Insurance and California Real Estate Investments

Legal News GavelAuthor: Staff

Investing in California real estate is, ultimately, a gamble. Even the most experienced and savvy investor cannot know what will happen to the property years, months, weeks, or even moments from now. Risk management is therefore one of the most important parts of California real estate investment. This may include measures intended to protect the property, such as security and fire suppression systems. It should also involve insurance coverage for various potential risks or losses.

Risk Management and Insurance

Insurance is a type of risk management that covers certain losses. The concept of insurance dates back to the ancient world. Farmers, merchants, and others devised ways of pooling risk as a hedge against possible future losses. Participants contributed a relatively small amount to a fund. That fund could then be used to compensate contributors who suffered a loss. This concept began to take its modern form in Renaissance Italy, with merchants in 14th-century Genoa entering into formal insurance contracts.

Today’s insurance policies might not have the same neighborly sense of community, but the principles are essentially the same. Individuals and businesses pay premiums to insurance companies, also known as underwriters. The premiums go into funds that insurance companies use to pay claims. Modern insurance policies require regular vigilance, since insurance companies make money in two ways:  receiving premiums and not paying claims.

Insurance policies take many forms and usually address specific assets or activities. Automobile insurance, for example, covers damage to a particular vehicle and the driver’s liability in the event of an accident. California real estate investors should consider several different types of insurance.

Property Owner’s Insurance

This general type of insurance includes “homeowner’s insurance,” as well as coverage for owners of other residential or commercial real property. Its coverage typically includes damage to the property, known as casualty loss, and liability for injuries or other damages occurring on the property. Real estate investments that involve leasing premises to individuals, families, or businesses should look for property insurance that covers foreseeable risks, such as damage to leased units and lost rent.

The exact extent of the coverage can vary widely. Casualty coverage in California, for example, typically does not include damage due to specific causes like fire or earthquake. Coverage for those is available in separate policies.

General Liability Insurance

Real estate investors are not likely to need general liability insurance if they have property insurance, but it is still useful information. This type of policy covers a business in situations in which business operations, or the products or services offered by the business, cause injuries or property damage. It is similar to a personal umbrella liability policy, which covers individuals for various risks that are not covered by homeowner and auto insurance.

Title Insurance

Purchasing real estate requires a determination that the seller has clear title to the property and that real property records do not show anyone else with a claim. Title insurance covers claims arising from defects in deeds or errors during a title search that resulted in heirs or liens going unnoticed. Mortgage lenders usually require title insurance for residential purchases, and commercial lenders are likely to require it as well.

Self Insurance

One California real estate investment advisor suggests that investors “insure themselves as if the world is coming to destroy them.” Even the best, most comprehensive insurance policy in the world still cannot anticipate and prepare for every conceivable risk. Not all real estate investors have the means to “self insure,” but every investor should set some money aside in case of unforeseen disasters.

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