Saturday, September 30, 2006

Insurance Primer

One of the things new TIC groups need to consider is insurance. This is another one of the not so-little-details of home ownership that new buyers might have little experience with.

There is no avoiding insurance. Your mortgage holder will require it. They are carrying the loan, and if your building burns down to the ground they want to be reasonably sure the property gets rebuilt so there is something of equivalent value sitting on your land.

That said, you are on the hook for the morgage whether or not the insurance company pays up. (Just ask all those folks down in Louisiana who are still litigating with their insurance companies after hurricane Katrina.)

So you are going to have to figure out how to get an insurance policy, and what is the best policy your group can afford. You will need to weigh the risks of your building's condition and location with the costs of the insurance coverage. For example, in a serious earthquake much of the land in the Marina has an increased probability of liquefaction. (As it sounds - the soil beneath the foundation liquifies.) If you are in a building constructed before the 1950s, you may have a brick foundation with disintegrating mortar that will is susceptible to a shake. Or you may have purchased newer construction where there is an unbraced parking garage beneath the residences, elevating the chances of a structural collapse.

This all sounds very doomsday, but this is exactly what insurance carriers are analyzing and hedging against. It is a business after all. They are betting, even in the event of a disaster, that they can take in more money than they wil need to pay out.

It is generally more difficult to get a good homeowner's insurance policy if you are in a TIC. One agent told me insurers don't like TICs because they must negotiate (and perhaps fight) claims with multiple parties on the same property. And if you are in a TIC with more than four units your building is considered a commercial, not residential, property so your options for insurance will be reduced further.

The devils are in the details. You need to read your policy. And you need to ask questions.

Here are some things to inquire about before you sign on the dotted line:

How long does this policy cover the carrying costs I will need to pay if I need to relocate due to building damage?

How long will it take the company to evaluate and pay a significant (over $10,000) claim?

What, specifically, are the exclusions in this insurance contract? (Earthquake, flood, mold, earth movement, and "wear and tear" are some of the perils that are usually excluded.)

And remember in most cases your TIC building policy does not cover the contents of your unit. Each member of the TIC will also need to consider the benefit of obtaining an individual policy for the replacement of furniture, electronics, jewelry and other personal possessions.


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