Insurance and Commercial Real Estate

by : Craig Higdon

One of the least considered, but perhaps most important aspects of successful real estate investment is insurance against losses. Even though the market for residential real estate has begun to cool, commercial real estate investment opportunities abound. Commercial properties have additional risks that need to be mitigated and in today's litigious society, it is important for investors to take the steps necessary to protect themselves and their investments.

As the housing market begins to cool off, the investment risk of real estate has increased somewhat. Residential and commercial real estate investors can no longer rely on a continually increasing market to bail them out of mediocre or bad purchases. The only real insurance you have here is to study investment analysis further and to really check your market before committing funds to a transaction.

There are other risks in commercial real estate that you can mitigate through third party insurance policies. The most common form is title insurance. Most real estate professionals recommend that buyers obtain title insurance on any property they purchase and if a loan is involved, the lender will make it a condition of obtaining the loan. The purpose of title insurance is to protect the buyer in the event that problems are found with the title after the close. Even though all sales of real estate include a title search, it is a good idea for the buyer to purchase separate title insurance as an extra measure of protection against mistakes in the search. This extra insurance will help protect the buyer in the event of any undiscovered liens, disputes over property lines, or other matters affecting title.

Another common, but important form of insurance for investment property is liability insurance. This provides the investor protection from liability in the event an individual is injured while on the property. It is all too common for individual property owners to be sued for seemingly frivolous reasons, so it is vital for all property owners to carry a sufficient amount of liability insurance to protect themselves and their personal assets. It may also help to have your insurance professional 'walk' the property with you to point out potential hazards before they become law suits.

Hazard insurance provides protection in the event of damage from fire, accidents, theft, and vandalism. Depending upon where you live, you might want to look into adding protection from storms and natural disasters. All owners of real estate should have this insurance and again, if a loan is involved, the lender will require you to purchase it and name them as an additional insured.

Environmental insurance is a new form of risk management that is gaining in popularity with lenders. Instead of performing Phase 1 and Phase 2 environmental studies, more lenders are opting for insurance against this type of loss. Because lender liability is limited in current law, the focus is on paying the outstanding loan balance or the cost of clean up, whichever is less. A word of caution here: Make the lender get the insurance (you'll still have to pay for it) ... it's not your job to understand the intricacies of environmental pollution and its risks.

In addition to these basic forms of real estate insurance there are other types of coverage that you may wish to consider. For instance, those properties located in or near flood zones may wish to purchase flood insurance, while those in earthquake prone regions may want to consider the purchase of additional earthquake insurance. And in the wake of 9/11, there is even the opportunity to purchase terrorism insurance!

In the final analysis, each real estate investor has to look at his or her own level of risk tolerance and what might actually affect the real estate investment. From there, with the help of an experienced commercial hazard insurance broker, you can then purchase the right mix of insurance needed to adequately address and mitigate those risks.