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Summary: In this article, we will go over insurance basics for real estate investors. Learn about the different policy types, determining how much insurance is enough, how to efficiently protect multiple properties and insuring properties held in an LLC. Make sure you’re covered on your current real estate investment and future investment properties.

Insurance basics for real estate investors may sound like the most mundane topic on the planet. And I’ll admit, it can be. But it becomes a not-so-mundane subject when you consider the financial consequences of not being insured when an event occurs to your investment property. It’s hugely important, especially for rental property owners, to make sure your assets are adequately covered. It’s not if natural disasters or tenant negligence will happen, it’s when.

A Quick Look Back at the Losses From Natural Disasters in the U.S.

Looking back over the last four years, the amount of damage natural disasters have caused has been substantial. From the fires in California, to Hurricanes in the Southeast, tornadoes in the midwest and hail the size of baseball’s in Texas, the cost of these events is through the roof (pun intended).

2017 – $140 billion in total losses (thanks to Hurricane Harvey)

2018 – $80 billion in total losses

2019 – $51 billion in total losses

2020 – $95 billion in total losses


When Hurricane Harvey hit, many homes didn’t have flood insurance because they were not considered to be located in a flood zone. This forced those uninsured home and property owners to pay for the damages out-of-pocket–many of whom could not afford to. Securing the proper insurance is a must-do for any savvy real estate investor.

Insurance Basics for Real Estate - Concept #1: Individual Policy vs Master Policy

There are two main types of policies that property owners need to know: Individual and master.

Individual Insurance Policy

An Individual policy is one insurance contract that covers a single property, like your policy as a homeowner. It’s often called a landlord policy in buy-and-hold real estate, this policy offers no option to add more properties.

Master Insurance Policy

A Master policy, on the other hand, is when you are able to add properties to the policy after it’s set up. No more applications or underwriting is required for each additional property. There’s no need to set up multiple policies because you have the ability to add properties online as needed, instantly. You can also remove properties online. A Master policy allows real estate investors to manage the insurance on multiple properties–all under one carrier. For real estate investors with multiple properties, a Master policy is the way to go.

Insurance Basics for Real Estate - Concept #2: The Difference Between Investor Policy vs Force-Placed Policy

Real Estate Investor Policy

On a Real Estate Investor policy, general liability is included on every property. It’s broad or special–meaning it’s a more comprehensive insurance contract. There’s better coverage and the rates usually reflect the fact that it’s a lower risk type policy, compared to a Forced Placed policy.

Force-Placed Policy

Force-Placed policy insurance is when a borrower has failed to make payments, thus forcing the lender or bank to then cover their interest in that property because the borrower has not. Teese Force-Placed insurance policies are typically much more expensive and provide limited coverage. Force-Placed is also referred to as creditor-placed, lender-placed or collateral protection insurance. 

Most of the time, general liability is not covered on a Force-Placed policy, unless the lender forecloses on a property. A real estate investor using a Forced Placed policy is leaving themselves wide open to a lawsuit in the event of bodily injury or property damage. 

Bottom line, you don’t want to be on the receiving end of a Forced Placed policy as an investor…

“Every year, I get this foreboding notice from the insurance company saying this property is about to expire…If you don’t pay your premium, you’ll be put on a Force-Placed policy and it’ll cost a fortune…” Ben Erik Smith

Insurance Basics for Real Estate - Concept #3: Basic Form Policy vs Special Form Policy

A Basic Form policy means that only what is listed on the policy is covered. Typically, there are five basic perils that are covered (occasionally a couple perils will be added), which basically outlines what the policy covers. While there are lower premiums associated with a Basic Form policy, its coverage is much more limited.  

Special Form policy is the opposite. Everything is covered unless it is specifically listed in the contract. This type of policy tends to be the best option for long-term, buy-and-hold real estate investors. A Special Form policy will protect your asset much better than a Basic Form policy because it provides blanket coverage, rather than limited or select coverage. 

Naturally, there is a higher premium for a Special Form policy, however, unless you have a lot of cash reserves on hand to cover a major disaster, the comprehensive coverage will be well worth it.

Settlements: Replacement Cost vs Actual Cash Value

When an event happens and insurance is triggered, a settlement amount will then be paid out. How much you will be paid depends on your policy. This is why it’s so valuable to understand the difference between replacement cost and actual cash value

Replacement Cost

Replacement Cost is replacing the damaged item with something of like-quality and value. In other words, insurance will pay for the full cost of replacement.  

Replacement Cost = good. 

Investor Tip: Replacement cost and property value are two different things..

Actual Cash Value

With Actual Cash Value settlements, take the replacement cost and then deduct depreciation. The depreciation rate depends on the items condition and age at the time of loss. Obviously, this can vary widely, but it’s basically a diminished settlement. Oftentimes, this will be reflected in the premium as well.

For example: Peggy has a Basic Form policy on a rental property that needs a new roof. Unfortunately for Peg, her settlement policy is Actual Cash Value (plus coinsurance). As such, she only received $8,000 for the new roof that cost $20,000+. If poor Peggy had read the policy and made sure she was fully covered, she wouldn’t have had to pay the difference out-of-pocket. Darn it!

Actual Cost = bad

Deductibles & Limits: What is My Risk Tolerance?

How much are you willing to risk coming out-of-pocket in the event of a loss? Asking yourself this question will help determine your risk tolerance when deciding which insurance policy is best for you. Next we’ll explain insurance deductibles and liability limits, two insurance basics for real estate investors.

Insurance Deductibles Explained

An insurance deductible is how much you will pay when there’s damage to your property. Once the deductible has been met, insurance will then be responsible to cover costs. If you want to pay a lower monthly premium, know that it will come with a higher deductible. If you are prepared to pay more out-of-pocket when an event occurs in order to pay a lower premium, then your risk tolerance would be considered higher.

Insurance Limits Explained

There are limit thresholds when it comes to liability insurance. The limits on liability coverage can vary widely.  Typically on an Individual Landlord policy, the limits are between $300k-$500k per year. On a Master policy it’s typically $1M per occurrence, to $1M aggregate per property, per year. Carriers all have their own liability limit thresholds and they won’t go above their set amount. 

So what if I want more liability insurance? Hint: it’s raining out so I’d suggest taking an…

What is an Umbrella Policy?

To increase the limit of liability coverage, a lot of people will use an Umbrella policy in addition to an underlying Master or Individual policy. Once the underlying Master policy has reached its limit, the Umbrella policy would then kick in and cover any remaining liability.

Umbrella insurance policies include two parts: 1) Property, which covers damage to the property itself (i.e. natural disasters), and 2) General Liability, which covers the insured if they become legally obligated to pay damages for bodily injury and/or property damage. 

Deciding whether to put properties under an umbrella policy instead of using an LLC depends on your risk tolerance. It’s argued both ways, but it’s always wise to consult with your attorney.

Understanding Coinsurance

Master policies all have some sort of coinsurance clause. If the investor under insures a property, meaning if they insure it for less than 90% of replacement cost. Then at the time of a loss, coinsurance will trigger. A coinsurance penalty or clause means that the settlement will be reduced by the same percentage of deficiency that the investor is beneath replacement cost. 

For example: If you are covering your property for 50% of the replacement cost, at the time of your loss, the settlement will be reduced to roughly the same amount. I.e. If the replacement cost on your property is $100,000, in order to avoid coinsurance, you must be covering it for $90,000. If it’s only covered for $45,000, at the time of a loss and after the deductible is met, your settlement will be reduced by about the same percentage of deficiency. In this case about 50% less.

Keep in mind that not all policies have coinsurance.

Find the formula for Coinsurance here.

Claims Made vs Occurrence in Insurance

Claims Made in insurance means that if a claim happens it will only be paid during the policy period. In other words, if the policy is no longer active, insurance won’t pay a claim. 

Let’s say a tenant was made sick after bug spray was used. If the insurance policy has changed to a different carrier, even if the incident occurred while the property was insured–it won’t be retroactively covered because the policy isn’t active anymore.

Occurrence in insurance is just the opposite of Claims Made. If the same tenant that got sick from the bug spray, Under occurrence, the policy would still be triggered and insurance would pay the claim.


Now that we’ve covered the ins-and-outs of insurance basics for real estate investors, you’ll be  sure to get the coverage you need. Understanding the basics of rental property insurance will help you, as an investor, avoid costly mistakes. Don’t end up like Peggy and find yourself with an unexpected $12,000 out-of-pocket expense. Now you can move forward with confidence and peace of mind that you and your assets are protected from natural disasters, tenant negligence, and liability.  

Want to make sure your assets are covered?

Become a member today (it’s free!) and connect with our insurance expert, Beth Boisseau-Coots, CIC, VP of Sales/Broker for J.B. Lloyd & Associates

Bonus: Investor Tips

What if I have multiple investment properties across different states? What if my properties are held in an LLC or LLCs?

A Master policy covers multiple investment properties in different states. Insurance coverage also isn’t affected if properties are held in multiple LLCs. As long as the same person (the insurable interest) is on the policy. However, your primary residence must be on its own insurance policy.

What if I only have two properties? Would it make sense to go through the hoops of getting a Master policy or is that overkill?

According to our insurance expert, most carriers like to see three properties for a Master policy. However, if you’re planning to grow rather quickly and know they’re going to have more than two rental properties in the near future, then it would make sense to get a Master policy. As with most things, it just depends on the specific circumstances of each investor.

Prefer to watch and learn? Get even more information about insurance options from expert, Beth, in the webinar below.

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