By Andrew G. Costlow
Many people wonder about insurance. We think we know what it is for, but why does it cost so much? How can we reduce expenditures on the “insurance tab” on our spreadsheets?
Of course we can shop property rates etc… but the one thing you want to really make sure you are “squared away” on is Liability. Why is this and why is liability the unpredictable killer of assets? How can I protect myself from liability? General Liability Insurance as stated by a Google search page:
“General liability insurance (GL), often referred to as business liability insurance, is coverage that can protect you from a variety of claims including bodily injury, property damage, personal injury and others that can arise from your business operations.“
Google knows everything right? Well, in this case they do a decent job. But look at the definition and you come to the conclusion that General Liability (GL) is a very broad term. What does it cover? “and others”? What is that? Indeed, it is “General” Liability.
The majority of claims that come out of GL are of the Bodily Injury and Property Damage type. If you hurt someone or damage their stuff, that is what we are talking about here. But why is it the unpredictable killer of assets? To understand that as investors, we have to think about the other side of the insurance coin and that is property insurance. Property insurance is predictable in most cases. Let’s say there is a $100,000 house and it is insured to value. It burns to the ground in a total loss. The insurance carrier knows it has to pay $100K. The investor knows they are going to be paid $100K. Everybody knows within a predictable certainty what that claim is about and how much is going to be paid. Now, let’s think about GL. Here is the scenario… an investor is flipping a house and it is vacant. A couple of teenage kids are playing around in the vacant dwelling (we hope there isn’t a vacancy clause exclusion…) and one kid falls and breaks their arm. This claim can go so many ways. Will the parents just take him to the ER and put it in a cast and be done with it using their own medical insurance or will they take him to the ER, not having medical insurance and then start getting bills from the hospital? If it is the latter, how are they going to pay? Do they have the money? Will they sue the Landlord? For what expenses will they sue? Was there negligence involved? If so, how much negligence was there and how does that translate into dollars? This is why Liability can be the unpredictable killer of assets and why General Liability Insurance is so important. There are just so many variables.
In most cases, liability claims are pretty straightforward. But, some can be very complex and very expensive. That is the crux of the matter. They are unpredictable. Thankfully though, they are pretty rare for the residential investor. Thus, General Liability is a pretty good bargain in the SFR investor industry and is something the SFR investor should be “squared away” on to protect their portfolio.
Andrew G. Costlow
REI Choice Insurance
Executive Vice President
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