrella liability insurance policy to provide another layer of protection on top of your underlying insurance policies.
Coverage Gap #5: Cyberattacks
The real estate industry is an attractive target for cybercriminals and scammers, who are drawn to financial data and high-value deals. Real estate investors may become victims of ransomware and other cyberattacks. Social engineering scams, including phishing, business email compromise and wire fraud, are also common. General liability insurance often excludes cyber losses, which can lead to coverage gaps.
What should real estate investors do? Stand-alone cyber insurance can help give real estate investors the protection they need for modern cybersecurity risks. If you don’t already have coverage, seriously consider obtaining it. Because social engineering and wire fraud are major problems in real estate, make sure your policy provides adequate coverage for these exposures.
Coverage Gap #6: Generative AI Exposures
As businesses adopt generative AI, they’re seeing new generative AI exposures. At the same time, insurers are introducing generative AI exclusions. As a result, you may not have coverage for a lawsuit stemming from your use of generative AI. AI-related lawsuits have already been filed for unfair price coordination among landlords, tenant screening discrimination and for use of false information in AI-generated listings.
What should real estate investors do? If you’re implementing generative AI in your workflows, conduct a risk assessment and insurance review. Also watch out for new AI exclusions in your various insurance policies, and talk to your insurance broker about your coverage options.
Are You Overlooking Any Real Estate Insurance Coverage Gaps?
Heffernan Insurance Brokers provides custom insurance programs for the real estate industry. We can help you review your coverage needs and make sure you have the real estate insurance you need. Learn more.
